Archive for May, 2008

Mad Science or Insurance Laboratory

May 13, 2008

There are so many creative uses for captive insurance initiatives that sometimes its hard to tell whether Mad Science is at work.  In fact, just the use of the word “creative” can give your tax advisers the heeby jeeby’s.

Mad Scientist at Work
(Public Domain Image from Dr. Cyclops (1940))

Captive Insurance programs can help to solve many risk financing problems for an organization.   In fact, one of the primary reasons to utilize a captive is to provide financing for risk that the traditional insurance marketplace is either unable to provide at a reasonable cost or unwilling to provide at all.  Depending on the circumstances many otherwise traditional risk portfolios have found themselves in this position. Among them medical malpractice, trucker’s auto liability, aviation risk and products liability.  In each situation these risk portfolios have been able to turn to an alternative risk financing mechanism in order to find coverage.

Another area of risk that can find a refuge in a captive insurance initiative is risk that is specific to a company’s operational characteristics.  Known as Enterprise Risk Management (ERM) this school of thought identifies the risks associated with accomplishing the strategic goals of a business, assigns a cost to that risk and then identifies how best to mitigate the risk.  Part of the risk mitigation plan may include transferring a part of that risk to a captive insurance company owned by the parent company.  An example of ERM for a global manufacturing and sales company might be currency fluctuations.  A captive may be able to mitigate that risk for the company and help to smooth out the earnings stream, benefiting the investment stability of the company as well as aiding in planning purposes.

As a final thought, a captive that is successful in helping its parent accomplish its own risk financing goals may be beneficial to that companies upstream and downstream stakeholders.  By that I mean a captive may be able to help its parent company’s vendors and clients by applying the same risk solutions to them as it does for its parent.  By helping to solve their common risk problems the parent gets the benefit of “third party” risk that helps to achieve tax efficiency for the captive as well as benefiting its partners in the distribution chain.

Bermuda has long been know as the “World’s Insurance Laboratory” and for good cause.  It has served as the innovation incubator for many insurance practices that are now common place in the industry.  Fortunately, innovation in the captive insurance market is never ending and will continue to move the entire market forward through the innovation of its “mad scientists”.

As always, please feel free to post your comments here.  If you would like to contact me directly you can reach me by email at


Independent Captive Operational Reviews

May 9, 2008

I was recently interviewed by Michael Moody of Rough Notes Magazine regarding a consulting engagement that I did for Milestone Insurance Company, a Bermuda heterogeneous group captive.  Here is the link to the full article in the on-line version of Rough Notes:

I am a firm believer that a captive should undergo a periodic review from an independent consultant in order to make sure that they are operating with maximum efficiency and taking advantage of every opportunity that a captive mechanism can provide.  In the case of Milestone, Catherine Duffin and the folks at Artex have done an excellent job in managing the costs of the program and providing a very stable insurance platform for the members of that group.

But what can a review do besides just provide a scorecard for the current service providers?

Lets look at some potential results from a captive program review:

  • When there are changes in risk management personnel the folks who championed and understood the captive may be the ones leaving the organization.  The corporate owner of the captive could be faced with owning a sophisticated insurance mechanism that could solve numerous and ongoing strategic risk financing problems but no one that understands it well enough to really use it to its potential.  Sort of like having a Maserati in the garage and no one with a driver’s license.
  • Things change in the business and regulatory environment.  Employee benefits in a captive may not have even been available as an option when the captive was formed.  Certainly things have changed in the business world including possible ownership changes, global initiatives and new products.  A review can help to identify what new opportunities might exist for the captive that could support the owner from both a risk financing perspective and as an overall growth strategy.
  • Third Party liability options in a single parent captive are often the holy grail of reaching favorable tax treatment for the parent’s premiums in the program.  The problem with third party liabilities is just that, they represent someone else’s risk and if you aren’t careful about it you can get burned.  Captive reviews often turn up third party risk assumption potentials in upstream and downstream stakeholders.  Vendors and clients who share common industry characteristics often have the same risk management issues and you’ve already learned how to do with them in your captive.  It is a natural related, albeit third party, risk.
  • Sometimes a captive has just outlived its usefulness and it needs to be shut down.   This is particularly true when the primary motivation for starting the captive was a short term premium savings or some type of tax play.

If you a captive owner or a broker that is responsible for a captive for your client I think there is a lot of value in performing a review of the captive’s operation and its potentials in the current market environment.   If you are interested in discussing this more please email me at or call me at 440.264.9992.