Specialization required Captives need a bank with expertise in the field By Michael J. Moody, MBA, ARM
Every captive insurance company must establish a number of key operating relationships. The captive manager is typically at the top of this list. However, another relationship that is close to the top is the banking relationship. In recent years, the banking relationship has grown in complexity and importance. This article will outline some of the key considerations captives should keep in mind as they develop a relationship with their banking partner. Specialized services Most captive parents have well-established relationships with their corporate banking partner, and some may consider whether or not to use them in regards to their captive banking needs. Many experts agree that this would be a mistake. According to Martin Ellis, first vice president and manager of Comerica Bank’s Global and Captive Insurance Group, “It is usually better for a captive owner to deal with a bank that specializes in captives.” Carl Musson, senior relationship manager with the corporate arm of commercial banking for the Bank of Bermuda (BoB) agrees. Musson says, “Captives can benefit from selecting a banker familiar with the needs of the captive insurance industry.” Not only should they have an intimate and specific knowledge of the captive industry, but, Musson says, they “should offer innovation in developing new products and services to meet the ever changing needs of the industry.” Comerica’s Ellis notes, “Banks that specialize in captives can usually offer ‘one stop shopping’ for specific captive needs.” However, the international scope of many captives also requires special attention. BoB’s Musson says these requirements should include, “multiple currency payments and cash management products and services that enable them to transfer and receive funds from around the world.” These services are needed to “optimize the return on their operating funds and to provide custody services for safekeeping of the captive’s investment portfolio,” Musson points out. Ellis also says that the captive friendly bank has both onshore and offshore account capabilities. Further, he notes, it is important that the bank also have “access to onshore and offshore mutual funds for those captive customers who are too small to have a separate management investment portfolio.” Play well with others A captive banker must maintain favorable relationships with most of the other service providers. Nowhere is this more critical than with the captive manager. Like many other service providers, most banks get involved via a referral from the captive manager. But the relationship goes well beyond this initial involvement. In fact, keeping tabs on the captive’s finances is one of the most important roles for a captive manager; and timely, accurate data from the banker is central to this task. Any banking relationship should provide both the captive owner and captive manager with “timely reporting of, and online access to, all transactions and balances,” according to BoB’s Musson. Comerica’s Ellis adds that, “Banks specializing in captives should also be able to communicate electronically with asset managers for seamless trade execution and reporting.” The captive, its owner, and the asset manager should have online access to the captive’s custody accounts. Ellis also notes that, “custody statements should include all relevant assets, transactions, and investment income details to simplify the captive’s financial and regulatory reporting.” And since not all captives are single-parent entities, banks should understand segregated account legislation and risk retention group regulations and be able to properly structure a banking relationship and provide proper reporting for them. Each type of captive will typically require an entirely different approach to the banking procedures, and banks will need to develop unique approaches to fit these needs. Group captives and risk retention groups will need to understand how the banking relationship is structured and how much control rests with the bank. The segregated cell captives are another special challenge for the banker, and specific operating procedures need to be in place prior to accepting these types of programs. Another important relationship that bankers must maintain is with the regulators in the various domiciles. But it is not enough to simply have a good working relationship with the regulatory authorities; the banker must know and understand any appropriate legislation. Ellis says, “Banks specializing in captives should understand and be in compliance with all regulatory requirements, such as the U.S. Patriot Act or similar anti-laundering legislation and should know their customer’s requirements, so as to avoid problems that could result in fines or sanctions.” As captives grow and mature, regulatory constraints will also change to keep pace with this captive movement. The captive’s banker must maintain a commitment to monitor these changes and make certain that the captive remains in compliance. Collateral concerns Many captive experts continue to believe that one of the foremost responsibilities for the captive’s banker is the involvement with collateral. As a matter of fact, this single area is one that typically distinguishes a captive banker from other commercial bankers. Their ability to provide several forms of collateral (letter of credit, Regulation 114 Trust, etc.) at competitive rates is a major plus for captive owners. As such, banks should be able to structure attractive LOCs, for example, with a variety of options including equities and lower-rated securities at appropriate rates. Any banking partner should be highly rated and its LOCs should have wide market acceptance. Additionally, the bank should be able to provide quick turnaround times on LOC applications and amendments, according to Comerica’s Ellis. Over and above the familiarity with the LOC market, a captive banker should also know the requirements and permitted assets allowed for the Regulation 114 Trust as well as the required language to include in the Trust agreements. Banks that want to attract captive clients will have available standard LOC and custody documents and know how to properly register any changes in the collateral in the various domiciles. The banker should have a comprehensive knowledge of the collateral market and the advantages of each of the various options available to the captive. For example, Ellis points out that captives can usually get cheaper LOC financing if the applicant on an LOC is secured by its own assets rather than an unsecured LOC issued on behalf of the captive’s parent. Future Specialized banking services that are directed at captives have made significant advances over the past few years. But as the captive movement continues, banks will need to develop additional products and services for the captive market. BoB’s Musson puts it this way, “In the future, banks will need to continue to develop a more specialized focus on captives and provide innovative financial products and services tailored to meet the needs of captives.” * |
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