Expert Commentary

Captive Claim Management

Many practitioners may think captive claim management is just like "regular" claim management. While most process and practices are the same or very similar, captives and alternative risk financing vehicles do have nuances and unique features and requirements that dictate processes and practices for this form of risk financing. Thus, this article will identify those distinctive aspects of claim management critical to a well-run program.


Claims Management
January 2019

A good place to start is the lines most commonly found in captives. They include auto liability, workers compensation, general liability, medical malpractice, professional liability, property, and product liability. There are others, of course, and new coverage ideas emerge often, but these represent the most common exposures covered in captive insurance companies. The choices of coverage are driven by a variety of factors that include primarily frequency of loss, the potential for catastrophic loss, regulatory rules, market pricing and availability conditions, and, of course, the needs of the organization. Regardless of the lines underwritten, when a claim strategy and program is chosen, be sure that the program meets the needs and expectations of the business and ideally follows industry best practices to produce the best claim trends and outcomes.

When determining what to insure in the captive, expected losses should be central. However, prevention and control tactics are the focus of exposure control, both pre- and post-loss. Yet, despite a company's best pre-loss initiatives, there will be claims, and you will be sued, so the best strategy is to be prepared for both. Unfortunately, many captive programs have little or no formal strategy or rigor, choosing instead to learn the hard way from a bad loss experience and, sometimes, several bad loss experiences. Reducing both the frequency and severity of losses will reduce the chances of significant variations from budget and cost of risk expectation.

Claim issues to consider include the types of claims that need to be handled in the program; the specific jurisdictions that will be involved and their regulatory rules; the expected volume of claims, by type; the alignment of claim strategy/philosophy with corporate culture and philosophy; and the corporate expectations of the claim program. The type of administrative structure and strategy that will be used offers the following common options.

  • Self-administration (large deductible or captive environments)
  • Employed, internal staff
  • Insurer (traditional insurance market)
  • Claim employees of the insurer
  • Specialty insurer (often subsets of large insurers)
  • Third-party administrator
  • Local law firm

Captive Claim Program Location

Jurisdictions and domiciles (i.e., country, state, county) play a major role in determining the requirements for and the needs of the claim program. Claim philosophy and expectation differ from domicile to domicile, with each representing unique regulatory considerations. Process, laws, and statutes vary as well. Other concerns include the local availability of claim professionals and other supporting vendors to execute day-to-day operations (activities for which insurers normally retain full-time staff).

Approach to Claim Management

Key strategic and tactical claim-related questions to consider include the following.

  • What level of involvement does the company expect from their claim administrator?
  • What are the expectations for communication methods?
  • What is the frequency and time frame of regular communications?
  • What is the agreed-upon claim philosophy?
  • What type of financial and claim reporting will be done by whom and when?
  • Who should be involved in audits?

Captive Claim Management Staff

A successful captive claim program should include competent staffing to specific skills and levels; consistent regulatory compliance; accurate policy interpretation/coverage decisions; timely, appropriate reinsurance reporting; internal and external audit compliance; consistent quality customer service; and effective litigation management process.

Professional claim staffing is critical to a best practices captive claim program. Important qualifications and competencies include the amount and type of claims experience; the level of legal understanding and background; the extent of the relevant industry knowledge; and the location of staff operations and whether it will be centralized, dispersed, and/or virtual.

In defining what skills claim professionals will need and how the program will operate, there are many considerations including what claim volumes should be expected, what the standards for adjuster claim caseloads will be, the nuances of the different types of claims to be handled, the complexity and time requirements of the program, client meeting requirements, claim review frequency, extent and source of field investigative work needed, severity of claims, expectations of program for turnaround times, and required deadlines and schedules. All claim professionals should understand and align with the corporate philosophy and the characteristics of the parent company's culture, customer service expectations, settlement philosophy, customer-relation sensitivities, and brand/reputation protection.

Fraud Prevention

Captives are no more immune from fraud as any other insurer, and thus fraud prevention is important to cover as part of a claim management process. It requires clear policies, appropriate accountability and ideally a proactive approach that includes background checks, enforced authority levels, double-payment approvals, check distribution checks and balances, electronic payment process, claim audit process, and a process for training and reinforcement of necessary skills.

