1 January 1970

The service provider mix

Captive owners should expect, and indeed demand, that their service providers work together to help achieve the overall good of the captive. not only should that be an expectation held by captive owners, but it should also be a widely held belief of the service providers themselves. I follow the old adage that we are only successful when our clients succeed, and certainly a large factor in achieving a thriving and efficient captive is having a harmonious and open relationship between all the parties involved.

I will take this opportunity to express an auditor’s opinions on the matters noted above as well as to offer some advice to captive owners and directors to consider when selecting their various service providers. More specifically, I will address this issue from the standpoint of what you can do to make our work, as financial statement auditors, flow more efficiently and effectively.

It is wise to start this conversation with two general comments that should overlie the entire discussion. firstly, it is my belief that captive owners should, to the degree possible and appropriate within the bounds of reason and good governance, view all of their service provider relationships as long-term. Secondly, and perhaps related to the previous comment, the cheapest option is not always in the best interests of the captive. (Nor is the opposite always true, by the way.)

Insurance managers

Obviously, selecting an insurance manager is the most important service provider decision that captive owners/directors have within their mandate. This, of all the service provider relationships, should be the one that is considered long-term. there should be a very good reason for any decision to switch insurance managers (and, no, marginal savings in annual fees is not a good reason). frequent turnover in this position can be frustrating to us as auditors and can cause inefficiencies and repeated learning curves.

You should ask to meet the actual persons who will be in charge of your account and/or will be serving as director(s), as well as asking for resumes and references. Be sure that you are comfortable with the personalities and their corporate priorities. Take the time to shop around, and ask to see examples of the various deliverables and peripheral services offered by each candidate. Explore pricing structures for monthly versus quarterly management reporting and consider these within the context of your governance requirements.

Tax consultation services

In my experience, this relationship is the one that has caused the greatest amount of trouble, both in terms of the number and magnitude of issues that have arisen as a result of either not seeing eye-to-eye with a tax consultant on a specific issue or dealing with incomplete information to audit.

It has also been my experience that this relationship most often reflects the ‘you get what you pay for’ phenomenon. therefore, it is important to not base your decision too heavily upon choosing the firm that quotes the lowest fees. i have seen a large disparity in the quality and completeness of the information provided to us to audit.

For us auditors, obviously more is generally better when it comes to audit support. for instance, the deliverables that we receive from the tax consultant should include the full set of tax footnotes for inclusion in the audited financial statements. it is not vital that these are provided in our format, simply that we receive an auditable and complete work product. it also helps if all of the known, as well as potential, tax issues are adequately documented and considered by the tax consultant.

The captive should be fully planned out so that proper scoping of the engagement is possible. We have seen that many captives, existing or launching, ignore some important issues based on their planned activities. Tax consultants and captive owners should know very well that a captive is not a ‘cookie-cutter’ type of entity. If they give it cookie-cutter treatment, they run a risk of missing tax issues.

There are a number of steps that captive owners/directors should consider during the proposal-taking and interview stage to ensure that they make a sound decision and receive good value for their money. These include:

• Ensuring that the professional engaged has experience of the relevant federal and state tax laws that are (or may be) applicable to your captive. The tax advisor selected should be qualified at least commensurate to the complexity of the captive’s structure and tax filing position.

• Obtaining, in writing, the specific responsibilities of the consultant and a list of the physical deliverables to be provided. Different professionals have varying ideas of what is a reasonable expectation. You may even consult with other relevant service providers (including your auditor) as to what is required.

• In situations where the tax consultant is also involved with the parent company’s tax filings, ensuring that he appreciates the fact that certain issues that are immaterial on a consolidated group basis can very well be material to the captive on a standalone basis, and will give adequate attention to such issues.

On an ongoing basis, the tax consultant should maintain a clear position and clear documentation of the captive’s tax filing position. As well, he or she should always be aware that different tax advisors and auditors may view issues differently in terms of severity. Understand that there are different standards for tax auditors versus tax return preparers, in terms of the level of risk that each will face.

Investment manager / broker / custodian

Again, ask to see example deliverables when making this decision. One of my clients had a sizeable portfolio of fixed income investments and neither the broker nor the custodian was providing the amortisation calculations in their reports. This resulted in much extra effort required of us (and additional audit fees to the captive) to perform an exercise that should have rightly been performed by them.

You should also ask as many questions as necessary to ensure that the investment manager understands the captive’s investment objectives and guidelines, as well as the specific requirements within the domicile, and commits to reporting on a regular basis to track their adherence to the same. Investment professionals who do not have such an understanding and do not make this a priority only leave the captive exposed to issues arising during the audit.

Finally, you should enquire if the prospective investment services firm has an available Type 2 SAS 70 report (an independent auditor’s report on internal controls within a service organisation), which, if available, can significantly reduce the amount of work required to audit the portfolio if the captive holds a considerable portfolio of investments.

Third-party administrator (TPA) / claims-handler

Again, the presence of a Type 2 SAS 70 report on the TPA’s internal control system as it relates to services provided to its clients may serve to realise efficiencies in terms of the amount of work that the financial statement auditor is required to perform. You should enquire whether the TPA/claims-handler is subject to independent claim audits and, if so, whether the results may be shared with the financial statement auditors.

You should ask enough questions to be able to gain comfort that the claims-handling system is robust and well-documented, and allows for historical, point-in-time viewing of a claim’s detailed progression and the related reserve figure. This is relevant to auditors, as we see a large spread in the quality of such systems when we are performing our testing of paid claims during the period and open claims reserves at period end.


It probably goes without saying that the consulting actuary selected should have some degree of experience within the domicile. Again, the deliverables should be agreed upfront and checked with the auditors to ensure they are sufficient. If possible, you should consider discussing the actuary’s planned approach, methodologies and assumptions with the auditors to ensure that any significant issues are dealt with in advance.


You should discuss, in advance, the prospective law firm’s policies in terms of any limitations included in their legal confirmation responses to auditors. We have, on rare occasions, encountered responses that include so many disclaimer paragraphs that they practically render the legal confirmation exercise useless.

Fronting insurer

I would advise to try not to turn over this relationship without good reason and great consideration. It can often be better to spend a few more dollars on fronting fees in order to retain a fronting insurer that has a history with you and your programme than to move on elsewhere for a marginally better deal. Turnover within this relationship can be problematic for us auditors, as requests for current loss runs of past years’ claims from a prior fronting company may not receive the attention they need because you are no longer a client; that could lead to delays in the completion of our audit work.

With some consideration to the matters discussed above, I believe that a captive’s owner and board of directors can contribute to not only some level of efficiency and efficacy in terms of the annual financial statement audit, but also to the overall success of the captive, in general.

Paul Arbo is a partner with BDO Tortuga. He can be contacted at: or via BDO’s website: