Captive Boards Drive Risk Management

An advisory board of a captive insurance unit can perform a dual role for a business by both overseeing operations and serving as a platform to discuss risk management policy for the corporation it serves, a brokerage expert said.

The advice came at an online seminar presented by Chicago-based insurance broker Aon Corporation titled “Evaluating and Developing an Effective Captive Strategy.”

Paul Graziano, executive vice president of Aon's national industry and product group, who moderated the session, said “evaluating and implementing a captive strategy can be a daunting task.”

Giving insight into the world of captives were Thomas M. Jones, an attorney with the international law firm McDermott Will & Emery, LLP; Paul Smith, a manager with the consulting and accounting firm Ernst & Young, LLP; and Laura Taylor, Aon managing director of strategic account management.

A captive, Ms. Taylor noted, is a special purpose vehicle developed in the 1960s in Bermuda, designed to cover limited risks of its owner or group of owners. The captive market has matured, she said, which means it is now at a point where it continues to see growth despite market cycles.

A captive can take many forms ranging from a single parent (one owner) to associate or group parent (multiple owners), with variations to the ownership and purpose. The risk vehicle can be designed as either a direct insurer or to serve as a reinsurer.

The three advised that when forming a captive, the owner needs to create a program for a risk that they understand. Anything else can cause trouble and turn the captive into an insurance company it was not intended to be.

The presenters pointed out that in forming a captive there are tax advantages on the premium paid and loss reserves. But that does not mean the money is tax free, as it is still subject to tax treatments depending on domicile.

The formation of a captive usually involves a process including a feasibility study to determine if there is enough risk worth insuring under the program, said Mr. Smith.

He said a discussion between executives and risk managers prior to the study can sometimes lead to an early decision not to pursue the program because there is not enough risk to insure.

A program can take a few months to form, and Mr. Smith advised its formation should not wait until the renewal of an insurance program.

While captives are run by outside managers, Mr. Smith noted that captives have an advisory board to oversee the program. He said the board should be composed of members in the company who have a stake in it including the chief financial officer, risk manager, general counsel, treasurer and others.

Mr. Jones said that putting an attorney on the board helps with confidentially.

Captive advisory board meetings, Ms. Taylor suggested, can also serve to promote risk management policy for the company because the people who develop those policies are brought together when they might normally be elsewhere.

For foreign-domiciled captives, where regulations require local membership to the advisory board, Mr. Smith said it would be wise to choose either a captive manager or attorney to fill the requirement.

The complete hour-long seminar is available at www.aon.com/webseminars.