Regulation of Claim Captives and Legal Concerns

Regulatory considerations will be driven primarily by the domicile of operation and license that may often be offshore and different from the domestic regulation you may be used to. Regulatory issues that claim professionals should understand include licensing requirements, continuing education requirements, domicile requirements for reporting, audit extent and frequency, your exposure to fines and penalties, and coverage-related issues. This last item is addressed through different approaches that may include the following.

  • A fronted policy arrangement with an insurer that dictates some claim handling expectations
  • A large deductible program where there is more flexibility with the interpretation of the coverage, and thus more flexibility for handling claims within the culture of the captive facility

At the end of the day, all applicable laws are primary, and the policy contract will be enforced by the relevant courts in the jurisdiction of the claim.

Since captives are in effect "insurance companies" subject to many of the same operating, legal, and strategic considerations as insurers in the regular markets, the captive owner should be clear on what exposures they intend to cover through the program. Among some of the more significant vagaries of captive claims, the following questions should be answered.

  • Do you understand vicarious liability and agency issues?
  • Are unintended exposures addressed and coverage revised appropriately?
  • What might expand coverage beyond the intended?
  • Are you using and interpreting endorsements correctly?

These are not necessarily all of the relevant questions that would be necessary to operate a captive insurance company in a fully effective way, but they are the ones most relevant to getting the claim function running well.

Reinsurance Issues

Reinsurance programs and levels are customized for the needs of the group captive or captive owner. Many layers of reinsurance policies are usually in force depending on the risk being insured. Reinsurance policies have their own, often unique set of requirements for claims including the following.

  • Reporting requirements
  • Claim administration requirements
  • Claim authority levels and authorization procedures for reserves, settlements, and payments

The overarching focus here would be to be sure you understand the design of and strategy attendant to how reinsurance will be used with your captive and the nuances that will affect how claims should be handled as a result; this is necessary if you expect reinsurers to pay when called upon to do so.

Audit Issues

Captive claim programs can be periodically audited for a variety of purposes by the following.

  • Fronting or excess/reinsurance insurers
  • Captive managers or owners
  • State regulatory agencies
  • Other stakeholders (e.g., brokers, agents, accounting firms, rating agencies, etc.)

Regardless of who performs the audit, the claim files should be handled consistently, kept complete, and always contain accurate content. Some issues of special importance related to captive claim audits include the following.

  • The depth and breadth of the audit process and focus
  • The compliance expectations of the auditor
  • To whom the findings and conclusions are shared
  • The follow-up and closure expectations on findings

Claim Administration

A best-in-class captive claim program should be customized to the needs of the parent organization and aligned with your overarching risk management strategy. The type of claim administration strategy you use can be determined based on a variety of factors that include the following.

  • Jurisdictions and venues in which your claims fall
  • The lines of coverage being handled, each having its own nuances
  • The claim expertise and best practices needed to manage claims well
  • The loss history results and trends you will experience

Recommendations and referrals for claim partners should be solicited and reviewed from other industry players, and the reputation and financial stability of the administrator should be reliably vetted and validated before choosing your partner and/or staffing your claim function.

Measuring Captive Claim Program Performance

Finally, measuring captive claim performance and documenting results are critical to sustaining management commitment to your captive strategy. Key questions you should ask and answer include the following.

  • How will you define captive claim success?
  • How will you secure the resources needed to address the identified negative trends?
  • How will you minimize large loss "surprises"?

Captive claim program success metrics don't differ much from most other regular market measures but should be designed in alignment with goals and priorities of the captive strategy. Some typical metrics include the following.

  • Average paid Indemnity and expense
  • Last reserve compared to the final paid per file
  • Percentage of claims paid versus denied
  • Turnaround time on payment processing

Ultimately, the overarching measure of success will be the effect of the company's results on the total cost of risk. For traditional (hazard- or insurance-focused) risk management, this remains a key metric for measuring cost-control efforts for expenses related to insurance program elements. In that claims are the biggest component of this metric, it highlights the importance of managing the claim function with excellence. As captive claims have similar potential to make or break risk management success, captive owners should ensure that claim management is appropriately designed and prioritized among other key captive program components.


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.

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