When companies choose a rent a captive, they often evaluate their prospective insurers from a short-term approach. This makes financial sense, because insurance premiums are paid in the short term, the tax deductions that are taken from those premiums are also realized in the short term, and indeed, risk management is always calculated as a present value. However, there is an important long-term financial component that should be taken into account when choosing a captive firm.
Insurance brokers and consultants agree that financial strength and stability of an insurance company should be a major consideration when entering into an insurance contract. This is because of an important long-term component of risk management. Risk itself is a statistical calculation that takes into account probabilities of financial downturns, and hedges against those circumstances. However, the actual downturn that triggers the hedge action is the true test of insurance. The major question is: will an insurer be able to hedge against the actual downturn? This is similar to the difference between auto insurance and an actual automobile accident.
In the United States, the government can be considered the first line of defense against being insured with an undercapitalized company which may be in danger of default. In addition, the health and stability of the parent company should be carefully established. In the event of a disaster, if you go down, so will they. On the other hand, you must be careful to understand that in a mutual disaster, they may have first claim to the benefits.
For this reason, a key to successfully choosing a rent a captive firm is to carefully evaluate their long-term financial stability.