Virtually every captive regulator and domicile requires that a captive be managed by, in their words, a competent professional manager. But many captive owners are not familiar with the group and often wonder why they are necessary.
The captive manager functions as the eyes and ears of the regulator. If a captive is following unsound practices in underwriting, claims, investments, or operations, and fails to take action when warned by the manager, it is the manager's duty to inform the regulator. Indeed, working with the regulator is the primary function of every manager. Regulators and legislators in domiciles change, and their attitudes about captives can also change. It is imperative that the local manager know the regulators and the key legislators and keep abreast of their comings and goings and interests. Such knowledge can make or break a captive.
A Myriad of Responsibilities
Beyond the "police" functions mentioned, it is the manager's responsibility to keep the books of the corporation and to make them available for inspection by the regulator, auditors, examiners, and shareholders. Many managers offer far more services, including arranging meetings, arranging fronting and reinsurance contracts, and working with attorneys and claims adjusters, banks, and investment houses. Depending on the presence and dictates of a fronting company, the manager also issues the policies and endorsements and may also participate to a greater or lesser degree in the underwriting of risk.
One very time-consuming part of the manager's job is working with auditors and examiners. The manager must have adequate office space to provide for the annual visits of the auditors. Files must be organized, thoroughly documented, and available. Personnel who work on the captive must be available for interview sessions.
As the Financial Accounting Standard Board (FASB) changes its rules, the audit process has become more time-consuming, rancorous, and expensive. The manager is often the owner's first and last line of reason in dealing with the auditors and examiners. A positive change in an opinion can make the fee seem very reasonable indeed.
Types of Captive Managers
There many forms of managers: brokers, independents, banks, accounting firms, claims adjusters, and in-house claims managers. In-house, or self-managed captive managers, are usually not permitted, but in certain circumstances regulators will agree when specific controls are in place. Obviously self-policing is not ideal but it can work in isolated situations.
Each form of manager has its own strengths and weaknesses. Broker/managers, the largest group by number of captives, bring networks and resources for integrating necessary traditional products into the captive structure. This would encompass fronting, reinsurance, third-party administrators (TPAs), and others. Fees can sometimes become difficult to determine as the brokers are able to spread costs internally without revealing them.
A few banks, audit firms, and claims firms have become managers in order to feed their other lines of business. These structures can be restrictive to the captive's operations. Should the other services not meet the goals and standards of the captive owner, it can be difficult to make changes.
Independent firms also come in a variety of shapes, sizes, and competencies. While generally offering more variety of choice for the owner, the owner must carefully evaluate the professionalism of the firm and its associates. The management business generally has a low bar to entrance, with few domiciles requiring licenses or anything more than being known to the regulator. This situation has enabled many people to enter the field perhaps with less knowledge than is required to perform the duties.
Costs and Fees for Captive Management Services
Fees for services will vary widely, generally ranging from $10,000 to $100,000. Most management firms do not rely on the management fees for their existence. They sell related products, such as fronting, reinsurance, and other services from which they derive the bulk of their income. The fees are directly tied to labor costs which can be few to huge. In fact, risk retention groups (RRGs) require a great deal of labor, which generally puts their fees into six figures. Captives would be far less. In some cases, the owner performs most of the accounting and financial work, and then allows the manager to have a copy, which the manager then submits to the regulator.
As long as the fees are in a reasonable range, it is a good idea to have a captive manager. They are usually experienced and very helpful in matters that arise for which the owner may have no insight or experience. To obtain the most value from the captive manager, the owner should keep the manager up-to-date and current on not only the captive's activities but also the thinking of the owner as to strategy. An informed manager is a better manager.
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