Navigating the Recession (Captive Review)
IN THE current global economic recession, businesses in all parts of the world are carefully examining the value of their expenditures, including the amounts they invest each year in risk management and their captive management fees. Accordingly, captive management firms must continue to evolve and be able to provide the services captive owners need and value most.
Not every captive owner has the same needs or requirements from their captive manager. Some owners have established captives for specific reasons, and simply require an outsourced accounting function and manager to ensure that the captive remains in compliance with local domicile requirements.
However, in the current environment these types of captives are a rarity. Today, most captive owners want captive managers to provide services designed to ensure that their captive adds as much value to the parent company as possible.
Marsh frequently surveys its captive management clients to assess its performance and to identify the specific services captive owners value most from their captive managers. Based on their feedback, the two most valued criteria currently appear to be proactivity and continuity of service team.
In order for a captive manager to be proactive and provide valuable and relevant advice, it must fully understand the goals of the captive.
A captive, like any other type of entity, should have clearly defined goals and a strategy in place to achieve them. Captive managers should function in a way that resembles the management team of any organisation, responsible for implementing the captive's strategy, and achieving the captive's goals, which often are designed to help enable owners/shareholders to experience the maximum return.
Within this context, a surprisingly common mistake involves the assumption that a captive is performing well because it is making a profit. However, suppose the captive's primary goal is not about making a profit, but keeping insurance costs down. The goals of each captive are often tied to the risk financing strategy of the parent company and should be an agenda item at every captive board meeting.
Enhancing the value of your captive
To help organizations achieve their goals, captive management firms should be staffed with professionals experienced in all areas required to manage a captive insurance company successfully. At a minimum, captive management professionals should have experience in finance, insurance and risk management, as well as an understanding of the legal and regulatory issues governing captives. Many captive owners want new ideas for using their captives or ways to enhance the value they can bring to the parent. Professionals who have had significant exposure to all areas of captive management generally are in the best position to help identify potential uses for captives and areas of improvement.
In its just-published second annual captive benchmarking report, Single Parent Captives - A Clobal Analysis, Marsh describes a variety of ways firms are using their captives. The report also finds that captive usage often depends on the location of the parent company. The report, which was developed by Marsh's Captive Solutions practice, draws on the approaches used by more than 900 single-parent captives worldwide.
Resources, such as the benchmarking report and related Marsh databases, help the firm's captive management professionals identify potential captive uses for clients and share knowledge and information with colleagues and clients across the globe.
In addition to providing ideas about how an organisation could use its captive, owners want to know whether their captives should retain more risk. Using the data collected for the benchmarking report, Marsh has identified 11 key ratios that help enable a captive owner to determine the following:
* Whether the captive is assuming an appropriate amount of risk relative to its financial strength.
* Whether the captive is operating at the right expense level.
* Whether the captive is making the most of the capital invested.
Captive owners looking for other ways to use their captives can benefit from their captive manager's experience and ability to benchmark the captive's financial performance. This may help in assessing whether additional capacity exists within the captive. Owners can then work with their insurance brokers to identify potential advantages in the commercial insurance market for a company that insures additional risks identified through the captive.
As mentioned, the feedback we received from captive owners identified continuity of service team as the second most important feature of their captive managers. By developing their employees through adequate and relevant training and providing career progression opportunities, captive managers can address both of the top concerns of captive owners. Indeed, while continuity of service is addressed through career-building approaches, as the employees remain within the captive management industry they accumulate the knowledge and build the skills required to become proactive and provide clients with value-adding ideas.
While employee training and development programmes and career-building opportunities help address some concerns with respect to continuity of service, this aspect of captive management historically has been an issue, particularly for some offshore domiciles with more transient populations.
One element in Marsh's approach to addressing this concern has been the establishment of a Technical Center of Excellence (TCOE) in Halifax, Nova Scotia. Among the reasons Marsh established its centre in Halifax is the presence of a highly educated work force and a stable work-force environment. Marsh's Halifax team can assume certain financial administrative and accounting responsibilities usually carried out in the captive's domicile and work seamlessly with the firm's domicile managers who continue to manage the captive overall and administer insurance documentation.
Additionally, many businesses own multiple captives, for example: one captive offshore, one to take advantage of EU direct writing opportunities, and perhaps one in the US to access TRIA or to write US Employee Benefits programmes. Use of the TCOE enables Marsh to serve clients with multiple captives with largely the same team.
Flawless delivery
Another area of focus for many businesses relates to corporate governance and compliance. Captive owners need to ensure that their captive is performing as expected, that compliance standards are being met, and that they are receiving relevant and accurate information to verify this.
Thus, captive managers need systems and processes to ensure that all services and operations are in compliance with both regulatory and the captive owners' requirements. The flawless delivery of the basic services, such as accounting and insurance policy administration, represents a captive owner's minimum expectation. Nonetheless, meeting this requirement calls for dedicated systems and procedures.
Captive management firms need systems to ensure the accurate and timely processing of transactions and reporting of financials. Additionally, captive owners' reporting needs vary, so the system must be flexible such that reports can be tailored to meet a client's individual needs.
Historically, many captive managers processed transactions manually and prepared financials using spreadsheets. The volume of transactions required and the various checks needed to ensure their appropriateness can lead to errors, requiring the captive manager to dedicate time to corrections and recalculations.
An effective captive management system enables the captive manager to reduce the likelihood of error, allowing the captive manager more time to concentrate on providing value added services to the captive owner. For example, Marsh uses a proprietary captive management system that combines both accounting and insurance functions. The system can be used to generate custom financial statements as well as a wide range of other accounting, insurance and cash management reports.
As businesses work to navigate the global economic recession, captive managers need to be proactive in providing advice on risk financing and strategies for making captives more efficient. They also need to address owners' concerns about the continuity of their service teams and maintain systems and processes to help captives comply with local regulations and perform all essential insurance and accounting functions accurately and in a timely manner.
By Scott Gemmell, senior vice-president, Captive Solutions Group, Marsh
