The Role of the Domicile Manager:
Who Are These Firms, and What Role Should They Play?
August 2003
It is vitally important that captives, particularly
offshore captives, retain the services of a professional management firm in
the domicile in which they choose to operate. These domicile managers do more
than keep the books; they ensure that the captive's interests are kept at the
forefront in all matters, such as finance, accounting, record-keeping, and relationships
with regulators and others.
by Michael
R. Mead
M.R. Mead &
Company, LLC
As an essential, even mandatory part of establishing your captive, you will
be encouraged or even required to retain the services of a professional management
firm in the domicile in which you have chosen to operate your captive. The essential
role of the domicile manager is to keep the books, pay bills, record and maintain
excess and reinsurance contracts, interface with regulators, and arrange lift
tickets and tee times. Actually, that was truer in years past.
The Goal of the Domicile Manager
The exigency of today’s financial and regulatory worlds compel the manager
to perform more services, at a higher level of professionalism than was expected
10 years ago. In most domiciles, the regulators require, or at least strongly
encourage if the legislation does not mandate, that captive owners retain a
professional management firm to keep the records and actually manage the captive.
The reasons for this are several, but the root is that most domiciles have not
funded the regulatory function to such an extent that each and every captive
can be observed to the finest detail. Nor should they do so, in my view.
Captives are all about financing and managing their own risks. To do so requires
enlightened and efficient regulation. If the regulator is forced to frequently
inspect the books and records for every transaction, the entire process will
become overburdened and largely pointless. To that end, the regulator needs
the services of an independent, professional firm that will be sensitive and
responsive to the laws and regulations of the domicile, and the preferences
of the regulators.
That goal is in an interesting juxtaposition to the fact that the captive
owner selects the domicile manager, and believes that the manager is beholden
to his interests. Further, some captive owners believe that, as it is their
money, they should be allowed to manage the captive themselves. After all, who
knows more about their business than they do? The art of the manager is to operate
effectively while serving, perhaps, two masters. In theory, there should be
a consistent goal for all parties. In reality, that goal can be often tested.
The Duty of the Domicile Manager
It may defy logic, but cases exist in which an owner does not make decisions
in his own best interests, or more particularly in the best interests of the
captive. The owner may well believe that the captive, and its money, are his
alone to spend, but in fact, as a separate corporation, the captive has a life
of its own, and while the ownership may be the same as the owner’s structure,
the regulators and risk sharing partners expect that the captive will operate
in their best interests as well.
It becomes the duty of the manager (and the word duty has been carefully
chosen), to protect the assets of the captive, including money, policies, claims
reserves, reinsurance and excess insurance contracts and standing in the marketplace.
This would include the interests and responsibilities of any outside directors,
who may not be current with decisions made by the owner that may compromise
or adversely affect their role. This duty is enlarged if the ownership structure
involves investors other than the owners of the insureds.
If the owner executes decisions that drain cash to the point of threatening
the timely payments of claims, or compromise the integrity of the risk sharing
partnership, then the manager must immediately notify the responsible party
or the owner, and work toward rectification.
Should the owner fail to respond, and the situation does not improve, the
manager has no choice but to notify the regulator, and work with the regulator
and the owner to repair any harm done or potentially done. This is often solved
with an injection of cash.
Practically, regulators meet at least annually with some of the officers
and directors of the captives for which they are responsible. These meetings
are intended to further the relationship between the captive, its owners, and
the official structure of the domicile which was begun with the licensing process.
The domicile manager must manage this process so that all parties feel informed
and satisfied. If this is done, as it is in the case of most captives today,
then all move forward on their individual tracks to the common goal, a successful
captive.
The Power over the Checkbook
The daily duties of the manager should include, in my view, keeping the checkbook,
the excess and/or reinsurance contracts, claims records and issuing the policy
and endorsements. Many owners hesitate when keeping the checkbook is introduced.
The checkbook is, of course, the official record where all relevant transactions
occur. Certainly it is possible to set up the checking account in such a way
that the manager does not have unlimited access to all of the funds of the captive.
The use of impressed or zero balance accounts is widely done.
The point is that a third party whose interests are primarily aligned with
the captive’s interests should control the actual use of the checkbook, even
with restrictions. In practice, there are often two accounts established, one
small one for the use by the manager to pay general and ordinary items such
as regulatory fees or other operational charges that arise from time to time.
It is recommended that a responsible party at the office of the manager be appointed
an officer of the captive so that such mundane checking transactions can be
handled with a minimum of call upon the time of the captive’s principal officers.
Record-Keeping and Other Duties
As the policy is issued, there must be a record of the billing to the insured
for payment and of the payment received. Some may be dubious as to the necessity
of actually performing this action inasmuch as they see the situation as all
one pocket, and the premium transaction as merely bookkeeping. There is a well-known
case of a major accounting firm with a captive, which denied a large, public
claim, in part because the parent had not transferred the cash owed to the captive.
This denial caused considerable tension in an already difficult situation, and
lead to the unwinding of a large settlement with a state attorney general. Suffice
it to say, the premium must be paid, and all records should reflect that fact.
Some managers will be retained to perform reinsurance and excess duties.
It is not a requirement of which I am aware, but merely a service offered by
some firms. Whether or not the manager actually places the coverage, he should
have copies of the entire transaction, and should review the contracts with
the interests of the captive in view. Again, it is possible, and has occurred,
that the excess or reinsurance contracts contain language or provisions which
conform to the wishes of the parent/insured, but are not in the best interests
of the captive.
A case in point would be language referring to coverage that was not included
in the application for a license. When the regulator issues the license based
on the application that includes the coverage projected to be offered and that
is supported by an actuarial study and a business plan, they are not happy to
see other coverage slipped in later.
Relationship management cannot be overlooked. There are several players who
will interface with the risk sharing partner, the regulator, and the excess
insurers or reinsurers. Often a broker performs that function. Frequently another
person within that broker performs the function. No matter who performs it,
good relations must be maintained, and the manager must, at a minimum, be aware
of the current state of those relationships. For that reason, the manager often
is the responsible party for the care and feeding of the regulators and the
insurer partners.
As in all relationships, those with regulators require a regular and thoughtful
effort. It is very helpful to have occasional meetings to be current on proposed
regulatory changes, including personnel. This applies as well to the insurer
partners. A good domicile manager will know the regulators, their goals and
objectives, and the legislative climate within which the regulators must do
their jobs. A captive owner does not want to be attending a meeting with serious
issues on the table only to learn then that none of his service providers have
yet met the regulator or know the regulators wishes and preferences.
Conclusion
While some of this commentary may seem to be in support of additional frictional
costs for the captive, I hope that I have made the case for your consideration
that all of the players have the common goal of the success of the captive.
Reaching that goal is more challenging than in the past, but the rewards are
still worth the trip.
The author has an ownership position in three captive management
companies, but is not in a captive management position.
Opinions expressed in Expert Commentary articles are those of the author and are
not necessarily held by the author's employer or IRMI. Expert Commentary articles
and other IRMI Online content do not purport to provide legal, accounting, or other
professional advice or opinion. If such advice is needed, consult with your attorney,
accountant, or other qualified adviser.