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The primary source of global captive insurance news and analysis 02 September 2020 - Issue 206
Sanitising
theWith unforeseen plan claims and costs, the industry is seeing a rise in businesses considering a medical stop-loss captive
Malta Focus Emerging Talent Independent Directors As uncertainties surrounding Ryan Peruski Now more than ever independent
COVID-19 play out, Malta looks at how Partner directors are important to captive
it can adapt to remain competitive Honigman insurance company governance
Captive Insurance Times
Issue 206
www.captiveinsurancetimes.com
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1349PCP_Captive Review_20200211.indd 1 2/12/20 12:09 PM Contents
News Focus page 7 In this issue Independent Directors Temple University’s Michael Zuckerman dis- cusses why now more than ever independent directors are important to captive insurance company governance
page 16
Malta Focus
Malta has a strong grip on the captive market in Europe, especially in PCCs, but as uncertainties surrounding COVID-19 play out, the country looks at how it can adapt to remain competitive
page 20
Healthcare Insight
With unforeseen claims and costs, the indus- try is seeing a rise in businesses considering a medical stop-loss captive
page 23
Emerging Talent Industry Appointments Ryan Peruski, partner at Honigman All the latest comings and goings in the page 27 captive insurance industry page 30
Set up an EU based protected cell with the independent experts Capital, time & cost efficient alternative to a standalone insurer or captive Direct access to the UK and EU market
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Atlas Insurance PCC Limited is a cell company authorised by the Malta Financial Services Authority to carry on general insurance business.
5 www.captiveinsurancetimes.com ReinsuranceReinsurance Trust Trust Services Services
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News Focus
brings 40 years of actuarial experience in the re/insurance industry to Aspen. Christopher Jarvis wins court battle against Arsenal Insurance over Jade Risk Prior to managing his own consulting firm, A judge at the US District Court for the Middle Judge Andrew Brasher ruled that “TaylorChandler Thehe served sale asof executiveJade Risk vice president and District of Alabama has ruled in favour of breached the employment agreement”. group chief actuary at Validus Group from Christopher Jarvis, former owner of Jade Risk, Jarvis2010 soldto 2019. captive He manager also held Jade various Risk tosenior- Taylor, after he filed a lawsuit against Arsenal Insurance, Brasher explained: “The employment agreement levelChandler, roles and for Fireman’sJohnson of Fund, TaylorChandler Endurance, in and KPMG. a subsidiary of TaylorChandler, for breach provides that, in the event of litigation, the loser 2015 due to the increasing running price of of contract. will pay the winner’s ‘costs and expenses (includ- the business. Mark Cloutier, executive chairman and Andrewing attorney’s Kudera fees).’ has been appointed group chief executive officer, commented: TaylorChandler agreed on a deal with Jarvis to executive vice president and group “WelcomingBy the end of 2015,an industry-leading the parties had agreed expert to purchase Jade Risk for $3 million at the end of Accordingly,chief actuary Jarvis isof due Aspen to receive Insurance deferred sal - aof purchase Andy Kudera’sprice of $3 millionquality for to Jade our Risk team and 2015. As part of the agreement, Jarvis signed ary,Holdings bonuses, and(Aspen), his expenses andeffective attorneys’ fees3 soughtincreases to close our the capabilities, deal. allowing us February 2020. to transform our business, simplify and a 60-month employment agreement with for litigating this action.” enhance our operations, and increase TaylorChandler to remain at the firm. TaylorChandler applied to borrow money from Aspen’s previous group chief actuary, Paul accountability across these functions.” Frydas,In his conclusion, will assume the judge the said:new “Jarvisrole of substan chief - Synovus Bank to complete the purchase. Part However, in 2017, Jarvis’ employment was termi- analyticstially performed officer the and contracts will lead he signed strategic with of“Kudera’s the money forcapabilities the loan came fromand the freshSmall nated by employees of TaylorChandler Britt Taylor, defendants,pricing, aggregation and they were management never excused fromand perspective,Business Administration paired with and withPaul it cameFrydas’ an Norman Chandler, and Johnny Johnson for his modelling.their payment Frydas obligations will remain under chief the actuaryemploy - considerableimportant limitation: expertise if a loan and from experience, the SBA is for Aspen Insurance UK, Aspen Managing will create a strong partnership across “pre-deal conduct”. ment agreement and promissory note.” used to buy a business, the seller may not remain Agency and Aspen Bermuda.Kudera complementary disciplines,” he adds.
