Captive Insurance Prequalification Checklist

Captive insurance can be an excellent solution for clients who are ready for it, which is why they need to be prepared for the prequalification process. 

Our sole purpose at Captive Coalition is to educate independent agents about captives and help their best clients become captive owners. We want to make it so you can confidently know when your client is a fit and how to prequalify them.

In this article, you’ll learn the step-by-step process for prequalifying clients, including the financial and behavioral indicators to evaluate before moving forward. 

Why Prequalifying Matters

Prequalifying clients for a captive insurer is important because entering a captive requires both financial stability and a mindset of long-term commitment. Captives are more than a financial decision—they’re also a strategic one. Proper prequalification can help prepare your clients for the responsibilities that come with a captive, reducing the chance of potential challenges down the road. 

By taking the time to prequalify, you help set your clients up for success so they can fully benefit from captives without unnecessary risks. 

Indicators to Prequalify Your Clients For Captive Insurance

Part of prequalifying your client is making sure they’re a fit for captive insurance in the first place. Make sure they have the correct mindset before considering them for a captive. 

1. Financial Discipline

One of the first indicators to check is whether your client is financially disciplined. For instance, late payments on insurance premiums are a red flag. If clients consistently struggle to meet their existing financial obligations, captives are not the right place for them. Captives require upfront investment and a steady stream of monetary contributions. 

An excellent financial indicator is whether they are current on their premium payments. If they can’t be consistent with payments, they will likely not be able to manage the cash flow requirements of a captive.

2. Cash Flow and Surplus

Captive insurance requires a client to have sufficient cash flow and reserves. On top of paying premiums, they need to cover captive management fees, actuarial services, legal fees, and other ongoing costs. Clients who don’t have enough working capital to meet these expenses comfortably will struggle. 

A question to ask: Does your client have surplus cash? If your client isn’t financially stable already, a captive could lead to more financial stress that outweighs the benefits.

3. Commitment to Risk Management

Safety and risk management is a cornerstone of captive insurance. Before even recommending a captive, agents should evaluate whether their client has strong risk management programs in place or is willing to make them stronger. They can’t just be lucky to have low claims. And if they’ve resisted safety protocols or skipped risk management recommendations in the past, this might be a sign they aren’t ready for a captive. 

4. Willingness to Adapt and Learn

Captive insurance is a long-term commitment requiring clients to continuously improve their operations. Captive insurance candidates should understand the importance of lifelong learning and transparency. If your client isn’t open to evolving their business practices or sharing operational details, they likely won't succeed in a captive. A captive relies on the idea that everyone involved is accountable and willing to adapt. 

Consider how open your client has been to adopting new practices and transparency. Have they demonstrated a willingness to improve their operations, or are they resistant to change?

Captive Insurance Prequalification Checklist

Here is a streamlined process to help you prequalify your client for a captive insurer:

1. Evaluate Financial Stability

• Check for timely premium payments.
• Review their financial statements to ensure they have sufficient cash reserves to cover captive contributions.

2. Assess Their Cash Flow

• Determine if they can handle ongoing costs like captive management fees, actuarial services, and other related expenses. 
• Ask: Do they have excess cash beyond daily operations? If cash is tight, a captive could strain their business.

3. Review Risk Management Practices

• Are they committed to safety protocols, employee training, and reducing risks?
• Do they have documentation of their safety and risk management practices?
• Make sure they’re open to adopting new risk management practices if needed.

4. Gauge Long-Term Commitment

• Ensure your client understands captives are a long-term investment, not a short-term fix. 
• Educate them on the necessity of maintaining a long-term mindset and being part of a larger, transparent group.

5. Check Their Adaptability

• Is your client open to learning and evolving?
• Do they value transparency and accountability within their business practices? 

How to Address Client Concerns

Even when a client is a good fit for a captive, you might face pushback regarding costs and long-term commitment. Here’s how they can be addressed:

• Upfront Costs:  Be upfront about the initial investment required to enter a captive. Explain that while there are costs—such as captive management, collateral, and reinsurance premiums—these are offset by the long-term savings captive offer. Clients will also have more transparency in how their money is used.

• Ongoing Fees: Clients may worry about ongoing costs. These fees—such as captive management, tax, and reinsurance fees—are part of maintaining the insurance structure. As the captive matures, operating costs often decrease, allowing them to retain more of their premium dollars. 

• Long-Term Commitment: Captives aren’t meant for short-term savings; they’re a long-term strategy for businesses that want more control over their insurance. Assure your client that while the initial setup may take time, the potential savings and risk control will build over the years. Yes, exiting a captive is possible if the business changes, but the initial investment such as collateral, will be held until all policy years are closed, which can take 5-7 years.

Preparing Your Clients for Success

Prequalifying clients is about ensuring they have the mindset and commitment needed for long-term success. Following this prequalification process will enable you to confidently recommend captives to clients who are ready to take control of their insurance, manage risks, and reap the rewards of transparency and cost savings.

Educate your client on where their premiums go in a captive and how it will give them better control. That way, they will understand how they will benefit financially.

If you have any other questions or want to schedule a consultation, click the button below to speak with one of Captive Coalition’s captive consultants.