U.S. Captive Insurance Law

A captive must be a stand-alone business for the IRS to recognize the deductibility of premiums paid to the captive. One of the ways a captive can exhibit its stand-alone nature is through annual meetings as required by the corporation’s bylaws. From an operational perspective this means the bylaws must state where and when meetings are to be held, requirements for notice and waiver thereof, quorum requirements, voting rights and proxies, and whether telephone meetings are allowed. Standard corporate practice requires these events to be transcribed and kept as official corporate records. It is imperative that the captive board members maintain rigorous adherence to the rules specifically outlined in the corporation’s bylaws. Captives usually use several different service providers. For the board of directors it is imperative to balance the business needs of the captive continually with the cost of using specific services. This monitoring of costs to run the captive should be done at regular intervals. For example, it should be part of the annual reporting process. It should also be done when the captive changes its business plan, when new members are brought in, when new board members are elected, when new lines of insurance are added or withdrawn and when a member’s or insured’s corporate structure has undergone a change. Here is a list of services the captive will use. Domicile manager: most captive jurisdictions require a local manager or a manager approved by the insurance regulator. The underlying policy reason for this is ease communication; the insurance regular needs to have a person within the jurisdiction to communicate with. The domicile manager has typically had the following duties: regulatory compliance, record retention, financial accounting and cash and disbursements management. Program Management: “The program manager is … the catalyst for bringing the group together, and may also be a risk taker.” In other words, the program manager overseas the implementation of the overall insurance program, from risk reduction strategies, to underwriting to servicing the policies. It is his job to play “quarterback” for the captive program. Claims management: The level of claims involvement will depend on the type of insurance the captive writes and the type of captive involved. If the policy is fronted, there may be little need for a claims department. However, a captive that writes many policies will have the need for a claims committee and an adjuster. Legal counsel: A captive will need the following legal services. Litigation support (to defend claims), corporate secretarial (making sure the corporate paperwork such as meeting minutes is kept appropriately), regulatory advice (insuring the captive is operating according to the jurisdiction’s code) and tax advice. Audit: Most jurisdictions require the annual report to be performed independently. Audit firms can also help with accounting, regulatory compliance and tax advice. Regulators frown on “auditor shopping” – switching auditors in order to obtain a favorable opinion. Usually a jurisdiction will require a legitimate business reason when a captive changes auditors. Actuarial Services: these fall into two categories, the first of which is rate development. The captive must review its rates periodically to ensure they are in line with loss experience. The second category is “reserve reviews," where the actuary certifies the “adequacy of the captive’s loss reserves.” Investment manager: The investment manager oversees the management of the investment portfolio and may also give advice regarding basic captive issues. Investment managers usually charge a fee, which is a percentage of assets under management. As a result, it may not be advantageous for a small captive to utilize an investment manager, instead using the treasury department or treasurer of a member of the board of directors.