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Captive counsel Crusader provides services that agents need to move their clients to the alternative market By Michael J. Moody, MBA, ARM A critical decision for anyone considering a captive insurance company is the selection of the captive advisor/captive manager. Today the range of options for captive managers runs the gamut from the large, international brokerage house affiliates to the smaller boutique-type captive managers. Frequently, the international brokerage affiliates concentrate their efforts on Fortune 500 type accounts, while the boutique managers serve the mid-sized commercial accounts. And it’s this mid-sized commercial account group that has contributed to most of the recent captive growth. One of the players in the boutique captive management arena is the Crusader International Group (Crusader), whose principals are long-time captive participants. Two veteran captive specialists, Michael R. Mead, CPCU, and Ian Kilpatrick, joined forces in 2002 to form Crusader’s U.S. operations. Mead, who functions as the president of Crusader’s consulting arm, Crusader Captive Services, Chicago, has been active in the insurance business for more than 30 years, spending the past 15 years specializing in the alternative marketplace. His partner, Kilpatrick, founder of Crusader International Group, has been active in the captive market for 30 years in the Cayman Islands. While both Kilpatrick and Mead had established themselves within the industry, they realized that by working together, they could provide a much broader range of services which few boutique captive managers could provide. Their initial involvement resulted in the formation of a South Carolina captive management firm, Meeting Street Management Company LLC. Subsequent to that, they have opened two other captive management companies, Potomac Captive Managers LLC in Washington D.C., and Sonora Captive Management LLC in Scottsdale, Arizona. However, it is Kilpatrick’s Cayman Islands captive management company, Crusader International Management, that continues as a mainstay of the organization. The group also offers a variety of other services through the Chicago consulting firm and several wealth management-related organizations, as well as its Advantage Life & Annuity Company located in the Cayman Islands, which is directed at high net worth individuals. The heart of Crusader continues to be its specialized captive management operations. Continued captive growth The establishment of Crusader International Group is predicated on the principals’ belief that the captive movement will continue to grow and that the marketplace values an independent approach to captive management. They also believe that much of the growth will be from mid-sized accounts and that the accounts will be influenced by their insurance agents/brokers. “We look forward to these types of situations since we are well positioned to work with agents/brokers that are reviewing the captive options for their clients,” says Mead. We realize from the start, it’s their deal and we are just there to help them with their clients.” And today, Mead notes, “It is easier then ever to find a captive solution, since there are many structures that can answer the needs of mid-sized accounts.” For example, rent-a-captives have offered a solution for many mid-sized accounts, and Mead points out that Crusader has two rent-a-captives, one onshore and one offshore. Additionally, he says, “We also have an agency captive that may provide a solution for some agents.” Crusader is well aware of the need to make certain that the agent/broker maintains an active role in any captive solution. Kilpatrick points out, “We know that the independent agents still want to have a role with their clients, and we make certain that they stay involved.” He goes on to say that a move to a captive can, in fact, strengthen the relationship between agents/brokers and their clients. “It puts agents in a considerably stronger position, because once people go into captives, there is a tendency to remain in captives for many, many years.” While the client must understand that a captive requires a long-term commitment, Kilpatrick says, “This assures the agent of his position and he or she no longer has to fear that a competing agent will present another program to the client. People don’t just hop in and hop out of captive programs.” In order to help expedite the captive formation process, Crusader has developed a “preferred partner” network, according to Mead. “These firms are well-qualified service providers such as audit, actuarial, etc., that we have developed long-term relationships with and that we are comfortable dealing with and recommending,” Mead points out. Despite this, Crusader will still suggest that the client develop a direct relationship with the various service providers, so that they feel that the program is, in fact, their own. Additionally, Mead says, “This way no one thinks that Crusader is adding on fees to those relationships.” Mead also notes that the Chicago consulting office has the ability to quickly take a look at an account and determine whether it may be feasible for a captive treatment. He mentioned that they do these “indicator studies” frequently and can provide the agent/broker with insight as to how to proceed with their client. Typically, they can provide an indicator study with five years of premiums and losses. According to Mead, “This type of study is designed to make the agent more comfortable with the captive concept and provide him with some direction with regard to his accounts.” Cause for concern Captive formations continue at a record pace and now the alternative risk transfer market exceeds 50% of the commercial market; however, one of the biggest roadblocks to captive formation today is the availability of fronting carriers. Kilpatrick notes, “While the rule of thumb for captive feasibility has been a premium volume of $750,000 to $1 million, this may not be a sufficient size today. These days the threshold of premiums is getting higher and higher just to get the attention of the fronts.” Today, in fact, fronting carriers are requiring a premium volume that is two to three times that amount. “This issue can cause some real stress on the agent/broker,” Kilpatrick says, “if the agent/broker has already suggested a captive to their clients to begin with.” But, he says, that is the reason why Crusader has formed its rent-a-captive facility. “If we are working with the independent agent from the start, we can help him or her structure a viable program, including the possibility of the rent-a-captive.” Mead adds that, “while the captive may be feasible from the financial side,” the current fronting issues may interfere from the practical side. While fronters and, to a more limited extent, reinsurers, can effect the formation of a captive today, Mead says that there are other captive structures that may still provide a feasible option for an independent agent’s accounts. Another concern that both Mead and Kilpatrick share is the unchecked growth of captive domiciles. While the regulators in the “more established” domiciles understand the captive concept, Kilpatrick says that new captive regulators may not get it. He says it is easy for these new regulators to bring an attitude of insurance company regulation to their jobs. As a result, he says, “They have not got their minds around the captive concept, so they regulate in a much less efficient manner.” Mead adds, “The lack of requisite skills of new captive domicile regulators is a concern. Their ranks are thin when it comes to people who really know what they are doing when it comes to captives. There are just not enough good domicile regulators to go around.” Words of wisdom Mead cautions potential captive owners and their agents and brokers to “be careful as to whom you select as your partner. Just as you are seeing more captive domiciles, there are also a lot more new consulting and captive management firms cropping up. Many don’t have the experience or, more important, the resources to really do the job.” Mead believes that a prospective captive owner needs to look for advisors who are going to be partners with the captive owner and his independent agent in the process. “Recently, we are seeing people who are using captives as tax planning tools,” Kilpatrick observes. Although he acknowledges the tax benefits to be derived from captive ownership, “when you look at them after formation, they rarely get the benefits they thought they would from a tax standpoint.” This has been a very active area for private corporations, where tax planners claim they can continue to maintain a tax-deductible position for a single- parent captive. Kilpatrick cautions about captives that are formed for a tax purpose: “This should never be the sole purpose for a captive formation.” Captive insurance company formations continue to grow worldwide, and the current hard property market assures continued growth over the next 12 to 24 months. Captives have proven themselves to be viable risk financing solutions for many organizations in the past, and as the pressure builds, more and more mid-sized firms will likely consider the captive option as well. It is important that independent agents and brokers view the alternative market as a strategic element in their growth plans and identify capable captive experts to partner with in their movement into this market segment. * |
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