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The most important thing to know about the Captive Best Practices Guidelines from the Minneapolis-based Captive Insurance Companies Association is that they are not a checklist. They are not rules or oversight. It might be impossible to wrap universal strictures around an industry in which every captive is as unique and independent as the stars in the sky. CICA's best practices instead are a collection of recommendations for how captives can handle issues of business alignment, corporate governance and regulatory compliance.

Perhaps the most interesting thing about the project was how it brought together leading minds from across the industry. The Best Practices Advisory Board consisted of two groups--one made up of regulators both onshore and offshore, the other of owners from for-profit and nonprofit captives, managers and other insiders.

The resulting unprecedented best practices and the cooperation that bore them, says Jay B. Waters, were "long overdue."

"The time has come for the industry to put together some definitive terms," says the Shaker Heights, Ohio-based vice president of corporate risk management for University Hospitals who served on the CICA Task Force for the best practices process.

Waters says that captives typically operate in a vacuum. Never before had any organization asked the whole lot of them: "What do you all think?"

The guidelines then are the first time that a collective answer has been delivered by the industry and regulators.

"It's nice that we managed to get all these guys together and pool their wisdom and experience," he says.

Waters admits, though, that what gives the guidelines some "force" was the regulator's input, which he says they were keen to provide.

The regulators appear to be enthusiastic. Shanna Lespere, one of 13 representatives on the regulator group and director of insurance for the Bermuda Monetary Authority, says that the process was a "good learning opportunity for everyone" to get a handle on what other jurisdictions were doing.

She adds that she has had close contact previously with other regulators through her work with the National Association of Insurance Commissioners and the International Association of Insurance Supervisors.

"I thought it was beneficial because we not only discussed the issues, but from a relationship building point of view, it's always nice to know who's who in other jurisdictions," she says.

And how did all these jurisdictions, which are normally competitive entities in an evolving, tight industry, get along?

"Everyone got along great," Lespere reports.

Of course, it might have been because none of the meetings took place face to face. Chuckles aside, the process was managed through conference calls and e-mails. The industry group started it off by coming up with a list of three major areas of focus. They passed those to the regulator group for its feedback. Building off the regulators' input, the industry group broke out the three topics into the specific guidelines.

It took about four or five calls with each group over six months before they had a draft to float and "wordsmith," says Karin Landry, the lead on the CICA Task Force. Both groups, along with the CICA Board of Directors, reviewed the guideline drafts.

Waters describes the guidelines as "pizza dough" that got passed back and forth between the two groups until they kneaded it into the finished pie.

Lespere says the system worked well to get people talking, while not interfering with everyone's busy full-time jobs.

As the "pizza making" orchestrator, Landry perhaps had the best view of the overall project.

It was "really collaborative," says the managing partner at Spring Consulting Group LLC, though she can joke after the fact about how during the first call it "was very guarded and silent on the other end of the line."

CICA went with the two-group approach, she says, in part because it would allow members of each group to speak more freely versus if they brainstormed together in one big group.

Or perhaps the success had as much to do with the efforts of Landry, as many of the participants have commented.

There was also the focus at the outset not to create overarching, overpowering regulations for how all captives must operate across all industries and all jurisdictions. After all, each domicile has its own view of what works best and this even can change when regulators or governments end their term and a successor takes over. And a captive whose parent is a widget manufacturer might operate differently than a telecomm captive would.

Still, Landry reveals that some CICA members considered setting up a new organization to accredit captives. But that would have created yet another layer of oversight for owners and managers to cope with. Hence, CICA took the best practices route.

"We didn't want to set up the ISO 9000 for captives," she says, though she adds that some in the industry might wonder whether the project went far enough with the guidelines.

Participants stick by their logic, though.

"These are not standards, they're not regulations, they're principles," says Jeffrey K. Kehler, program manager for alternative risk transfer services with the South Carolina Department of Insurance and a member of the regulator group.

"A set of principles that will apply to some captives and all captives can apply some of them."

Now, finally, what are these valuable principles? The guidelines fit into one of three categories: business alignment, corporate governance and regulatory compliance.

The business alignment best practices deal with how captives can remain relevant to the parent company with a clear mission statement and a competent risk management program. Captives must marshal staff and resources to meet their strategic and operational goals. And they must be able to review and adapt strategies to remain relevant for the parent/owner.

"Business alignment is often overlooked but critical," says Landry.

Skip Neilson, a member of the best practices industry group and oil products team lead for the Americas with Shell Oil Co.'s Risk and Insurance department, noted how his captive has had to "correct" its original business plan to reflect strategic changes in the way it took on risk, for instance.

Another big part of business alignment is parent buy-in and recognizing that the captive itself is a business, which ties into the second category of guidelines, corporate governance.

These best practices deal with how well a captive is run in terms of fairness, discipline, transparency, accountability and independence.

As for the latter, Neilson says, "You don't want to give the impression that you are being run by the parent company."

One of the best practices involves forming captive boards from leaders from the parent or owner, as well as the risk manager and outside experts.

Another best practice within this topic is the creation of a conflict of interest policy. Neilson explains how his captive sends out a questionnaire to directors to allow them to self-declare any conflicts, though not all conflicts require action.

"It's the disclosure that's important and you weigh the consequences," he says.

Within the third guideline category, "regulatory compliance," is the hot-button issue of the role of captive managers. The best practices recognize that captive managers serve as "the eyes and ears of the regulators" and that regulators want them to "maintain regular communication with them on behalf of the captive parent/owner(s)."

Kehler recognizes offshore domiciles typically focus more on captive managers than onshores do. "As we move forward, it makes sense for the onshore domicile to adopt that offshore mentality," he says, adding that South Carolina is developing its own manager standards.

Still, one thing that surprised Landry during the process was how regulators seem to also want more direct contact with the captives themselves.

Perhaps that's something to be fleshed out in later editions of the CICA guidelines. As for future work, Landry reports that the "ongoing, iterative process" could lead down the road to drilling down further into these three categories or to exploring other best practice topics.

MATTHEW BRODSKY is senior editor/Web editor of Risk & Insurance®.

August 1, 2008

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