From Regulation to Risk Management: Captives Thrive with the Right Team in Place

Captives require the cooperation of a number of different individuals in order to succeed.

By: Alex Wright | May 15, 2024

Setting up and running a captive insurance company is a huge undertaking.

There are so many different moving parts to the process, from the brokers and captive managers to the regulators, actuaries, accountants and attorneys who need to be involved.

But if done well, the benefits that can be reaped far outweigh the challenges involved.

The State of Vermont is a shining example of how this can be achieved, with members of the captives community working collaboratively towards the end goal of successfully forming and managing a captive.

A Strong Parent Company

The most important role is that of the captive owner or parent company, according to Sandy Bigglestone, deputy commissioner of the State of Vermont Department of Financial Regulation’s captive insurance division.

Without them, she said, it wouldn’t be possible to form the captive in the first place.

“Having that parent interaction and engagement in the process and buy-in from the C-suite, with treasury support, lends itself to good governance of the captive and a solid business plan,” said Bigglestone. “As a result, they will derive all the risk management benefits that come with that too.”

Quarterback Role

Next in the pecking order is the captive manager. They serve as the main point of contact and coordinator for the captive’s service providers, including actuaries, auditors, claims administrators and brokers, as well as coordinating its board and committee meetings, and liaising between the owner, third parties and the regulator.

The captive manager also has to maintain the captive’s books and records, preparing regular financial reports for the owners and board of directors, as well as business plan updates, along with supporting pro-forma financial statements.

Additionally, they ensure the captive is run as an insurance company with appropriately credentialed risk and underwriting professionals to support the insurance policy working and issuance, adherence to risk management and loss control efforts, and support for business plan changes.

Bill Murphy, EVP, alternative markets, Arch Insurance

“The captive manager is the quarterback of the team,” said Bill Murphy, EVP of alternative markets at Arch Insurance. “They manage the process with the producer, captive member or group, fronting carrier, TPA, actuary and any other service providers.”

It’s therefore vital that captive owners do their due diligence and find a manager with strong ethical values and whose purpose and goals align with their own, according to Jason Palmer, director at WTW’s captive and insurance management solutions. They also need to be knowledgeable and experienced in the relevant type of captive.

“Strong communication and coordination are key to being a successful captive manager,” said Palmer. “It’s important to know your deadlines, whether they be internal, to the captive owner, the board of directors or regulatory. It is then the captive manager’s responsibility to orchestrate any other third party participants to meet those agreed upon deadlines.”

Bigglestone added: “The core business of the parent company that forms the captive isn’t to run a captive insurance company and know insurance accounting inside out and all the operational needs for that.”

That’s why having a captive manager who can fulfill that role for them is key,” she continued.

That’s critical in Vermont where there’s a law that states every captive must have a principal place of business in the State. But where it isn’t feasible, captive owners can engage a manager to handle all their regulatory reporting and compliance instead.

Going hand-in-hand with the captive manager is the consultant. They carry out feasibility studies to evaluate the options available and identify appropriate solutions.

Regulatory Oversight and Actuarial Support

Then comes the regulator. Their main purpose is to ensure the captive operates within the regulatory framework and remains stable and healthy.

They review applications and business plans to ensure feasibility and compliance, oversee the captive’s activities, provide education about the regulatory framework, and take the lead on industry and policy matters as well as legislative advocacy.

Sandy Bigglestone, deputy commissioner of the State of Vermont Department of Financial Regulation’s captive insurance division

“It’s crucial in the State of Vermont to make sure that we have a gold standard set of rules and regulations, as well as the appropriate resources to ensure our captives are both highly solvent and well-run,” said Bigglestone. “It also protects our reputation as a regulator and the investment the captive owner or parent company is making in their captive.”

Another integral role is the actuary. They carry out an annual independent audit of the captive, as well as providing up-to-date analysis, advice and reporting.

Next up is the attorney. They play a key role in setting up the captive and ensuring compliance and that it has the necessary corporate protection to develop legal documentation and support the board.

Where Does Insurance Come In?

On the insurance side, the fronting or reinsurance carrier provides coverage, while third party administrators can be used to handle their underwriting and claims. In a group captive context, carriers are critical in the risk selection process for adding new members, providing claims oversight, performing policy issuance and endorsements, and finance responsibilities of preparing and reconciling captive session statements.

“Group captives require a great deal of back office support that your carrier must provide,” Murphy said. “It is also important that they have a risk appetite for the business you are looking to put in the captive. You want to select a fronting carrier that has the same long-term track record you are looking to build in the captive.”

