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Offshore captive insurance companies and third-party claims administrators could become targets for state regulators, and captive risk executives who think they can sweep compliance issues under the table are in big trouble, according to lawyers and other captive insurance experts who spoke at a presentation on compliance benchmarks during a meeting of captive insurance managers.

Since 2001, there's been a huge transfer of insurance capital and underwriting activity to companies located in Bermuda and the Cayman Islands. Where there's money, there's a reason for aggressive regulators to start knocking on doors in search of financial shenanigans. New York Attorney General Eliot Spitzer's prosecution of big insurance brokers is an example. California Insurance Commissioner John Garamendi's chase of corrupt title insurers is another.

"Be prepared to provide full disclosure of documents," said Jack Flug, managing director of Beecher Carlson, who advises clients on settlement strategies.

In anticipation of a dreaded "knock on the door" by a persistent regulator, insurance buyers can institute immediate reforms to make sure they comply with laws, Flug said.

Reforms include asking for more disclosure by brokers, becoming more involved in placements, raising standards related to insurance bids, splitting larger programs among several brokers, requesting written proof of competitive bids for review and seeking the advice of independent risk management consultants.

To help their companies meet compliance requirements and avoid inquisitive letters from the regulators, risk executives can also start conducting internal compliance reviews of their procedures, said Arthur Coleman, president of Citadel Risk Management Inc.

He advised risk executives to "fence in" problem areas, create "SWAT" teams to address risks, generate metrics to monitor risk management, build goals and objectives around sound business practices, and report results good and bad.

The Sarbanes-Oxley Act has made it a requirement for public firms to comply with disclosure laws, thereby making it less likely that big firms will run afoul of state or federal regulators.

But midsize and small companies are finding the economic burden of meeting the law a crushing responsibility. Paying for a proper auditor can cost between $20,000 and $200,000, Coleman said. "Those are huge costs," he said.

Flug, who recently left Marsh, knows about investigations firsthand. He said the recent trials of Marsh, which last year settled bid-rigging allegations with New York Attorney General Spitzer, had "changed my life."

"It was a very difficult period of time for me at my previous organization and for others," he said.

Marsh settled with regulators for $850 million. Aon and Willis, as well, settled for lesser sums.

But class-action lawsuits from plaintiffs will run in the "megamultiples" of what the brokers have settled for with state regulators, he added.

Executives from carriers like AIG and reinsurers like Gen Re have also been indicted for financial deals. Regulators allege that in those cases no risk was actually transferred in the transaction.

April 15, 2006

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