The Debate Over Captive Manager Licensing: Raising Standards or Adding Burden?

The issue of captive manager licensing continues to be a contentious discussion within the industry. In a recent article for Captive Review, authors Michael Corbett, Nate Reznicek, and Robert Walling examined the potential benefits and drawbacks of additional licensing requirements for captive managers ("Captive Manager Licensing: Worth the Cost?", June 2024). Their analysis presents three potential paths forward: maintaining the status quo, introducing an NAIC-based licensing model, or implementing credentialing through an organization such as the International Center for Captive Insurance Education (ICCIE).

The Current Landscape

Currently, captive managers play a critical role in the formation and operation of captives, overseeing financial statements, coordinating with regulators, advising on coverage, and managing claims. However, unlike other insurance professionals—such as agents, adjusters, and actuaries—captive managers are generally not subject to formal licensing requirements in most US domiciles. Instead, regulators primarily monitor service providers through captive financial examinations and approved provider lists.

Proponents of the existing framework argue that the current oversight is effective in identifying and addressing quality concerns within captive management firms. They note that regulators can already exercise control by refusing to approve problem managers or disallowing captives that engage questionable service providers. Additionally, some regulators believe that formal licensing could create unnecessary bureaucracy without meaningfully improving standards.

The Case for Licensing

On the other side of the debate, Mr. Corbett, Mr. Reznicek, and Mr. Walling highlight the inconsistencies in how captive managers are regulated compared to professionals in adjacent roles. They argue that licensing could bring greater transparency, accountability, and uniformity to the industry, particularly as regulatory scrutiny of captives—including IRS investigations into certain 831(b) arrangements—continues.

One potential path forward is establishing a credentialing body with disciplinary authority, similar to the approach taken by the Casualty Actuarial Society (CAS) and the American Institute of Certified Public Accountants (AICPA). This model would involve mandatory certification, ethical standards, and enforcement mechanisms, creating a formal process for investigating and disciplining managers who violate industry best practices.

Another alternative is integrating captive management into the existing NAIC Producer Licensing Model Act, which governs insurance producers across the United States. By treating captive managers as a distinct line of authority under this framework, regulators would have a structured approach to issuing, monitoring, and revoking licenses.

Stakeholder Perspectives

The captive industry remains divided on whether stricter licensing would enhance professionalism or simply add regulatory burden. Key stakeholders offer differing viewpoints.

• Captive Managers. Some see licensing as a way to raise the industry's reputation, while others fear it could slow market responsiveness and create additional costs.
• Regulators. While many regulators believe they can manage quality through the captive examination process, some acknowledge that licensing could provide more transparency and enforcement tools.
• Captive Owners. Transparency and accountability are critical concerns for owners, who want assurance that their managers meet high standards.
• The Internal Revenue Service (IRS). While not a direct stakeholder in licensing decisions, the IRS has scrutinized certain captive management practices, particularly in small captives. Formal licensing could provide an avenue for more self-regulation within the industry.

Looking Ahead

While Mr. Corbett, Mr. Reznicek, and Mr. Walling refrain from advocating for any single approach, they stress that the captive industry should proactively engage in this debate rather than risk having regulatory changes imposed upon it. Whether through credentialing, licensing, or enhanced oversight, the goal remains the same: ensuring high-quality captive management while maintaining the flexibility and efficiency that make captives a valuable risk management tool.

See "Captive Manager Licensing: Worth the Cost?" by Michael Corbett, Nate Reznicek, and Robert Walling, published in Captive Review, June 2024.