Captive best practices guidelines
CICA guide focuses on business alignment, corporate governance and regulatory compliance
By Michael J. Moody, MBA, ARM
This year’s Captive Insurance Companies Association (CICA) conference held in March again drew more than 500 participants. While many were expecting an update of the proposed IRS regulations regarding consolidated financial statements, they were pleasantly surprised to find out that the IRS had withdrawn that aspect of its proposal. That news set the stage for a very successful conference.
As in years past, a conference highlight was the presentation of the annual fronting survey. The survey, which has become a centerpiece of the conference, was expanded this year to include information on reinsurance and employee benefits. The conference also featured a number of excellent education sessions as well as the presentation of the Outstanding Captive Award to Housing Authority Insurance Group, and the Distinguished Service Award to Tom Jones of McDermott Will & Emery.
New initiative
Another highlight at this year’s CICA conference was the introduc-tion of the “Captive Best Practices Guidelines.” Discussion of the guidelines began at last year’s conference, which also included deliberations about developing some sort of captive accreditation process. Ultimately, CICA decided to develop the best practices guidelines rather than an accreditation process. According to Karin Landry, managing director of Spring Consulting Group and CICA board member, “CICA felt that accreditation would create another level of regulation that captives didn’t need.” She notes that CICA believes that the current regulatory environment is adequate, and “CICA felt that this was not its role.”
Shortly after the 2007 conference, a committee was formed to develop a guide to captive best practices. The committee was made up of two working groups: industry representatives and regulatory representatives. Landry says that each group created a list of its top 10 issues. She notes that, for the most part, “both groups developed a similar list.” The list of 10 major topics was further distilled to three core areas to be covered by the guidelines.
Top three guidelines
Business Alignment. In essence, this guideline states that a captive should align itself with the business of the parent(s) to remain relevant. The committee believes that developing a mission statement that supports this position will help to align the various parties. They also note that a proactive risk management program that focuses on prevention is a critical component of the mission statement.
Further, the owner(s) or captive manager should be capable of success-fully running the captive. This includes selecting the appropriate domicile and form of captive as well as securing the needed licenses, board members and required ongoing education. Specific insurance programs as outlined in the feasibility study should be implemented as well. The ongoing operations and policies to support the captive should also be created.
The final issue with regard to business alignment is owner commitment. The guidelines indicate that a long-term commitment to the strategies and mission of the captive is required. Further, the captive’s strategy should be reevaluated every three years—or sooner if needed. This will ensure that the captive’s board of directors is effectively overseeing implementation of these strategies.
Corporate Governance. This is essential to control and direct the captive’s administrative management. Among other things, this would include fairness, accountability, transparency and discipline. The committee notes that corporate governance begins with a board of directors, which all captives must appoint, that is responsible for monitoring and adjusting strategic, operational and financial controls. It is important that the board be made up of qualified members who have sufficient and appropriate experience. Typically board members are chosen from representatives of the owner(s) parent, the risk manager and other knowledgeable professionals such as the captive manager, auditors, actuaries, accountants and/or legal counsel. It is important that these professional advisors be non-voting members of the board.
The guidelines state that the board will establish the policies and procedures for corporate governance. In that regard, all board decisions should be documented and records of all meetings kept. Continuing education should be a requirement for all board members. Additionally, ongoing evaluation of the effectiveness of the design and operation of the captive is a key concern. Reevaluation of all captive functions should take place periodically. The board should form and maintain several standing committees, which at a minimum should include under-writing and risk management, finance, and audit and regulatory compliance. In addition to the original policies, procedures and controls, operational guidelines are critical to the success of the captive. These guidelines should include financial protocols, investment strategies, record retention, audits and conflict of interest policies.
Regulatory Compliance. Here the guidelines state that the captive must be aligned not only with the parent(s) business but also with the domicile regulations. For the most part, insurance regulations are used to protect the captive’s policyholder(s) by establishing standards of corporate governance, financial strength and market conduct. Thus it is important that the captive manager have clear knowledge and understanding of all licensing and regulatory requirements and protocols.
The captive manager is the key link in regulatory compliance. This individual is the eyes and ears of the domiciliary regulator. The captive manager is also the interface between the captive owner(s), other service providers and regulatory authorities. As such, managers must be well versed in reporting and filing requirements, licensing issues, financial solvency requirements and tax audits.
Regulators, for their part, are most concerned about solvency and the overall financial strength of the captive. Thus, the captive manager must keep the regulator advised about capital and surplus issues, liquidity and solvency ratios. The manager must also advise authorities of the captive’s reinsurance structure, including the reinsurer’s rating. The captive manager must maintain regular communication with domicile regulators and supplement this contact with annual statements.
Next steps
Now that CICA has presented its guidelines, what’s next? Landry points out: “We will continue to fine tune the three areas addressed in the guidelines.” However, she notes, “As a group, we decided not to make these three areas more specific.” There is concern that if the guidelines were more specific, they would lack the flexibility to work in individual and unique situations. Therefore, CICA sees little value in “drilling down” any further into the three areas addressed by its guidelines. At this point, Landry says that both working groups (industry and regulators) are happy with the current guidelines. She indicates that the intent is to leave them pretty much as is. “The way we hope it will progress,” Landry says, “is by people taking the guidelines and applying them to their unique circumstances, then measuring and tracking their performance so they can see how they should evolve the captive over time.”
Landry also notes that the guide-lines have “been very well received.” As far as future expansion of the three areas is concerned, she says, “If we go further, it will be to develop some of the remaining seven areas.” Such matters, she says, will be decided at a future CICA board meeting.
Conclusion
CICA is to be commended for publishing the Captive Best Practices Guidelines. With a committee of more than 20 people, it is always difficult to reach consensus. As Landry points out, “Everyone chipped in and did what they had to do.” And she goes on to say, “We really tried to incorporate everyone’s views.” At the end of the day, she notes, “Everyone who was a part of the working groups had an opportunity to provide input.”
The Guidelines are further evidence of CICA’s growing impact on the captive movement. The association’s involvement, along with the Vermont Captive Insurance Association, and all the other Coalition members, helped get the proposed IRS regulation withdrawn. Development of the guidelines also demonstrates CICA’s involvement in the captive community. It is clear that the CICA Board of Directors and its members are working toward a better environment for captives worldwide. *