Selecting the right captive manager for your project is perhaps the most important decision you can make when deciding to form an affiliate captive insurance company. The range of quality between managers varies greatly. In the micro-captive industry, paying more does not assure you of quality either.
We recommend requesting a free preliminary captive assessment, or pre-feasibility study. This can provide you not only with an exact proposal of start-up and ongoing operational expenses of your captive, but will give you some ideas to the quality of analysis and responsiveness of communications with a manager.
COMPETING CAPTIVE MANAGEMENT FIRM TYPICAL FEES AND COSTS
Click here for information on the typical fees charged by experienced mid-sized to large captive managers.
IMPACT OF RISK POOLING ON FEES
If 3rd party risk pooling is a required part of your captive design to follow IRS guidance for qualifying your captive as an insurance company for federal income tax purposes, and/or to reduce risk of high severity losses retained solely by your captive, and thereby reducing volatility of losses in your captive program, be sure to inquire of your prospective manager the type of risk pooling facility they utilize, the associated costs, and the collateral elements of the risk pooling facility program. You can learn more about risk pool programs by visiting www.CaptiveRiskPool.com.
MAIN CAPTIVE MANAGER SERVICES AND SKILLS NEEDED
A written engagement agreement controls every captive management relationship. No two managers have identical engagement agreements; in fact they vary widely and it is very unreliable to compare management service price quotes until you get confirmation in writing of exactly what services and outside costs are included. Also it is important to discuss a manager’s operating policies and procedures and the timing of those activities. You may find when talking to a captive management firm’s business development team that they do not really know that much about the details of operations post formation as typically they do not have any related hands on experience.
Here is a list of the main management functions typically needed after formation (formation stage essentially entails the captive design, creation and licensing):
- insurance contract management (invoice, prepare policies, and manage policies)
- captive accounting (creation and maintenance of accounting system)
- bank and investment account review (assist with opening bank and investment accounts, and reconciling such accounts monthly)
- claims management (whether directly or with involvement of a TPA, most management agreements include claims investigation, processing and payment)
- fronting, surplus, pooling, reinsurance arrangements (managers typically coordinate involvement with other insurance companies and captives that may be part of your captive program)
- investment guidance
- regulatory reporting and exams (filing required reports with domicile regulators and assisting with any examinations)
- actuarial assistance (engaging and working with actuaries)
- financial audit assistance (identifying and working with outside financial auditors)
- tax preparation (identify and assist with completion of income and other required tax returns by a 3rd party tax preparer)
- corporate secretarial services (assisting with board and shareholder meetings and maintenance of a corporate book)
- distributions and unusual transactions (sometimes managers assist with loans, capital financing arrangements, dividend approval, and wind up of captives but often for extra fees or with involvement of outside legal service providers)
TYPES OF CAPTIVE MANAGERS
These three (3) basic types of captive managers.
Broker/managers, the largest group by number of captives, have resources for integrating traditional insurance products, fronting, reinsurance, and third-party administration (TPAs) into the program. Fees can be difficult to compare and determine as brokers tend to spread costs internally without revealing them.
A few lawyers, banks, accounting 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 and often result in added costs for services typically included by full service independent firms.
Independent firms also come in a variety of shapes, sizes, and competencies.
Each form of manager has its own strengths and weaknesses. One is not necessarily better than another based purely on whether they offer a basket of products and services. So as to not be surprised, and to better understand the focus of your management firm, be sure to ask what related services they offer and whether or not they subsidize formation and management fees expecting to make money elsewhere in the relationship.