Captive management: picking the winning team

30-11-2011

Marc LaPoint

Captive management: picking the winning team

Marc LaPoint at USA Risk outlines what you need to consider when choosing the optimum captive service provider team.

Picking the winning team of service providers for your captive, whether it’s for a single-parent captive or a group programme, can be a difficult task. You certainly can’t find ratings of captive service providers in Consumer Reports, or even in a trade publication. Indeed, while all the providers we know handle the basics competently, there are significant differences when you extend these services into the world of alternative risk. Understanding the key criteria can ensure that you have a winning team. When a captive is evaluating its choice of service provider, the following criteria should be used:

Experience and staffing

Successful captive management takes a combination of skills. Staff should include people who are qualified in both accounting and insurance. Captives should employ professionals with relevant accounting and actuarial credentials, such as a certified public accountant or member of the American Academy of Actuaries; and with insurance credentials, such as a chartered property casualty underwriter, or association in captive insurance designation. When your team understands accounting, underwriting, and coverage issues, value is added.

You should learn about the service provider’s history. How long has it been in the captive business? How long do employees stay? Excessive staff turnover is a problem because of the lack of continuity and, therefore, the knowledge of the account. You, the client, shouldn’t have to spend yourtime and energy retraining new members. At the senior executive level, you should look for service providers who are experienced in different domiciles. Someone who has dealt with just one domicile won’t be able to comment on the benefits of other jurisdictions. For instance, while Vermont may be a top choice for an owner-insured captive programme, it may not be suitable for a more entrepreneurial structure. Service providers today need a global perspective. Look for creativity, too. The service provider should have the ability to develop creative approaches for new programmes or even restructure an existing programme.

Breadth of service

Does the service provider offer all you need? Are the services unbundled, so you can pay for what you need and not be charged for unnecessary services? Essential services include financial management, regulatory knowledge, audit and tax, actuarial, underwriting, policy management, claims, reinsurance placement, loss control, and cash and investment management.

The ability of a service provider to deliver a broad range of services depends on the experience of the staff and its support systems. And yet, caution should be taken so as not to be swayed by the value of a bundled approach. We advise using an unbundled setup in order to avoid conflicts of interest. Certification by an independent actuary will have more credibility with regulators. A staff actuary doing a feasibility study, forinstance, has a vested interest in the approval of a proposed programme. An independent actuary can be completely objective. Similarly, if there are complex tax questions, you should rely on an experienced tax attorney. Investment management requires someone actively to manage a portfolio—again, that service should be provided by a professional asset manager. The captive manager should be familiar with qualified actuaries, tax attorneys and investment managers and be able to recommend those whose approach is best suited to the client’s particular needs.

Communications

When appointing a service provider, you are buying a service, so it should be easily accessible and responsive. Can you contact them easily? Do staff promptly respond to voicemail messages and emails? Can key contacts be contacted after-hours? While you might think that such responsiveness would be a given today, some service providers still don’t have up-to-date communication systems; this is especially so when you go to small, out-of the way, foreign domiciles.

Your service team are experts, and like other experts, they sometimes take the position of telling the client what to do without listening carefully first. If a service provider won’t listen to you, you should take your business elsewhere. A service provider should serve you as an honest consultant. If something does not make sense or won’t work, they should say so, even if they might lose income as a result. A ‘yes man’ won’t serve you well.

Will you have access to the top people once you’re a client? Or are they interested in you only during the sales pitch? Even though your primary dealings may not be with senior executives, they should be accessible and aware of any changes you’re made to your programme. Take a look at the firm’s office when you visit. Is it well organised or chaotic? You can often get a sense if the firm is running smoothly.

Independence

As representatives of an independent firm, we freely admit our bias towards independent captive managers (those that are not a division of a broker or an insurance company). It can’t be denied that many nonindependent service providers give good service. However, clients should be aware of potential conflicts of interest. Brokers make their money on commissions and tend to use captives as a defence mechanism. Brokers would probably prefer that you use a fully insured programme, which generates more commissions, but realise that if they don’t offer a captive, they might lose the account to a competitor. Additionally, unless the service providers operate at arm’s length from the broker, you may not get unbiased advice about how your captive can best be utilised. An independent provider doesn’t have to keep a parent broker or insurer happy. It does not serve two masters—the client remains its sole concern.

Cost

The principle here is simple: the fee should reflect the value of the services rendered. If you want what amounts to basic services, the price should be low. A more complex programme will cost more. And if you reduce the amount of work the provider does, you should expect to see a reduction in fees. Captive management is a competitive business and fees are usually in line with reality—but not always. You should beware of the ‘5 percent fee increase a year’ strategy. Your provider, like any other company, should be aiming to become more efficient. If your provider proposes an increase, make sure it is supported by increased workload or responsibilities.

Some providers offer new clients a rock-bottom price that seems too good to be true. Generally it is. A firm offering low pricing will look to increase its fee next year when the client feels it is locked into the decision.

Finally, check references. Almost anyone can talk a good game. But has the service provider really performed as advertised? The best way to find out is to seek out client references. Clients can offer a valuable reality check. Ask them specific questions about the performance and you’ll gain some valuable insights.

Marc LaPoint is senior vice president of business development at USA Risk. He can be contacted at: mlapointe@usarisk.com

US, USA Risk, service providers, captive, insurance

Captive International