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40 Captive Insurance Times - Issue 192 7 www.captiveinsurancetimes.com News Focus
employed with that business for longer than a webinar that Jarvis had used which mentioned The court found that this evidence was destroyed year after the purchase. Jarvis, Taylor, Chandler Arsenal as the owner of a hypothetical case study in bad faith. and Johnson developed a workaround where to illustrate how a construction company could Jarvis became an employee of TaylorChandler dramatically reduce its tax liability by using The judge concluded that although there was “a itself to satisfy the bank, according to the judge. a captive. lot of testimony during the trial about the captive management industry and best practices in cre- In 2016, Jarvis informed Chandler that Jade Risk The judge said: “Chandler testified at trial that, ating and maintaining such insurance companies. had 35 active captives, however, 12 of those because it framed captives as a tax dodge and captive clients surrendered or dissolved bring- would draw the ire of the IRS, he had told Jarvis The court appreciated that testimony — ing the number down to 23. The deal closed four that he didn’t want Arsenal’s name on it. Jarvis it was very interesting — but it was not weeks later without a change in terms of the denies being told this.” especially relevant”. purchase price. The judge explained that Jarvis made financial concessions to assuage However, the court found that “Chandler never He explained: “This case is ultimately about TaylorChandler’s concerns that surrendering told Jarvis not to use the case study, although he written agreements that memorialised an arms- captives and increased regulatory scrutiny would clearly did not want Jarvis to use it”. length deal between sophisticated parties. translate into a loss on the deal. In his opinion, judge Brasher stated that the “deal The court concludes that Jarvis substantially per- Jarvis volunteered to defer $175,000 of his salary was doomed before the ink was dry. It fell apart formed the contracts he signed with defendants, and $750,000 of the purchase price and sug- less than a year after closing.” and they were never excused from their payment gested that the agreement include performance obligations under the employment agreement benchmarks that could substantially reduce the Among the issues that had already occurred, elec- and promissory note.” deferred payments if he failed to meet them. tronic files were reported missing and Jarvis had also allegedly retained an Apple laptop which The judge noted that there are three issues that became the property of Arsenal Insurance as part remain to be resolved, which include the defend- Problems emerged of the acquisition. In terms of the missing files, ant’s spoliation sanctions, Jarvis’s costs and Julia Stuart, a longtime administrator for various attorneys’ fees, and prejudgment interest. After the deal closed, it became difficult to merge financial institutions and former Jarvis employee, Jade Risk into Arsenal and convert Jarvis from an testified that although she preserved emails for He said: “After these issues are addressed, the owner into an employee. Brasher noted two rea- Jarvis’ defence and wiped data from the desktop court will enter a final judgment as a separate sons for this: federal regulatory challenges hurt computer, Jarvis did not order her to do so. document that (1) awards Jarvis $175,000 in the captive insurance industry and fundamen- deferred salary from TaylorChandler, $160,000 tal differences in philosophy strained the parties’ In her initial deposition, Stuart said she didn’t in captive origination bonus payments from relationship. The federal regulatory changes that delete anything from the computer, but in a TaylorChandler, $512,286.88 in promissory note were causing problems was the Internal Revenue subsequent affidavit, she admitted to “deleting payments from individual defendants Taylor, Service’s (IRS) Notice 2016-66, which formally everything as well as shredding all the hard doc- Chandler, and Johnson, and appropriate pre- labelled micro-captive transactions as “transac- uments that were on site”. judgment interest; (2) requires Jarvis to render tions of interest”. Chandler testified at trial stating unto TaylorChandler the MacBook Pro laptop that the notice had a “chilling effect” on the cap- At trial, Jarvis testified that he did not know the or its value in 2017; (3) awards spoliation sanc- tive industry. destruction of documents because he was over- tions to all defendants in the amount of attorneys’ seas when it occurred. But before trial, Jarvis fees and expenses expended to develop and lit- In the court case, the judge suggested that Jade wrote in an affidavit that he authorised the shred- igate the spoliation issue; and (4) awards Jarvis Risk was “aggressive” in selling micro captives for ding “because he did not want the documents to his attorneys’ fees and expenses in litigating tax purposes. The judge referenced a PowerPoint be discovered by other office tenants”. this action.” ■
8 www.captiveinsurancetimes.com News Focus
ACIA reveals safety protocols for in-person event
