Ten years ago I wrote an article in which I commented on the debate (topical at that time) regarding the independence of brokers and captive managers. Ten years on the debate remains but the issues have moved on. Captive managers have never faced a more challenging environment than they do now; consequently captive boards have never been more reliant on their managers to provide effective responses to such a dynamic captive universe.
Ten years ago I concluded that it was more important to select the best manager for the job rather than worrying too much about their alignment or otherwise with your group broker. That still remains my position, but the range of skills you should be looking for is now presenting a substantial challenge to single-domicile independent managers.
Perhaps that explains why there are a reducing number of these as they sell out to brokers, or establish multi-domicile capabilities. This has driven significant consolidation in the industry over the last few years and will continue to do so—there will be no let-up in the rate of change in the captive firmament.
Crucially in those 10 years the key question has changed from “Which manager delivers the range of services required by my captive?” to “Which captive manager offers the range of services required by the group?”
The range of services required of captive managers has also grown considerably as the expectations and demands of captives from an increasing number of stakeholders have grown. So here are three questions to ask about your captive:
- How are you dealing with issues of global compliance?
- How are you pricing your risk?
- How are you adapting the captive business model to meet the changing demands of your own dynamic business environment?
How are you Dealing with Issues of Global Compliance?
This encompasses traditional compliance requirements of the domicile but also takes in other regulatory compliance in operational jurisdictions, and international compliance such as Anti-money laundering and sanctions. This requires a comprehensive understanding of all compliance requirements, the various ways of achieving them, and how to properly monitor and control compliance across the programme to reassure the directors and owners that appropriate levels of compliance are being met.
How are you Pricing Your Risk?
Traditional captive “underwriting” practices such as broker’s bench quotes, unadjusted averages claims bases, or simply defaulting to renewal as expiry are increasingly unsustainable. They are experiencing ever more stringent scrutiny from auditors (both captive and group), regulators, business unit managers, tax authorities (Insurance premium tax and corporation tax), fronting insurers and captive non-executive directors.
What is needed is a defensible risk assessment process based on recognised modelling techniques and sound, comprehensive data. What is more, premiums must be robust at both the global and local (to the insured risks) levels.
How are you Adapting the Captive Business Model to Meet the Changing Demands of Your own Dynamic Business Environment?
No captive programme can remain still for long and no captive strategy is likely to remain optimal for more than 2 or 3 years without some adjustment.
This requires constant challenge and review, looking to match optimal captive structures and coverage with the changing needs of the group. To work properly this requires an understanding of the group’s business and strategy, the captive, and a detailed understanding of the changing international insurance and risk environment. Periodically this review should set out to re-establish the economic value of the captive from scratch—if you wouldn’t set it up now, you probably shouldn’t have it at all.
Ten years on, independence of manager and broker remains an issue in some people’s view in their selection of captive manager. However, in my view this ignores the increasing complexity of captive programmes and the increasing challenges of the world in which they operate. The key factor has to be whether your manager has the capabilities to meet these efficiently and effectively; open communications, cooperation and international bench-strength are far more important in achieving this must surely take precedence over the perceived advantages of independence between broker and manager.