The Importance of Vendor Management Best Practices for Captives

Captive insurers, particularly group and association captives, rely heavily on external vendors for various services. However, many captives lack a comprehensive set of vendor management best practices, which can lead to difficulties in maintaining these relationships.

Given that these services are often costly and vital to the captive's success, it is crucial for both management and the board to thoroughly review these contracts on a rotating biennial basis. This article provides a general overview of how to implement some of these practices.

For captives seeking a clear and organized procedure for managing their vendors, it is essential to identify key factors for both success and risk early on.

Success Factors

• Clearly define the expected level of service and delineate the roles and responsibilities of both the captive insurance company and the vendor.
• Establish communication expectations. Vendors should provide ongoing updates on service levels, staffing, employee turnover, customer satisfaction, performance results, and other relevant issues.
• Schedule regular meetings to discuss these items. Some discussions may require board input, while others can be managed at the staff or management level.

Risk Factors

• Insufficient due diligence by both parties before executing a contract—conduct thorough research.
• Lack of trust in the decision to outsource or in the specific vendor by the board or management. Successful vendor relationships require full buy-in from both the board and management.
• Relying on the vendor to be a strategic adviser or thought leader in new business decisions unless they are specifically qualified to do so.
• Allowing contract costs to be the primary factor in selecting the vendor.
• Significant staffing changes at the vendor.
• Failing to recognize that successful vendor management requires significant effort from the captive.

Many of these criteria can be identified and included in the request for proposal (RFP) that captives should use to procure services. Collecting RFPs from multiple sources to assemble your own simplifies the process and helps ensure nothing is overlooked.

Vendor Risk Management

Another critical area for captives is assessing the business risks associated with a vendor. The white paper Four Keys to Creating a Successful Vendor Risk Management Program That Works by ProcessUnity, a third-party risk management assessment company, states, "It wasn't long ago … that your company viewed third-party vendors as merely providers of goods and services to your business. The conventional wisdom … characterized vendors (including consultants and contractors) as suppliers, not business partners; so their problems weren't your problems….

"For most companies, regulatory requirements are the leading reason to conduct vendor risk management (VRM) assessments. External regulators as well as internal auditors are expecting that you thoroughly understand the range of risks inherent in doing business with outside organizations, and that you have taken measures to lessen the impact of those risks on your own business."

Many captives may not fully understand the increasing scrutiny from insurance regulators, who now view vendor issues as directly impacting the captive, especially concerning cyber security.

Issue Resolution

One major reason captives change vendors is the lack of issue resolution. Effective procedures ensure issues are addressed quickly and without escalation, preventing small problems from becoming larger issues. The captive and vendor should agree upfront on how issues will be handled and by whom. Management should maintain a list of known issues, assign responsibility for their resolution, and establish a time frame for correction.

Effective vendor management allows captive insurers to control costs, mitigate potential risks, and ensure high-quality service delivery and value. When implemented correctly, it offers several benefits.

• A wider selection of potential providers
• Enhanced performance management of vendors
• Better value for money spent on contracts

Since vendor performance directly impacts the captive's performance, consider adding vendor management to the agenda at your next board meeting—it could be highly beneficial.