Oklahoma to reduce capital requirements The Alabama Captive Insurance Association for certain special purpose captives (ACIA) has released official safety protocols for its annual conference, which will take place as Oklahoma’s insurance commissioner Glen Jerry Messick, CEO of Elevate Risk Solutions, the first in-person captive event since the COVID- Mulready has issued a notice to advise all par- said: “For instance, it will allow a broker to spon- 19 pandemic. ticipants in the captive insurance industry on sor a series captive structure without having to the reduction of required capital for certain commit a large statutory capital amount. The conference, taking place in Birmingham, special purpose captive insurance companies. Alabama at The Westin Hotel & Resort on 16 to The Oklahoma insurance department (OID) As the sponsor allows no liability at its level, 18 September 2020, will have several safety meas- pursuant to 36 O.S. § 6470.20 and 6470.34 it naturally forces each series captive to pro- ures to ensure a safe conference for attendees. determined that as of the 16 September 2020, vide its own adequate level of risk capital the capital requirement for certain special pur- to operate.” These include providing masks with filters pose captive insurers will be reduced from to all attendees each day of the conference $250,000 to $50,000. “The fact the commissioner and his team and setting up all meeting spaces with social researched this and was quickly responsive distancing guidelines. The reduction in minimum capital and surplus to an industry need is yet another reason is available only to special purpose captive Oklahoma is focused on developing its captive ACIA will also provide hand sanitiser to all attend- insurers organised as a ‘series’ pursuant to 18 regulatory platform,” Messick added. ees with additional sanitiser stations set up O.S. § 2054.4 and does not accept or receive throughout the venue. direct or assumed risk; does not issue any Commissioner Mulready noted that written form of an insurance contract; insures the application for this reduction is required and It will utilise hotel staff for contact-free distri- risks of its participants only through separate needs to be directed to the captive division. bution of all food and beverages, including participant contracts. buffets, while also implementing a ‘no-touch’ He added that if this reduction allowance is conference greeting. Additionally, special purpose captive insurers approved, the reduction will be documented will need to fund liability to each participant by a company-specific order. Norman Chandler, president of ACIA, said: “We through one or more protected cells and understand the concern surrounding the COVID- segregate the assets and liabilities of each Additionally, in May, Oklahoma’s governor 19 pandemic and are collaborating with our protected cell from the assets and liabilities of Kevin Sitt has signed HB 3864 into law, which event venue to successfully ensure a safe envi- other protected cells and from the assets of the sets out how premium taxes by captive insur- ronment during the 2020 conference following special purpose vehicle insurance company’s ers should be distributed within the state COVID-19 safety guidelines recommended by general account. of Oklahoma. ■ the Centers for Disease Control and Prevention.” ■
9 images by natalia_bratslavsky/stock.adobe.com & seanpavonephoto/stock.adobe.com www.captiveinsurancetimes.com B++ Good News Focus
McGriff launches new group captive solution
McGriff has formed a new group captive prac- Rick Ulmer, McGriff CEO, highlighted: “Captives tice, McGriff Captive Solutions. are a critical risk mitigation strategy for our clients.” The new practice will serve as an advisory resource for companies seeking a more Ulmer added: “Steve Aldrich was instrumental CICA continues financial support cost-efficient way to finance risk while in the original formation of the Truist captive to ICCIE offering members ownership of their under- and is the right person to develop a strong writing profit otherwise retained by an captive strategy for our firm. He understands The Captive Insurance Companies Association’s insurance company. the business and is uniquely positioned (CICA) president Dan Towle has presented the with our McGriff industry practices and association’s annual $10,000 contribution to Leading the new practice will be Steve Aldrich, Truist Bank verticals to help drive the strat- the International Center for Captive Insurance a 40-year industry veteran. Additionally, he egy, structure, and engagement between our Education (ICCIE) during ICCIE’s virtual ‘sweet 16’ will serve as McGriff’s industry practice various stakeholders.” anniversary celebration. group leader. Commenting on his appointment, Aldrich said: The association said it is their 11th consecutive Aldrich, who joined McGriff in 2001, will man- “Given the hard market we’re now experiencing, year of the $10,000 contribution. age global captive programme formation for clients with strong balance sheets are looking the middle market, ensure programmes com- for options to control their destiny, rather than Towle highlighted CICA’s strong support for ply and follow best practices, and work with exposing their business to the up and down ICCIE’s educational programmes and encouraged clients and broking partners to develop new cycles of the insurance industry.” others to support the captive industry by contrib- captive products and resources. uting to our partners at ICCIE. He continued: “I’m excited about building on According to McGriff, the new group captive our success and solid reputation in the captive “Donations to ICCIE help them to keep their good solution is the next step in the alternative risk and alternative risk transfer space with a new work moving forward so they can continue to transfer operations of McGriff and parent com- entity designed to position us very well for offer classes and evolve their designations to pany Truist Bank. the future.” meet industry needs,” Towle said.
