An explanation of the roles and responsibilities of captive consultants in the formation and operations of a captive insurance company and best practices for selecting your captive manager.

With the increasingly competitive economy, successful business owners and their strategic advisors are turning to more advanced strategies to improve their financial wellbeing and gain and secure competitive advantages. As they make their way through their investigative processes, a steadily increasing number of profitable businesses end up electing to pursue the potentially profitable endeavor of captive insurance company ownership.

As is common with relatively new strategies, captive insurance has quickly gained the attention of potential captive owners and their advisers, as well as some increased scrutiny from regulatory bodies. To help navigate these waters we will take a look at a few best practices and help address questions related to some important players that are required to help ensure a successful and legitimate captive insurance program.

Captive Manager

This week we will turn our focus onto the captive manager. As this individual/firm is more than likely the one to introduce the captive concept (often referred to as a “marketer”) the importance of selecting the right professional for this task is of utmost importance. In addition to introduction they also quite commonly perform the duties of a captive formation consultant and “quarterback” the feasibility process in addition to their duties in the ongoing operations of your captive insurance company.

When performing the duties of a formation consultant, look for the following:

  • How the provider “sells” a captive. A captive is first and foremost a powerful risk management tool. If the primary motivators for setting up a captive are being touted as tax savings, estate planning strategies or investment opportunities, look elsewhere. A competent professional should not shy away from acknowledging the potentially significant ancillary benefits of a captive, but their approach should be based upon the identification and transfer of legitimate risk. If this is established and transferred appropriately, all the flashy benefits can simply come along for the ride.
  • Your captive manager should be approved to manage and have experience managing captives in multiple domiciles. Don’t limit your captive’s potential by hand-cuffing your insurance company’s performance by the limitations of your captive manager. There are numerous respectable domiciles where you can elect to base your captive. Your captive manager should play a key role in outlining the pros and cons of numerous potential domiciles as well as provide guidance on which domiciles you might be better off avoiding.
  • A good captive manager/marketer should also be a proponent of setting up and operating compliant captives. It’s no secret that the IRS has a bone to pick with captives (for legitimate and misinformed reasons) and captive insurance company ownership in turn can result in a higher likelihood of audit. With this in mind, the IRS has published certain guidelines of what is acceptable for risk-shifting, risk distribution, etc. Come across a marketer that suggests that they can avoid these safe harbors because of some unrelated private letter rulings? Unless you are comfortable accepting the ridiculous amount of risk that could come with their advice, quickly cross them off the list and move on to someone more qualified.
  • Captives are a not a quick fix for improving an organization’s financial stability. Avoid marketers/formation consultants that view captive insurance companies as a transaction and have little to no responsibilities once the captive is operational. Find a partner that views your decision to form a captive as the long term risk management strategy that it is. Their professional commitment and responsibility to the success of your captive after the domicile issues its license is just as important, if not more so, than the work they do in the feasibility process.

We will continue to explore the key roles and qualifications of additional captive professionals (captive managers, risk/loss control consultants, investment managers, actuaries, etc.) in future articles.

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About Assurance Partners:

As one of the largest providers of risk management services in the Midwest, we specialize in partnering with strategic advisors to help them guide their clients through the process of determining risks that are unique to their organizations. We then translate those risks into an acceptable insurance program allowing them to obtain the protection and financial benefits that are unavailable in the traditional insurance marketplace all while strengthening the advisors’ value and providing opportunities for additional revenue.

By |Published On: April 19, 2023|Categories: Insurance|3.8 min read|