Conditions for Captive Insurer Value: A Monte Carlo Simulation

We construct two potential scenarios to depict the cash flows from the operation of a captive insurer. We then use Monte Carlo simulation to identify conditions that are sustainable in practice and under which captives have a high probability of creating positive shareholder value. We use realistic value ranges for both a class 1 Bermuda captive and a British Virgin Islands (BVI) general captive. On average, captives have a low probability of generating shareholder value. This outcome is consistent with much of the literature regarding captives. Well-managed captives, however, have an extremely high probability of generating value for their shareholders—even without favorable tax treatment. A well-managed captive is incorporated in the least costly captive jurisdiction during a soft insurance market, but remains dormant until a hard insurance market. The parent self-manages the captive’s operations and uses non-cash assets to satisfy the captive’s regulatory capital requirements while dormant; the captive calls for little reinsurance. Captives of parents with low systematic risk have the highest probability of generating shareholder value even when the captive invests conservatively.