Magazine article Risk Management

Are Captive Boards Serving Them Well?

Magazine article Risk Management

Are Captive Boards Serving Them Well?

Article excerpt

If it was possible to poll all of the directors and officers of captive insurance companies and their parent organizations, I suspect that many of them would say that they felt inadequately equipped for the decisions that they had to make during the formation and first few years of a captive's life.

Forming a captive that effectively responds to the intended business objectives while complying with legal and regulatory requirements and achieving recognition as an insurer by the IRS, can be confusing for anyone. Issues pertaining to questions about the selection of domicile, the source and method of capitalization, appropriate pricing, the necessity or advisability of a front or reinsurer, tax structures, etc., are hardly clear-cut--even for CEOs, CFOs and risk managers. Imagine how much more confusing it is for other executives on the captive parent's board of directors who are less familiar with the principles of risk

management and insurance. And yet there is so much more to consider, such as the operational and governance issues devolving from the substitution of functions previously performed by a traditional insurer with internal or contracted functions.

Creation of a captive does not make the functions normally performed by a traditional carrier magically disappear. Some entity, whether intramural or contracted extramural, must now perform the functions of policy construction, policy issuance, claims determination and administration, litigation management, development or production of risk management information systems (RMIS), responsible reserving, reinsurance acquisition and management, financial and regulatory reporting, etc. Before a clear picture of the real impact on the organization can be formed, it is necessary to research the ramifications of each issue on every layer of the organization, including executive, management, technical and clerical. There are many financial, legal, tax, regulatory, governance and risk management issues that can have direct, indirect and dramatic consequences to a company's results, rating agency evaluations, corporate image and internal practices.

Considering the breadth and diversity of affected functions, it is easy to wonder if directors, whether individually or collectively, are adequately prepared. Because the captive universe is so diverse in type and size, it is difficult to generalize. …

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