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The Captive Service Provider Wheel of Fortune

Live reporting from the 2008 VCIA Conference
By John Salisbury, CPCU, ARe, ARM
President, Captive.com, LLC

“The Captive Service Provider Wheel of Fortune” -- with the captive board of directors firmly ensconced at the center of the wheel -- was the title of a timely and helpful Vermont Captive Insurance Association conference session moderated by Lawrence Cook of Discover Re. The panel included Michael Maglaras of Michael Maglaras & Co., Pamela Woodroofe of Collins Consulting and Janeanne C. Lubin-Szfranski, Hospital of Saint Raphael.

The panel addressed the roles, challenges, and complexities of a captive's day-to-day interactions with its captive manager, program manager/MGU, third party claims administrator or claim department, broker, investment manager, independent consultant, actuary, auditor, legal counsel and regulators.

Maglaras contrasted how some captives actually select service providers with how they should select them. He emphasized how important it is for service providers to work together, and suggested that prior to any meeting of a captive board, the service providers should jointly discuss their respective reports and recommendations. He warned that unanticipated Board of Director confusion -- and even conflict -- can result from the absence of effective communication among service providers prior to meetings.

The roles of various service providers were discussed during the session. Attention was called to the advantages of maintaining an independent consultant or director with the expertise he or she will need to challenge key assumptions and options provided by various service providers.

Lubin-Szfrabsjki addressed the importance of sound claims handling -- in my opinion, a sorely-neglected topic within the captive insurance community. She described the Hospital of Saint Raphael’s in-house claim process. Pressures to keep reserves low because of the impact on an organization’s financials and the prospective consequences were discussed.

The value of an operational review of a captive was highlighted by Pamela Woodroffe. Some of the expected outcomes of an operational review, according to Woodroffe, might include

• improved captive efficiency;
• identification of possible of ways to increase surplus; and
• an independent report that benchmarks the captive within its peer group.

Lawrence Cook argued that a captive reinsurer is not a service provider. He suggested instead that reinsurers are primarily risk takers and partners. The reinsurer’s balance sheet protection and underwriting expertise, among other contributions brought to the table by the reinsurer, help create sound captive financing and enhance the captive’s opportunities for growth.

The session concluded with an important discussion of what can go wrong between the captive and its service providers, offering suggestions on strategies and tactics that can minimize or eliminate each potential problem.

There was good audience participation, and presentation slides for the session were provided to each attendee.