Dale Sagen, vice president, business development leader, accident and health at QBE North America, added: “The most important piece of running a captive is identifying a risk partner that you can transfer some of your risk to. At QBE, we have 25 captive programs that we support in this way, enabling the captive owner to feel comfortable with the risk and know they have a partner that supports them.”

In addition, investment managers provide the required financing. In a group setting, investment advisers also manage the assets in the trust to help with capital preservation and asset growth.

The final piece of the equation is the broker or agent. They secure the coverage for the captive and ensure that it continues to meet their needs.

“The key challenge in fulfilling these roles is finding the right partners,” said Tracy Hassett, president and CEO of edRISK. “Making sure you have the right people in the right place, at the right time, is critical.

“We in Vermont, where our captive is domiciled, are very lucky. The relationships between the regulators, the State, the service providers and the Vermont Captive Insurance Association made that easy. Vermont is the top domicile in the world, and that is largely because they have the right people and partners in the right place.”

One Team

But in order for all these roles to work effectively, collaboration is required. To achieve that transparent communication, shared goals and objectives, and the leveraging of technology are required across the entire value chain.

“The key to a successful captive is collaboration,” said Hassett. “Collaboration between members, owners, business partners and regulators. A captive will only reach its full potential with all stakeholders rowing in the same direction.”

Bigglestone added: “Every role is highly valued, and when they are all brought together as a whole, they ensure the success of Vermont as a captive domicile. It’s a model that has served us well for the last 42 years in business and will continue to do so moving forward.” &

Alex Wright is a UK-based business journalist, who previously was deputy business editor at The Royal Gazette in Bermuda. You can reach him at [email protected].

Creativity, Expertise and Global Reach: How Sompo Provides Stability and Supports Distribution Partners

Carriers that have the depth of experience and the vision to create and maintain stable portfolios will be better partners to buyers and distributors of insurance in the long run.

By: Sompo | July 1, 2024

Insurance pricing cycles will run their course, but industry veterans know that risk management success is built on partnerships that are transparent, stable, and flexible.

The past five years saw rate and capacity crunches in a number of lines. As some markets now shift and soften, insureds can take their lessons learned and hopefully take advantage of a more stable and predictable transaction environment going forward, at least for the time being.

One of the staunchest challenges carriers and their broker partners face now and going forward may be in helping to support buyers of insurance who might be suffering lingering rate fatigue based on the previous year’s market trends.

Buyers, in essence, are looking for relief and stability in their carrier relationships after experiencing substantive market dislocation in important lines, including, but not limited to, property, D&O and cyber.

“In terms of a prolonged hard market, this was a kind of unicorn extending back to 2019, when the excess liability market started to harden, followed by the D&O market in 2020 and 2021, E&O and cyber in 2021 and 2022, and then last year, the property market,” said Jonathan Monks, executive vice president and head of distribution for North America at Sompo.

These rate increases were challenging for both insureds and their brokers, especially in the days when they showed no signs of easing. The successive, cumulative nature of them just added to the stress some buyers experienced.

But for all their challenges, these markets were an opportunity for brokers to deepen their relationships with carriers committed to building a sustainable portfolio that responds to the risk landscape, the competitor landscape and the market’s overall dynamics — insurers more likely to provide stability for insureds in the long run.

“The core function of insurance is to provide stability,” Monks said. “While competitors move in and out of markets, carriers, in general, want to be consistent. Ultimately, our brokers are trying to present stability to their clients, and we want to help them achieve that goal.”

Partnering with the Distribution Channel

Jon Monks, Executive Vice President and Head of Distribution for North America at Sompo

Monks and his colleagues at Sompo believe that by being very deliberate about their product portfolio and being cognizant in avoiding overlap between distribution channels is one of the best ways they can be good partners to their brokers.

As a specialty insurer, Sompo places a great emphasis on its relationships with wholesale brokers. Ideally, wholesale brokers are in turn specialists who are adept at interfacing with the retail broker community to bring books of attractive business to specialty carriers.

Since they operate at scale, wholesale brokers can engage in relationships with specialty carriers that might balk at trading with retail brokers that lack the necessary scale or expertise in a specific product or industry niche.

The good news for brokers, carriers, and their clients in one major respect is that certain segments of the property market have shown signs of rate deceleration in response to a relatively benign CAT loss experience in 2023.

