Captives Dont Require Regulator Protection
Self-insured risk managers should have more say in how their risks are financed
Today's insurance world is roiled by accusations and investigations into allegedly improper activities by brokers and carriers. Some of these accusations touch upon forms of alternative risk finance, including captives.
At the fore, it must be agreed that proven illegal acts must be prosecuted and punishment meted out. An individual breaking the law must be dealt with by the law. But to embroil an entire industry is, in my view, inappropriate. Unfortunately, some state attorneys general have chosen to pick a fight with an industry usually unable to defend itself.
To directly address the captive issue, I must state that I view finite-risk structures and income-smoothing policies as in the family of alternative risk finance. Perhaps others do not, but alternatives to traditional structures they are.
Although I cannot speak to every specific situation, as I am not knowledgeable on every deal, I have encountered several and feel that I can raise some relevant points. Certainly others can offer greater insights into specific deals, and I would urge them to do so.
It must be clarified that the alternative finance deals of which I am aware were all passed by regulators, accountants and lawyers.
However, in any case, my view is that the essential problem is one of regulation and legislation. Most captive legislation is initiated with a view to increasing government revenues and creating local jobs. Often Vermont's statutes are simply copied with no real analysis into the needs of the particular jurisdiction. I once encountered an offshore jurisdiction that had paid good money to have an attorney photocopy the Vermont statutes.
Even much of the insurance legislation is not adequate for today's commerce. If the attorneys general ever delve into direct procurement and industrial insured regulations they may well resign, daunted by the never-ending discrepancies, inconsistencies and irrational enforcement. Meanwhile, at this point most states cannot define in statute the difference between an agent and a broker. (Of course, neither can most insureds!)
So to me the problem is not one of wild and crazy insureds and their cohorts trying to evade the law. Rather it is the law that doesn't understand alternative risk and its uses and structures. If a structure passes accounting and legal review, is fully disclosed to investors and approved by regulators, then it serves a valid and necessary commercial purpose. I daresay that few federal or state financing schemes would pass such scrutiny.
Today we have attorneys general with perhaps other agendas tying up valuable time and resources to investigate deals that in most cases have been approved by other regulators.
Subpoena power is all encompassing. The costs to the industry of photocopying irrelevant documents, reading same, sitting in endless depositions and hearings where only the other side receives compensation for being there are significant and unrecoverable. And who restrains the investigators? The public? Boy, if you want to put someone outside our industry to sleep, just say "insurance."
Is federal regulation the answer? I have been on both sides of that issue. On its own, it certainly would not improve things. I think recent moves for dual regulation might have merit. But in the meantime, serious thought should be given to the fact that regulation has fallen very far behind the needs of commerce in regard to insurance.
What is needed is clear and direct regulation that recognizes the right of adequately financed and managed insureds to have more of a say in how their own risks are financed.
In general captive laws are good, and in most domiciles they are continually tweaked to attain benefits to the domicile and to captive owners. But when a captive, for whatever reason, chooses to eschew a fronting carrier and wishes to cover exposures in another jurisdiction, it should not be necessary to perform ritual contortions, obfuscation and evasion to get the job done.
If a public corporation chooses to construct an entity to better finance its own risk, and if that entity is fully disclosed and approved by a choir of professionals and regulators, the marketplace should trust their wisdom rather than that of another governmental investigator with higher political ambitions.
What can be done? What do YOU think? Write to me at mike@crusadercaptiveservices.com, and let's start a dialogue.
Michael Mead, CPCU, is a member of the Captive Insurance Companies Association board of directors and president of M.R. Mead & Company in Chicago.
Reproduced from National Underwriter Edition, March 4, 2005. Copyright 2005 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.
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