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Finance Best Practices
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strategic direction based on which action results in the best credit rating. Since
the ratings derived by Standard & Poor’s are based on prospective actions that
may never be implemented, the ratings will be kept confidential until such time as
the company makes its plans public. Examples of possible activities that could
require a prospective credit analysis are asset sales or divestitures, stock buy-backs,
mergers or acquisitions, financial restructurings, recapitalizations, expansions
into new lines of business, and modifications to the corporate legal structure.
The primary difficulty with this best practice is the considerable fee required
to have these analyses performed. The fee charged will increase for each addi-
tional strategic option a company wishes to have analyzed, so having a broad
range of possible actions reviewed will be expensive.

Cost: Installation time:

11–16 RENT A CAPTIVE INSURANCE COMPANY

Companies are having increasing difficulty obtaining reasonably priced insurance
of all types, if they can obtain insurance at all. Captive insurance companies have
been used to provide access to insurance. They are run by a single company, an
association of companies, or by an entire industry in order to solve particular
insurance problems. Though the use of captive insurance companies has been a
longstanding option for obtaining at least some of the necessary insurance, this
option has required extensive legal analysis, incorporation costs, and significant
initial capitalization fees that have limited their use. Also, sharing a captive with
other companies has, until now, meant that a company must share in the risks
incurred by other companies, which can present an uncomfortably high risk profile.
Over the past few years, changes in the legal requirements for captive insur-
ance companies have brought about the creation of the rent-a-captive. Under this
legal structure, a captive insurance company has already been created by a third
party that rents it out for use by multiple companies. The structure is usually in
the format of “protected cells,” whereby each company using one can shield its
contributed capital and surplus from other renters that are also using the captive.
Not only does this format prevent a company from dealing with the initial start-up
costs of a captive insurance company, but it also allows it to retain any underwriting
profit and investment income from contributed funds. The company can even
recover a low-claim bonus at the end of the rent-a-captive contract, though it can
also be liable for additional claims payments that exceed its initial or subsequent
contributions into the captive. This format is especially useful for those companies
faced with moderate risks that have reduced their frequency of claim incurrence.
Conversely, it is less useful for companies seeking catastrophic coverage or that
have high volumes of small-claim activity.
The creators of rent-a-captive insurance companies usually charge a percent-
age fee of premiums paid into the captives in exchange for their use, while some