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Each captive manager has different qualities, so when management operations are sold to another firm, captive owners should know their rights and sometimes reassess the arrangement, Andrew Barile, CEO of Andrew Barile Consulting, tells Captive International.
Recent industry headlines of captive management operations being sold on highlight the need for captive owners to be more proactive in looking at their existing arrangements and knowing what their rights are if the management company changes.
This is according to consultant Andrew Barile, CEO of Andrew Barile Consulting, who argues that as the pace of change in the captive sector has increased, owners must be more proactive in their approach to using service providers.
“The captive client today is in a world of disruption and change. They have to be on top of everything they are doing because the service providers around them are all in motion,” says Barile.
He recalls situations where he has called captive owners to discuss the change in their captive management, only to find that is the first they have heard of it.
“Many captive owners have stayed with the same people for years and never evaluate that part of their structure until it becomes an issue,” he says.
But he believes that if captive management moves ownership, captive owners should reassess their position with the management company.
A number of issues can crop up. Sometimes a captive manager can end up with too many clients and not have the resources to service them all properly.
“I have spoken to captive managers in Vermont who manage 300 captives when there aren’t even that many working days in the year. The business is very stretched out.”
This can cause many problems, Barile explains, including a lack of oversight of the captive, financial statements not getting done in time, and captive managers generally not having enough time to meet the owners of the captives they manage.
Equally, a client might ask for new policies and discover they are incorrect, he says.
“The sale forces the captive owners to pay attention to their captive management company and look at what services are being provided,” he adds.
Fortunately, there is often a clause in the captive management agreement where the captive has the right to terminate its agreement and move on to another management company, or has six months to do so, Barile notes.
Repercussions of M&A
In every M&A transaction there is always some fallout, and there may be conflicts that neither party knew existed, according to Barile.
“A company might sell its captive management operations and get the cheque but now you have an issue where some clients might leave the management company because they don’t like the new owner,” he says.
One reason this might occur is where a buyer has different strategic ideas. They could also increase management fees. “There’s a new CEO in charge who looks at it as a profit centre,” says Barile. “That can mean the new buyer may say it is raising the captive management fees.”
Barile advises captive clients to look at their captive management agreement and see what their rights are, how much notice should be given to evaluate the change in management, and whether their new captive manager is prepared to sit down and explain the implications of the new ownership.
New managers may not understand the captive’s reinsurance arrangements, or the captive’s exposures and the policies they need.
Each captive is unique. As Barile explains, a captive writing nursing home professional liability insurance or a captive writing workers’ compensation will be completely different in nature from other forms of insurance.
“Don’t forget the seriousness of what the captive manager does for a captive,” says Barile. “The captive manager is doing the policy issuing, doing the ratings, buying the reinsurance for them, and doing the financial statement.”
His biggest concern is that captive managers are responsible for setting reserves for future losses. That takes an intimate knowledge of the portfolio which a new manager may not have.
“When you delegate the management under that contract, and you have no employee oversight in the captive—or the whole board of directors of the captive are people who work for the parent corporation—how much oversight do they have if none of them at the board level have worked for an insurance company?” he says.
“I’ve looked at certain captives where the entire captive was run by the management company. When I looked over the resumes, none of the offices or the board of directors of the captive had worked for an insurance company. So where is the oversight over the captive manager being delegated?”
Captives, M&A, Captive management, Andrew Barile, Andrew Barile Consulting, North America