In the new captive formation process the creation of the business plan uses the largest amount of time and intellectual resources. That’s understandable because the document forms the foundation of the startup. Front companies, reinsurance and claims administrators all use the statistical data and the narratives of the business plan to set their pricing and terms and conditions. Domiciles use the information to judge the insurer’s acceptability and its potential to be successful within the location’s regulatory framework. Once licensed, the business plan is used by auditors and regulators to make sure that the captive is operating according to its original approved plan. Even years after a captive is licensed, regulatory bodies like the IRS take an interest in the business plan and how a captive is operating currently compared to its original business plan.
A business plan is required of virtually every captive. The real question regarding a captive’s business plan is whether or not it is a static document or a dynamic document. Once created and used as a part of the formation process can you just stuff it in a drawer and forget about?
The simple answer is no! The captive business plan should be a dynamic document that is reviewed regularly. Let me give you a couple of reasons why…
Stakeholders like the domicile’s insurance department, your audit firm, claimants, reinsurers, the Internal Revenue Service and the shareholders of the captive’s parent in a publicly traded environment all rely on the accuracy of the business plan to portray the business of the captive. Unless this document is regularly reviewed and updated it is doomed to be inaccurate and will likely contribute to a problem for the captive and its ownership. At a recent captive insurance conference session dealing with IRS regulation of captives, the two attorneys conducting the session both emphatically agreed that an updated and accurate business plan was a powerful deterrent to IRS “fishing expeditions” into the taxation status of a captive.
Another reason for periodically dusting off the business plan is to make sure that the captive is still supporting the parent’s strategic goals. In my consulting practice I am regularly contacted by firms that own a captive and that have had personnel changes over the course of several years and they find themselves in the unusual position of not knowing why they even have a captive in the first place. Either the new management is not schooled in the use of captive insurance as a part of a creative risk management regime or the company’s strategic goals have moved so far that the captive is no longer relevant. A regular review of the captive’s business plan allows the captive to be re-aligned with the corporate goals and to make a powerful addition to accomplishing those goals. Not only is this recalibration critical in keeping management informed of the captive’s capabilities, it can often contribute to new uses for the captive that keep it relevant and a contributor to overall success.
This review should be conducted every couple of years and should be the product of not only fact checking the captive’s operations against the existing business plan, but understanding the parent’s overall business goals and how the captive might contribute to achieving them. If you are interested in discussing how this process works send me an email at firstname.lastname@example.org and I would be happy to contact you to discuss it.