In financial lines, Monks points out that there is a lot of new capacity that has entered the market. But buyer beware, unlike Sompo, these entrants might not have the claims experience to price the risk adequately, and they may be sailing into the teeth of headwinds that might shred their risk transfer capital.

According to Monks, “Last year, security class actions rose almost 20%. From 2022 to 2023, we saw an increase in average settlements, and some of these new entrants have yet to be tested in a claim scenario,” hinting at the possibility of challenges insureds and brokers might face in partnering with carriers who have yet to prove themselves in working through complex claims.

This is yet another example where stability and transparency matter in a carrier’s relationships with buyers and brokers.

“When making major changes to the terms offered on a renewal, we need to be up front about those changes and let our distribution partners prepare their clients for potential impacts,” he said.

“Minimizing surprises is critical to effective client management, and we have a role to play in that equation for our brokers.”

Competency, Diversity and Growth

Optimism at Sompo that it can be a trusted risk transfer partner in any part of a given line’s market cycle stem from three important factors. They are:

A strong, diverse portfolio managed by expert underwriters.
A resilient balance sheet and global capabilities
And risk control and claim services that provide that vital support to an important piece, or what should be an important piece of an insured’s risk management program; that being avoiding losses in the first place and/or efficiently managing an insured through the claim process.

First, to the portfolio and its underwriters.

Monks and his colleagues point out that Sompo is increasingly satisfied with the performance of its casualty and specialty portfolios in admitted and E&S offerings.

Going forward, that confidence in its product portfolio will be bolstered by the specialty expertise of the company’s underwriters.

“The underwriter has a lot of power in our organization,” Monks added. “We believe that empowering the underwriter can provide a differentiated experience in the transaction for our brokers and clients, as well as a better financial result for us as a firm.”

“There’s value in being really strong in our specialty disciplines,” Monks said, “whether that falls across product or industry lines.”

Geographically, Sompo opened offices in Toronto, Houston and Denver in the past 12 months and is gearing up to open a Miami office. Existing footprints in Boston, Dallas, Los Angeles, and Chicago have also been expanded.

Being in the right locations matters, because it gives Sompo’s underwriters better access to the brokers with which it conducts business. The more frequently they can engage in face-to-face communication, the better for all concerned.

It’s one thing to hop on a plane to conduct business. It’s quite another to have a favorite lunch spot where you can meet an important distribution partner weekly or monthly.

“We’re focused on attracting talent and putting it in places where we haven’t been as local as we need to be to harvest the portfolio that we want,” Monks said.

“We are trying to get closer to our brokers because we know that the closer we are and the more we’re in front of them, waving that specialty banner and highlighting our underwriting talent and expertise, the more we’re going to get differentiated results.”

Speaking of geography, that despite its ongoing North American expansion, Sompo is a global organization that continues to experience growth across key markets worldwide. That perspective and experience just adds to the sophistication of its leaders and practitioners.

Sompo banks on underwriting, as any competitive specialty underwriter would. But its distinctiveness in risk control may set it apart even more starkly. The company continues to invest in a deeply specialized risk control team that assists its underwriters in assessing and mitigating risks across a variety of products.

Those include property, casualty, builder’s risk, excess casualty, ocean marine and cyber. Ongoing and consistent communication with risk control and claims helps underwriters envision programs that can cut down on the risk of injury and other losses on job sites or on properties owned by the insured.

“Loss avoidance, via risk selection and/or risk improvement is a critical competitive advantage,” Monks said. “We have a team of dedicated risk control specialists and engineers with deep industry and technical expertise whose role in the firm is integral to our underwriters and our clients as we work together to reduce their risk profiles.”

“If you talk to product leadership, the first thing they tell you is that risk control support is vital to the health of our business,” Monks said.

Here and Staying Here

As we’ve said throughout, being a reliable risk transfer partner in any market cycle means having the expertise and the acumen to offer sustainable capacity for our clients and most importantly, deliver on our promise in a claim scenario.

“We all feel a responsibility to our insureds and our brokers to deliver stability and market insight,” Monks said. “That’s ultimately how you build long-term partnerships. You make every effort to avoid surprising your partners and you provide optionality, where possible, when situations become challenging.”

To learn more, visit: sompo-intl.com.

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Sompo. The editorial staff of Risk & Insurance had no role in its preparation.

We are Sompo, a global provider of commercial and consumer property, casualty, and specialty (re)insurance. Sompo employs approximately 9,000 people around the world who use their in-depth knowledge and expertise to help simplify and resolve your complex challenges. Because when you choose Sompo, you choose The Ease of Expertise.