Forming a new captive? Choosing the right service providers is key

Allan Autry and Adam Dubuque, partners at Johnson Lambert, Patrick Theriault, managing director at Strategic Risk Solutions, Mike Meehan, principal at Milliman, and John James, head of business development at Performa, on the advantages having the right captive services partners can provide and how to find them

 

As we’ve all seen, new captive formations have been at an all-time high over the past few years. Pure captives, group captives, cell structures and even risk retention group formations are on the rise across all domiciles. To set your captive up for success, it is crucial to have the right captive service partners on board during the pre-formation phase.

How do your captive manager, audit/tax firm, actuary and investment manager add value in the pre-formation process and help your captive meet its strategic objectives once that first policy is issued? Keep reading to learn about the advantages they impart, as well as considerations for selecting the right service partners for your captive.

Insights from a captive manager

You’ve elected to create a captive – great choice. Another critical decision is selecting the captive manager. How do you decide which manager is right for you? Here are several areas to consider.

  • This must be a trusted relationship so you are confident and comfortable your insurance company manager is taking care of all the moving parts of your captive. Can they manage your subsidiary with the right people, processes and tools to allow you to sleep at night?
  • Look for a company manager with some experience in both the captive insurance business and the industry you operate in. Your manager should have a familiarity of the domicile where the captive insurance company will be located and the type of captive you are considering setting up.
  • Understand the technology the captive manager has in place to run your captive. Make sure those tools and processes are clear and provide you with the insight to the captive you need.
  • Review the manager’s internal controls. For example, does the captive manager have a SOC 1 annual review completed?
  • There is no one size fits all. Is a one-stop turnkey solution right for you or would a fully unbundled approach better fi t your long-term needs? Do you prefer brokerage and management under one roof or an independent approach 100% focused on the captive programme?

Understanding the ins and outs of your captive are crucial to its success. Start with trust and expertise with an insurance focused manager that has your interests at the forefront.

Significance of an experienced CPA

As you look to build out the team of service providers for your captive, having an accounting firm with in-depth knowledge and a wealth of experience in the captive industry can be critical as your captive moves through its life cycles.

In the formation stages, having the right tax and audit firm ensures the captive is on the right track from the start and is set up for long-term success. The accounting firm will help determine the correct federal income tax position of the captive, advise on best overall organisational structure, review the wording of the policies and help vet issues to prevent unforeseen surprises.

In determining which accounting firm you want to partner with, look for a partner with a proven track record in the captive insurance industry, one that provides a team of experienced insurance professionals, one that strives to be your business partner and put your best interests first, and one that has strong working relationships with your other service providers.

Putting all these attributes together will set you and your captive up for long-term success.

Expertise from an actuary

As organisations evaluate whether and why a captive may be the right option to finance their risk, they will also engage an actuary to conduct a feasibility analysis. The actuary will gather financial information, such as historical loss experience, exposures and premiums.

For the actuary to select the appropriate methodology and assumptions for the analysis, the exchange of information needs to include much more than just data. The sharing of qualitative information is equally important.

Understanding the reasons why a feasibility analysis is being conducted, as well as the goals and constraints of an organisation, can help the actuary as they select certain inputs and parameters to test and evaluate in their models, such as the captive’s retentions and potential reinsurance structures.

The communication between the actuary and the prospective captive owner should also include a discussion related to any changes that may have occurred in the business over the past several years and any upcoming changes, including acquisitions, divestitures and risk management initiatives, information that may not be easily identified in the data but is undeniably important to the analysis.

When selecting an actuary, it is incumbent upon the prospective owner to engage one who will take the time to ask the necessary questions to get a comprehensive understanding of the organisation’s business and serve as a trusted business advisor.

In this way, the actuary will be better prepared to provide a more thorough and complete feasibility analysis, allowing for stakeholders to make informed decisions about the captive insurance programme.

Importance of an investment manager

Finally, it is imperative to select the right investment manager for your captive.

Forming a captive to retain your own risk is primarily driven by your insurance needs and risk management goals, but a prudent investment programme should also be a part of every successful insurance company’s strategy.

Your captive’s investment programme should begin during the formation process (or shortly thereafter) by identifying a partner that can help determine an appropriate strategy, draft an investment policy statement and be ready to put your captive’s assets to work after official formation.

The investment programme is there to provide a return on the company’s assets to offset expenses of the programme and support the long-term financial health of the captive.

Therefore, it is essential to implement an investment plan at the captive’s inception to start generating a return early in the captive’s life cycle. Selecting the right investment advisor is also key as they should:

  • have significant experience managing assets for captives
  • be willing to act as a fiduciary
  • have knowledge of the regulatory environment in which captives operate
  • understand the purpose of the assets they’ve been entrusted to manage
  • be able to deliver a customised investment solution that evolves over time based on your captive’s unique structure, risk tolerance, liquidity needs, liability profile, etc.

Doing so can position you well for many years of long-term financial success.

With these great insights from veteran captive professionals in mind and with the right team in place – both at your organisation and through strategic partnerships with captive-focused service providers – if you are considering a captive solution, this market may offer a compelling opportunity to pursue it.

Should you need additional information or any guidance from an assurance or tax perspective, the Johnson Lambert team would be pleased to be a resource.

12 August 2024
5-6 November 2025

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