Captive service providers employ local expertise and centres of excellence to attend to the intricacies of the captive sector. Here, the mobility of human capital in the sector is explored.
Much depends upon the service being provided, the type and nature of the captive and its domicile of residency, but captives are increasingly selecting ‘best in breed’ service providers from across the US. Domiciles with an established reputation and an existing bench of captive service providers are likely to play host to such firms, but they can be found in other centres of excellence that are home to captive specialists in law, accountancy, claims handling and captive management.
As Tom Jones, partner at McDermott Will and Emery and Arthur Koritzinsky, managing director in the Captive Solutions Group at Marsh indicated, there is now true mobility in the provision of captive services. Koritzinsky said that while Marsh has offices in locations across the US, it employs a centre of excellence approach to much of its captive business. Jones concurred that in the case of captive managers, the critical mass associated with jurisdictions such as Vermont, Hawaii and South Carolina has encouraged firms to establish significant presences in captive-focused jurisdictions, although he argued that there is nevertheless a need in some instances to have a home presence in particular domiciles.
Maintaining a presence in every captive domicile has, however, become increasingly difficult following the “proliferation of options”, said Jones, with the suggestion being that a centre of excellence approach—but one which is able to deploy human capital across the US—is the right one.
Turning to the specifics of captive management, Jones said that in many instances there is a requirement to keep books and records in the domicile in which the captive is formed—and perhaps some captive management presence to attend to these documents—although he added that these can be readily transferred from more mature domiciles in which captive managers reside when inspections occur. Such documents are presently a “physical nexus” for the captive, but little more, “although as we move towards cloud computing, frankly this is going to wind down”, he said.
Such an approach isn’t the reserve of captive managers. As Koritzinsky outlined, “there is a lot of mobility in the sector—in captive management, actuarial services, accountancy and law”. In the actuarial space, Jones indicated that “there frankly aren’t any geographical limitations”, with captives able to draw on actuaries across the US. He added that the same is true for accounting services, with the Big Four and a couple of boutique firms able to “coordinate the audit—particularly if they already working with the parent, whether through their local branch or remotely”. There are requirements to be approved by the local regulator to practise, but for those with US accreditation it is essentially a formality, he added.
For structural legal and tax planning services, Jones said that during the captive formation and planning stage “there is only a handful of law firms that can provide the necessary expertise, and these are not restricted by domicile”. Rather, captives need to seek them out, located as they are in a few locations across the US. Jones is one such lawyer “on the short-list if there is a problem, getting called to meetings or asked to take part in conference calls”. Faced with particular legal issues, captives will necessarily turn to these ‘national’ captive legal experts, but in the day-to-day running of their captive they consistently will rely on local lawyers resident and licensed in the domicile.
Such local law firms are present in “all the mature domiciles. They help prepare all the constitutional documents and often do the hand-holding when there is an initial meeting with the regulator— something that is necessarily a local function”, said Jones. While such an approach is not always possible in some of the newer, less wellresourced domiciles, it seems that US-wide expertise, coupled with a local presence to attend to local needs, is a good fit in the legal space.
Despite the ability to draw on centres of excellence across the US, there are instances where a local presence is either required or of benefit. As Bill Whitehead, vice president—captive/alternative risk transfer at Lexington Insurance Company, indicated: “Service providers do not operate in a vacuum. You need to be aware and cognisant of the rules and regulations of your captive domicile and its monetary authority.” It is of benefit to have “someone in the domicile representing your interests as well as being knowledgeable about what is required”.
In the case of some of the more mature domiciles, for example, “regulators allow service providers from outside the state to work with captives and service providers locally, but when the service provider reaches a critical mass, there is often an expectation that it will establish an office and start hiring people locally”, said Koritzinsky. Marsh has in fact done this in some of the more mature domiciles, employing a centre of excellence approach in Arizona, Hawaii, South Carolina and Vermont, but Koritzinsky argued that “it doesn’t make sense to have lots of small offices; rather it is better to have critical mass. The regulators understand that such an approach enables you to do a better job”.
Addressing the need for proximity, Whitehead said it very much depends upon the nature of the captive and its business. In the case of claims handling, the need for a local presence “will depend on the characteristics of the account being underwritten and retained by the captive. If it is a highly customised programme—such as professional liability, which can be sizable, complex and significant— then you need a team of experts where you are operating in-domicile, to understand that account. You need a core group of experts that are communicating together”.
"Service providers do not operate in a vacuum. You need to be aware and cognisant of the rules and regulations of your captie domicile and its monetary authority."
In the case of more “process-driven accounts” claims handling and other captive services can more easily be carried out remotely, he said. Nevertheless, “when you get into large complicated claims and structures (whether in claims handling or in other captive service areas) I don’t think anything beats face-to-face interaction for the wellbeing of a captive, its treatment and success”. And when you are talking about best of breed, capability should necessarily reflect upon the success of your captive.
Technology has, however, helped lower the hurdles associated with remote operation. As Koritzinsky indicated “technology has really made such hurdles go away”. He cited technologies such as teleconferencing and the ability to attend meetings in real time, as well as online captive management tools such as marshmanagement. com as being able to deliver bespoke service from afar. With such technology, firms can “communicate and deliver information to their clients” without the need for a local presence. He added that it is less about where you are located; rather it is “about the personal relationships you build with the client and the regulator”. If technology can help in this, then it can be an invaluable tool in enabling captives to establish and maintain relationships with the best service providers, irrespective of where they are located.
Jones was rather more bearish about technology. He said that technology was a positive development for the service relationship, but that it would be many years before tools such as cloud computing replaced, rather than supplemented, the traditional relationships and structures associated with the industry. He added that developments in IT had made access to information “more convenient and timely”, but conceded that there was still some reticence about the integrity of online systems within the industry. He added that the captive industry is inherently social and continues to prefer actual meetings, as evidenced by the ever growing number of captive conferences.
Despite the ability to employ service providers from the whole US, there remain a few areas where captives will have to employ local expertise. Some domiciles insist upon a resident of the state on the captive board and an annual meeting in the domicile. Technology and the mobility of human capital have, however, meant that captives are increasingly able to pick service experts from the entire US. While critical mass will mean service providers will inevitably gravitate towards the likes of South Carolina and Vermont, it seems likely that captive skills and knowledge will continue to proliferate as the industry grows.
US, service providers, captive, insurance, McDermott Will & Emery, Marsh, Lexington