Honestly, at the risk of sounding cliché, I don’t think we have a “selling point” per se. We do approach things differently, however. We are not afraid to say “no” if we don’t think a captive makes sense. While other firms bifurcate their consulting and management operations, we are fully integrated which allows us to be far more proactive in delivering solutions and strategy to our clients on an ongoing basis.

By and large, the industry—domiciles specifically—do an excellent job of staying on the leading edge with respect to captive insurance innovation. Most regulators and domicile associations are in continual contact with managers, legal counsel, etc, to ensure they are in tune with the pulse of the industry.

I’ll start with US jurisdictions because they’re the “easiest”. Fortunately, in the US domiciles we haven’t seen much by way of negative implications from a regulatory standpoint. We’ve seen the continued push by the Internal Revenue Service (IRS) to clean up abusive microcaptives; it’s doing so very aggressively.

It seems the IRS has certainly been pushing the envelope on some of their tactics—keep in mind that we are in support of the abusive transactions being addressed, but not overreach.

In offshore jurisdictions we’ve seen more activity with respect to regulations. Most of that has been driven by outside factors—Solvency II and the Organisation for Economic Co-operation and Development. Much of it for good—the fight against money laundering and financing of nefarious activities. In some cases, there has been undue pressure put on the offshore jurisdictions to those ends.

By and large, though, they’ve done an excellent job adapting and promulgating rules as efficiently as possible. It’s certainly been an increased amount of effort from our offshore teams but we’re managing through that. It would be nice to see the activity calm down for a bit.

Our captive insurance practice teammates were well equipped to move quickly to a work-from-home environment due to prior experience with work travel and preparedness exercises. The team has been fantastic, without missing a beat. Over time, the work-from-home situation is going to become more challenging. It’s not everyone who can effectively work from home at peak productivity and frankly many people just don’t want to for the long term. The blurred lines between work and home life become more challenging over time.

We have seen significant activity on the new business front for a solid 18 to 24 months. The market was firming before the COVID-19 outbreak and will continue well after. While the pandemic exacerbated the premium increases insureds were seeing by wreaking havoc with the stock market, the increases were already occurring and expanding across most every industry and line of business. When that happens, there is a flight to alternative risk financing, as there should be.

It's a very delicate balance. The challenge of balancing growth with delivering the high quality, personal service to clients comes down to maintaining adequate staffing of teammates with the skills and commitment matching the culture of your organisation.

Some other firms outsource to “back offices” in other countries and in some cases many time zones away. I think that inhibits the ability to deliver service at the highest level—being able to respond to questions in a timely manner, for example. We simply don’t believe that is the best answer. If you have the right tools and processes in place, you can more effectively plan the right time to add to your team. We’ve managed through significant growth in recent years, including 2020, so I know it can be done.

A big challenge we all, as an industry, need to be monitoring is the labour market. It is getting more difficult to identify qualified potential teammates. There just aren’t enough graduates with the necessary accounting education. Industry associations, captive and accounting, need to be more active in addressing this need.

We’ve seen the Captive Insurance Companies Association do a great job with targeting students already in college. But we need a strong campaign at the high school level before they’ve made their degree decisions in order to increase the entry level pool of talented future team members.

One of the first things that should be considered is whether the consultant a prospective owner is speaking with is trying to sell them a captive, or trying to find the best solution. More often than not over the past 24 months I’ve told folks that a captive simply doesn’t make sense. So, back to the premise of your question, there should be a preliminary review.

I’ve seen some proposals from other consultants for group captive structures cost, at expected losses, 20 percent or more than the renewal guaranteed cost programme. It is primarily due to the expense load. There are good structures out there, to be sure, but why would you pay 20 percent more to take on all that risk?

I hate to be elemental about it, but it’s a mathematical equation. If I’m paying $100 in premium for a carrier to take on $90 of expected losses, I should do that all day long. Now, let’s say I’m paying $100 in premium with expected losses of $40. The first question should be, do I need a captive to in order to retain more risk, take a higher deductible? If no, there is a cost:benefit analysis to determine whether a captive would be better than retaining the risk corporately.

“One of the first things that should be considered is whether the consultant a prospective owner is speaking with is trying to sell them a captive, or trying to find the best solution.”

Assuming we need the captive to retain more risk we need to look at what a captive structure, pure or group, would look like. If I’m taking a much higher retention and using a captive I’m adding on $13 of captive operating expenses, $4 of direct placement tax and still need guaranteed cost premiums for the limits above my higher retention and fronting costs—let’s call that $30.

My expected losses and expenses total $87. Then the discussion comes to risk tolerance and appetite. It is worth the risk at the higher retention for the potential savings of the $13?

Too often prospective captive owners hear about a captive and just want to set one up. It is incumbent upon those of us in consulting roles to provide them thoughtful analyses about whether or not it makes sense and not just “sell them a captive”.

If the prospective owner ultimately believes that the non-financial benefits outweigh the cost of the captive then it would still be completely reasonable to establish a captive.

I don’t think access to reinsurance itself is a primary driver for captives. Finding ways to protect against significant adverse loss development and mitigating the impact of the premium increases in the traditional market are drivers.

The use of reinsurance behind a captive on a line-by-line or an integrated basis can be a critical risk financing tool to organisations. To flip the risk financing world on its head and approach risk financing holistically betting on your good risk is the future, and having strong reinsurance partners is key to that success.