Investing Captive Funds
There are a number of constraints that come into play when creating the investment philosophy of a captive insurance company. Among these are: who owns the captive, and what is their philosophy towards investment risk, especially when they are faced with severe insurance risk, meaning potential for claims as with healthcare captive insurance companies, and various forms of professional liability insurance captives.
Most of the Fortune 500 captive insurance companies integrate their investment plans for the captive, with the investment department of the parent corporation. That is why the Chief Financial Officer and the Treasurer are on the Board of the captive. Some of these captives use the funds to purchase domestic U.S. insurance companies, so they can eliminate the ultimate cost of using "fronting" carriers. This has become a creative use for investments.
Managing the cash flow in a captive insurance company to determine the available cash to invest also requires paying attention to restrictions from the "fronts" and the regulatory authority in the various domiciles both onshore and offshore. On the basis of the substantial insurance risk being absorbed by the captive, the regulatory constraints on investments of the incorporation domicile, and the "front" insurance company requirements, captives have had a conservative approach, such as no loss of capital, fixed income securities, etc. This is, however, not true for agent-owned captive insurance companies who have been able to take a more creative approach to investing available cash in non-traditional investment instruments.
Some of these captives invest in hedge funds, where the anticipated return is greater. The owners are looking for higher yields on their investments, and the available float of premiums can produce ultimately higher investment income for the captive insurance company. Many of the owners of hedge funds are looking at the captive insurance company as a source of capital. Many offshore hedge funds have also set up captive insurance companies to write their Directors and Officers liability insurance.
The dividend payable by the captive to its parent has always been marked with internal corporation policies. Some of the early captives actually funded the corporation's overseas expansions. Reinsurers of captive insurance companies are always concerned when the captive insurance company has an aggressive investment philosophy. Reinsurers want to see the captive retain their investment funds, and not dividend the funds out to the parent company.
Captive insurance company managers have attempted to provide investment advice to captive owners, and play a role of trying to get their managed captives higher yields to offset their captive management fees. Many have learned that to manage cash flow in a captive insurance company, writing professional liability (long tail), medical malpractice, and earthquake insurance is no easy task.
The rating organisations are asking many questions about a captive insurance company's investments. They, obviously, are looking for a conservative investment philosophy if the captive wants a good financial rating.
Finally, captive insurance companies need a planned investment strategy and guidelines. Authoritative sources want to look at a complete overview of your captive's investment portfolio. Details include a breakout by sector, rating, maturity, yield information, and above all, asset liability matching. Industry breakdowns of your corporate bond and convertible bond portfolios are reviewed. Captive owners need to monitor their investments, and delineate any single large investment guidelines. You need to focus on investment risk when investing captive insurance company funds.
Captive owners need to be prepared to discuss their strategy of investing in fixed income or equity securities or mutual fund holdings. Captive insurance company owners have both inside and outside investment management, and should continually explore the use of outsourced investment management, by evaluating the role of outside investment management, and their expertise, and investment performance.
Captive insurance companies have two sources of income, underwriting profits and investment income and are always looking to increase both of these areas to assure themselves of an adequate rate of return on their captive investment. Author Andrew Barile, CPCU, is an internationally recognized expert on captive insurance companies, with over thirty (30) years of experience. He currently is retained by law firms with respect to captive disputes, sits as an Independent Director on the Board of Captives, Domestic and Offshore, finds fronts for captives, negotiates reinsurance for captives, and provides the feasibility study for new captive's owners. His book, The Captive Insurance Company, An Emerging Profit Center was written 25 years ago, and is still relevant today. Andrew Barile Consulting Corporation, Inc. Insurance and Reinsurance Consultants P.O. Box 9580 ? Rancho Santa Fe, CA 92067 Voice: (858) 759-5039 ? Fax: (858) 759-8436 ? Cell: (619) 507-0354 E-mail: abarile@abarileconsult.com - Website: www.abarileconsult.com
Most of the Fortune 500 captive insurance companies integrate their investment plans for the captive, with the investment department of the parent corporation. That is why the Chief Financial Officer and the Treasurer are on the Board of the captive. Some of these captives use the funds to purchase domestic U.S. insurance companies, so they can eliminate the ultimate cost of using "fronting" carriers. This has become a creative use for investments.
Managing the cash flow in a captive insurance company to determine the available cash to invest also requires paying attention to restrictions from the "fronts" and the regulatory authority in the various domiciles both onshore and offshore. On the basis of the substantial insurance risk being absorbed by the captive, the regulatory constraints on investments of the incorporation domicile, and the "front" insurance company requirements, captives have had a conservative approach, such as no loss of capital, fixed income securities, etc. This is, however, not true for agent-owned captive insurance companies who have been able to take a more creative approach to investing available cash in non-traditional investment instruments.
Some of these captives invest in hedge funds, where the anticipated return is greater. The owners are looking for higher yields on their investments, and the available float of premiums can produce ultimately higher investment income for the captive insurance company. Many of the owners of hedge funds are looking at the captive insurance company as a source of capital. Many offshore hedge funds have also set up captive insurance companies to write their Directors and Officers liability insurance.
The dividend payable by the captive to its parent has always been marked with internal corporation policies. Some of the early captives actually funded the corporation's overseas expansions. Reinsurers of captive insurance companies are always concerned when the captive insurance company has an aggressive investment philosophy. Reinsurers want to see the captive retain their investment funds, and not dividend the funds out to the parent company.
Captive insurance company managers have attempted to provide investment advice to captive owners, and play a role of trying to get their managed captives higher yields to offset their captive management fees. Many have learned that to manage cash flow in a captive insurance company, writing professional liability (long tail), medical malpractice, and earthquake insurance is no easy task.
The rating organisations are asking many questions about a captive insurance company's investments. They, obviously, are looking for a conservative investment philosophy if the captive wants a good financial rating.
Finally, captive insurance companies need a planned investment strategy and guidelines. Authoritative sources want to look at a complete overview of your captive's investment portfolio. Details include a breakout by sector, rating, maturity, yield information, and above all, asset liability matching. Industry breakdowns of your corporate bond and convertible bond portfolios are reviewed. Captive owners need to monitor their investments, and delineate any single large investment guidelines. You need to focus on investment risk when investing captive insurance company funds.
Captive owners need to be prepared to discuss their strategy of investing in fixed income or equity securities or mutual fund holdings. Captive insurance company owners have both inside and outside investment management, and should continually explore the use of outsourced investment management, by evaluating the role of outside investment management, and their expertise, and investment performance.
Captive insurance companies have two sources of income, underwriting profits and investment income and are always looking to increase both of these areas to assure themselves of an adequate rate of return on their captive investment. Author Andrew Barile, CPCU, is an internationally recognized expert on captive insurance companies, with over thirty (30) years of experience. He currently is retained by law firms with respect to captive disputes, sits as an Independent Director on the Board of Captives, Domestic and Offshore, finds fronts for captives, negotiates reinsurance for captives, and provides the feasibility study for new captive's owners. His book, The Captive Insurance Company, An Emerging Profit Center was written 25 years ago, and is still relevant today. Andrew Barile Consulting Corporation, Inc. Insurance and Reinsurance Consultants P.O. Box 9580 ? Rancho Santa Fe, CA 92067 Voice: (858) 759-5039 ? Fax: (858) 759-8436 ? Cell: (619) 507-0354 E-mail: abarile@abarileconsult.com - Website: www.abarileconsult.com
