For Captive Owners, There's No Transferring Governance Responsibility

Corporate governance is critically important for captive insurance companies, as well as the managers and other service providers the captive employs. It's the captive's owner, though, that bears the ultimate responsibility for governance.

"At the end of the day, it's the owners of the captive who are responsible to the regulators in some way, shape, or form in all aspects of the captive insurance business," said Kevin Doherty, partner at Dickinson Wright PLLC. "The owner ultimately is responsible for a regulated insurance company and for all compliance of any sort with regard to the captive."

Mr. Doherty made his remarks during a webinar titled "Governance, Oversight, and the Role of the Captive Owner and Service Providers," part of the Captive Insurance Companies Association "Building on the Best" Webinar Series.

"Regulators have one responsibility and that's to regulate the captive. We don't regulate the service providers and certainly not the captive manager," said Michael Corbett, senior vice president at Pinnacle Financial Partners, former director of captive insurance in Tennessee, and current Tennessee Captive Insurance Association president.

Mr. Corbett set out five primary responsibilities for captive insurance company owners.

• Regulatory liaison. The captive owner must assign someone—usually the captive manager—to be the regulatory liaison with primary responsibility for statutory compliance and adherence to the captive insurance company's business plan on file with the domicile. "It sounds simple, but for the owner—understanding that they have assigned this duty via contract for somebody else to look after—does not absolve the owner from ultimately being responsible," Mr. Corbett said.
• Accounting and financial reporting. The captive owner—with advice from its captive manager—will decide who will take the accounting responsibilities. "Sometimes with larger captives the accounting is done in house," Mr. Corbett said. But whether accounting and reporting are done by an outside accountant or in house, someone must be responsible for all required financial filings.
• Corporate governance. "This is ... an issue that's started to rise in importance with regulators in the captive industry," Mr. Corbett said. The captive owner is ultimately responsible for corporate governance. The owner will likely receive advice from the manager, accountant, or lawyer, but ultimately the governance responsibility rests with the captive insurance company owner. "It's sometimes lost on captive owners that the governance responsibility resides with them, not with the captive manager," Mr. Corbett said.
• Third-party service contracts. The regulator typically looks at the captive manager as being the "neck of the hourglass" between the regulator and the captive owner, Mr. Corbett said. The regulator wants to have one party it can deal with who has knowledge of all of the captive's operations and third-party service contracts, he said. Typically, this will be the captive manager. In some cases, however, captives might have separate program managers that are managing reinsurance or third-party business, and the captive manager might have no knowledge of those activities.
• Insurance operations, underwriting, and claims. "Perhaps the most difficult to pinpoint is insurance operations," Mr. Corbett said. "This gets back to the captive manager's ability to be able to communicate the status of all insurance operations." If the captive involves other parties that aren't well connected to the captive manager, the captive manager is not going to be able to opine on some of those operations that are part and parcel to the captive, he said. That could create a breakdown in communications with the regulator and subsequent problems for the captive.

"These five items are something that I would like to see the captive management community want to embrace and make sure that their owners were all aware of, that that's what regulators are looking for," Mr. Corbett said.

Colin Donovan, president of STICO Mutual Insurance Company, a risk retention group, said his captive "basically ceded the accounting and reporting responsibilities to the captive manager." STICO does have an audit committee that meets with the auditor at the completion of the annual audit to go over the audit process and confirm that everything went properly, he said.

STICO handles the other three of Mr. Corbett's five responsibilities itself, Mr. Donovan said.

Given the importance of the captive manager's role in the success of a captive insurance company, the panel discussed whether managers should be regulated.

"That's been a debate we've been having for about 2 years as to how far do we want to take this," said John Capasso, president at Captive Planning Associates. While some in the captive insurance industry favor creating some sort of self-regulatory organization for captive managers and other captive service providers, others oppose the idea, he said.

"There are no real formal standards" for captive managers, Mr. Capasso said. "They're not really regulating managers." While regulators may "approve" captive managers, there is no licensing requirement, he noted.

But, Mr. Doherty said, "Fortunately for our industry, most managers are known to most regulators." So, it's not accurate to suggest that there's absolutely no oversight of captive managers, he said.

"I want to make sure that my captive manager knows what [it's] doing," said Mr. Donovan. "The best way that I’m going to find how [it] doesn't is if I start getting slapped by my regulator.""

"I think I concurred with a lot of my fellow regulators that domiciles regulate captives, period," said Mr. Corbett. "[Captive regulators are] not in the business of regulating captive managers. Because it's never going to be one-size-fits-all with captive managers."

Mr. Corbett said he does expect the captive owner to be aware of and address the five responsibilities, however. "What I anticipate happening is captive managers telling captive owners—either existing or prospective—that of these five jobs, we're willing to do four of them," he said. "The other, you have to take responsibility for, which is corporate governance.