Jeff Kenneson, president, Quest Captive Management
2 October 2019Law & regulation

Your guide through the captive maze

What differentiates Quest from other captive managers?
We are independent which allows us to work closely with our clients’ brokers and agents with no conflicts of interest. We are an approved captive insurance manager in the US domiciles, Bermuda, the Cayman Islands and Europe, which allows us to assist our clients to place their captives in the appropriate domicile for their risk and their circumstances.

“Fronting arrangements and the collateral required for those arrangements are a constant cause of heartburn for captives in the industry.”

Our senior management all have 20+ years of experience in the captives space and with multiple domiciles onshore and offshore.

How should a company pick a captive manager to help with jurisdiction selection?

Some of this is predicated on the goals of the prospective owner, but generally you would want a captive manager with the appropriate experience in the captive insurance industry and one that operates in most domiciles, onshore and offshore.

Of course, a potential captive owner may be predisposed to a domicile, in which case this last piece may be less relevant. But with a multi-domiciled captive manager, the captive should be placed in the optimal captive location for what they are trying to accomplish. With a captive manager which operates in just a few places, there may be limitations as to the proper domicile for the risk and circumstance.

Is the increasing rates environment translating into greater interest in captives?
We are seeing some movement with property coverages, whether that be existing captives expanding their coverages to property, or owners that originally had property in their captive who discontinued the coverages when the market went soft but now are taking a piece again.

Property is one of those coverages that come in and out of favour when placed through a captive; now it’s back in favour in some regions of the US.

Your run-off business is growing nicely—what are the prospects for this business?
The captive insurance industry is a mature industry and with that maturity we’re seeing captives reach the end of their usefulness to the owner due to retirements, closures or the sale of a business. We also see large corporations morphing into different entities which make the captive arrangements unnecessary for whatever reason.

With thousands of captives worldwide and new captives being formed all the time, we’ll continue to see captives reach their useful life and move to a run-off solution.

What other areas of growth are you are seeing in the business?
We are seeing a lot of entrepreneurial startup businesses looking at captives to insurance their specific exposures. This is a very exciting growth area for us. These startups aren’t necessarily coming to us to solve their workers’ compensation, general liability, auto liability or property issues, although they may put these coverages in their captives as well.

They are coming to us to solve unique exposures that they encounter in their day-to-day businesses. These opportunities allow us to put our expertise on display to distinguish between business risk and insurance risk.

What are the main advantages of the rent-a-captive model?
Probably the most obvious is the ease of access. In some domiciles, a rent-a-captive arrangement can be established in a matter of weeks because the new cell participant is not asking for a full licence from the regulator, they are simply renting a cell of the facility that already possesses a licence.

Without the added work to obtaining a full licence, in most cases the startup costs are a bit lower. Depending on the arrangement, there may be some cost-savings on an ongoing basis depending on the programme flowing through the cell.

If the arrangement is not taking a tax position for the transactions in the cell, there may be some reduction of the capital required to support the programme. This is typically up to the sponsor of the facility.

Is the rent-a-captive model most appropriate for companies that are new to the captive space?
This is definitely for new entrants into captive insurance—you wouldn’t typically see a captive owner move to a cell arrangement. I believe all captive arrangements are a long-term risk management play, but the cell arrangement is more attractive for someone that may want to dip their toe in the water before committing to a full-blown captive licensing process.

Cell arrangements are more geared towards smaller risks where the premium may be below $2 million. However, we do have cells with excess of $10 million running through them. The choice of a wholly-owned captive versus a cell arrangement depends on the circumstances and the goals of the potential captive owner.

What things do you look for in your prospective business partnerships?
We want to ensure that the prospective captive owner is looking to solve an insurance issue, whether that be premium increases, coverage issues or lack of coverage altogether, or that they want to form the captive for risk management purposes.

We are sceptical when business owners come to us to form a captive because it will save them money or for strictly tax purposes. In most cases, properly formed captives do reduce costs for the owner in the long run but in the short run the owner could be disappointed. Capital needs to be infused and there are startup costs that are incurred which isn’t the case when they stay with their current insurance.

From conversations you have with clients, what are the current key challenges or concerns for the captive industry?
As is the case most of the time, fronting arrangements and the collateral required for those arrangements are a constant cause of heartburn for captives in the industry. When it comes to risk retention groups, the regulatory overstepping of non-domiciliary states continues to be an issue. Many trade organisations have spent countless hours and money to combat this interference.

Jeff Kenneson is president of Quest Captive Management. He can be contacted at:  jeff.kenneson@davies-group.com