Captive Insurer Boards: Roles and Governance Guide

Establishing and Governing a Captive Insurance Company: A Comprehensive Overview

Setting up, owning, and managing a captive insurance company is a significant undertaking. This article aims to guide individuals assuming positions on a captive board, providing insights into the responsibilities associated with overseeing a captive insurance company. For those less acquainted with the concept of captive insurance, we will explore fundamental aspects and the decision-making process involved.

Selecting a Domicile

The initial and pivotal step in this process is choosing a domicile for the new insurance company. Whether the founder has already identified a domicile or seeks assistance, careful research is imperative. Domiciles, including but not limited to Bermuda, Vermont, Cayman Islands, and other US states, vary in their regulatory frameworks, allowing different structures, management teams, and professional service providers. Factors such as taxes, prohibitions, limitations, and regulatory involvement must be meticulously considered in alignment with the captive's goals.

Navigating the Interview Process

If you are to serve on a captive board, an interview with the relevant captive domicile authorities is likely. This interview will assess your insurance knowledge, familiarity with captive insurance, your relationship with the founder, and the purpose behind your acceptance of the role. Preparing comprehensive responses is crucial, as authorities will inquire about the value you bring to the captive board.

Maintaining Independence

Regardless of any affiliations with the founder, it is crucial to uphold independence and impartiality. Founders may have various motivations, including but not limited to tax considerations, which might not be openly disclosed. As a board member, your primary responsibility is to concentrate on tangible insurance matters. This involves addressing challenges that traditional insurance markets may encounter and showcasing how the captive can adeptly handle such issues.

Obtaining Professional Advice

Once the coverage and financial purposes of the captive are determined, seeking external advice becomes paramount. It is necessary to engage qualified professionals, including actuaries, accountants, managers, and reinsurers. While you and the captive founder may possess valuable insights, regulatory bodies typically mandate the involvement of external experts to ensure compliance and objectivity.

Choosing Service Providers

When selecting service providers, a meticulous approach is crucial. Consideration should be given to appointing separate firms for various functions to maintain independence and objectivity. For instance, engaging a qualified and experienced captive manager who can provide valuable insights and connections within the industry is a strategic initial step.

Selecting an Actuary

The actuary plays a crucial role in predicting losses and setting premiums. While actuaries may differ in their approaches, it is essential to choose one with proven expertise in captive insurance. An actuary's success rate is a significant factor, and collaboration with the domicile's reviewing actuary is pivotal in finalizing formulas.

Accounting for Captives

Understanding that captive insurance accounting differs from conventional accounting is essential. Accounting firms specializing in captive insurance can offer tailored expertise, considering the unique aspects of insurance accounting, such as premium entries, reserves, and investment considerations.

Reinsurance Considerations

Reinsurance is a critical aspect requiring careful consideration. Agreement among founding parties on policy limits, both per occurrence and in total, is necessary. Reinsurers often seek assurance regarding the captive's ability to meet its obligations, sometimes requiring additional security measures, such as letters of credit.

Conclusion

Serving on the board of a captive insurance company demands a thorough understanding of regulatory compliance, risk management, and strategic decision-making. By adhering to professional standards, maintaining independence, and seeking expert guidance, the board can contribute to the success and sustainability of the captive.