Tips for successful captive succession planning

Earlier this year Global Captive Management (GCM) celebrated Alanna Trundle’s inclusion in Captive International’s Forty Under 40. The captive insurance industry is in safe hands with these 40 established Gen Y/Millennials in an industry developed over the decades by many Baby-Boomers and fellow Gen X-ers.

Reflecting on the accomplishments of these 40, I was drawing parallels to the many ownership and leadership transitions of our own captive owners, directors, and officers, and I want to provide some insight that might help you in your captive’s succession planning objectives.

Current Cayman Islands captive owners, directors, and officers are likely to be well versed on the 2019 Cayman Islands Monetary Authority’s (CIMA) own Statement of Guidance Succession Planning. The guidance is intended to provide CIMA’s minimum expectation of the succession planning the board of directors or governing body must document to ensure that licensees, including captives, have continuous and seamless operation in the event of a related change.

The guidance expands to say this planning should not only address the transfer of key leadership but also ownership itself. The guidance stresses the importance of transitions when there are two or fewer shareholders and/or the statutory minimum of two directors.

Items to consider

“The articles of association of the captive should outline the terms of transmission, transfer, repurchase, surrender, and redemption of shares.” Ian Bridges, Global Captive Management

There is a lot to consider under the guidance, especially when no two captives are alike, as there are plenty of ownership structures and various captive options, including single parent captives, group captives, segregated portfolio companies, portfolio insurance companies, and segregated portfolios.

Fortunately, the articles of association of the captive should outline the terms of transmission, transfer, repurchase, surrender, and redemption of shares. Additionally, there may be other legal agreements such as a shareholder agreement or offering document such as a private placement memorandum, which must be considered when a captive owner effectively plans for the ownership succession of the captive.

In a simple situation where a privately-owned organisation wholly owns a captive insurer, we commonly see the shares owned by one individual, many individuals, a partnership, or a limited liability company, corporation, or trust. The legal succession planning for the ownership of the shares would differ under each scenario.

The setup of one individual owner will need to include the shares in her/his will and testament in the event of the untimely passing of the owner, and the captive should document specifics of survivorship, which may be tricky to navigate when other aspects of the will are not even disclosed to beneficiaries.

Succession for publicly-owned captives

Ownership succession is different for publicly-owned captives. Since the shares are owned by a public corporation, there is generally not a formal succession plan, given the natural perpetuation of the corporate owner.

There could however still be a change in ownership due to a corporate merger, so the succession plan can focus on the board of directors or governing body such as an executive committee. Once again, the articles of association will detail the appointment, removal, and powers of directors.

A publicly-owned captive tends to have a larger board of directors than a privately-owned one, so there tends not to be a high inherent risk of dropping below the minimum number of directors. However, for a planned future retirement of a director, the board will need to consider the make-up of the remaining members to determine the ideal director appointment. A departure could result in the board needing additional expertise in reinsurance or financial and treasury management; perhaps an independent director may be of value.

Additional consideration should be given to a key employee of the public organisation who may not hold the position of director or officer. Often, there is a “point person” to liaise between the captive manager and all of the public organisations’ departments that are involved with the captive, such as risk, legal, tax, treasury, and accounting. The guidance might lead the licensee to consider this a person in a controlled function, which is holding a role vital to operations.

Furthermore, the guidance contemplates both short and longer-term absences and even incapacitation of this potential controlled function. In this situation, the guidance indicates the persons, and his/her successor, should receive the appropriate training and knowledge to carry out the role, which is something an owner would normally plan for in their own organisation—hence, the captive is no different.

Training is likely to be provided within the owner’s organisation, but it can also come from other sources such as the broker, captive manager, actuary, or tax provider. Additionally, somebody new to the captive, whether a director, officer, or person providing a controlled function, could consider attending the annual Cayman Captive Forum, which provides excellent learning and networking opportunities.

Reach out for help

Succession planning is most likely something you already consider in your own business, but as an owner, director, or officer, it is a regulated requirement. Careful consideration should be given to planning all aspects of a captive’s thorough succession plan.

After all, you can’t have succession without success, and this comes from investing the time to adopt a plan commensurate with the complexity of the captive itself.

Ian Bridges is senior vice president at GCM. He can be contacted at: ibridges@global.ky