MBT, a Bermuda-based single-parent captive In May, McGriff Insurance Services and McGriff, Recently, Benjamin Whitehouse, attorney at and reinsurance company founded in 2001, is Seibels & Williams, the retail insurance subsid- Butler Snow, was named as serving as president owned by Truist Financial Corporation and also iaries of BB&T Insurance Holdings rebranded of the governing board of the ICCIE for 2020 managed by McGriff. as McGriff.■ to 2021. ■
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Reinsurance Solutions Group launches new subsidiary
Reinsurance Solutions Group, an independent Cupido has over 20 years’ experience in insur- He noted: “With the effects of world events African-owned reinsurance broking group, has ance/reinsurance and brings a combination starting to be felt in South Africa, and with our launched a new subsidiary Reinsurance Solutions of product and customer knowledge to his reinsurance industry being quite limited, there Intermediary Services (RSIS) in South Africa. The new role. was an excellent opportunity for us to bring to new company will comprise a team of brokers market a new player with new offerings.” that draw on their global experience as well as He forms part of RSIS’ newly-appointed execu- skill sets in the local market. tive team, following the granting of its financial “We are a niche and highly focused team, which services licence by the Financial Sector Conduct allows us to quickly adapt to changing conditions The group offers captive solutions services, Authority in June 2020. and develop responsive reinsurance solutions as underwriting and policy pricing reviews, treaty and when our clients need them.” review and placements. As part of the launch, Commenting on the new office, Cupido said: “Its Cameron Cupido will take on the role of CEO of entry into the market is a strategic one, coming “This undoubtedly gives us a competitive edge,” Reinsurance Solutions Intermediary Services. at a critical time for the local industry.” he added. ■
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12 www.captiveinsurancetimes.com News Focus
2020 conditions have created ‘innovative interest’ in captives The “perfect storm” of insurance market con- insurance risk belongs and who is responsible such as artificial intelligence and secure portals, ditions during the spring and summer of 2020 for it. as well as cost efficiencies, database devel- has generated growing interest in alterna- opment, and increasing demand from both tive insurance, according to panellists at the These questions surrounding what now consti- consumers and businesses. Vermont Captive Insurance Association’s (VCIA) tutes occupational health and safety, as well as virtual conference. concerns of the privacy and security of online He added that over the next 30 years, the insur- meeting platforms and personal data, and the ance industry as a whole will experience an Speaking at the ‘Innovation and emerging risk status of what constitutes an ‘essential worker’ accelerated rate of change as more services spotlight: captives in 2050’ panel, Peter Foley, and their related healthcare insurance, Koral will be disintermediated, with the ability to buy, senior managing director at Arsenal Insurance pointed out that insurance coverage will signifi- change or modify insurance directly. Management, identified that 2020 has presented cantly change over the next 30 years. unpredictable challenges, with the COVID- In addition, Foley noted that alternative risk 19 pandemic exposing underlying long-term He added: “This will also be seen in cyber cover- is likely to be consistently at the forefront of issues, as well as a gradual but accelerating age, which will inevitably expand in complexity.” innovation, aiding the balance of growth and transformation towards the gig-economy and potential for increased regulatory oversight. He insurtech investment. By 2050, Koral predicted there will be a reor- added that it will be important for domiciles ganisation of workers compensation, disability to have the necessary resources to work with Foley added the pandemic and current work and personal accident coverage, as well as an the private market, as well as receptiveness to from home model has raised the important ques- expansion of employer responsibility in light of new ideas. tion of insurance coverage, as gaps in protection evolving definitions of discrimination and bias. have led to an interest in alternative insurance, In terms of captives, Koral viewed the structures namely captives. However, he also noted that At the panel discussion, Koral used the example as a solution to the chicken/egg dilemma of new “2020 has the potential to be a pivotal year for of autonomous vehicles to demonstrate how businesses, whereby innovative startups cannot captives if managed properly”. auto coverage is likely to change as innovative gain underwriting coverage with no track record, products develop. “These complex machines will yet cannot operate without the coverage. Edward Koral, managing director of BDO USA, require a different definition of negligence, prod- noted that the work from home model has uct liability coverage for errors and omissions, Koral concluded by recommending that when impacted the gig/sharing economy. As personal cyber coverage against hacking, and mainte- designing new insurance products, parent organ- and work coverages have seen an increasing nance contracts for cost of repair,” he said. isations “must carefully consider the bespoke overlap – for example, personal property as a risks they face, divided into third party and multi-purpose workplace – the insurance indus- Foley identified the current tools for change avail- parent risks, but also understanding that these try as a whole has seen a reassignment of where able are user-friendly technology capabilities, can overlap”. ■
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Troy University gives distinguished award to Edward Pappanastos
Troy University has awarded the 2020 Wallace educational initiatives throughout the year Commenting on this, Arsenal CEO Norman D. Malone, Jr. Distinguished Faculty Award to cultivate current and prospective risk Chandler said: “Pappanastos has been instrumen- to Edward Pappanastos, scholar-in-resi- management and insurance students and tal in developing the Risky Business internship dence with Arsenal Insurance Management increase awareness of the opportunities programme, and we are excited to have him and the associate chair of the department of available in the risk management and insur- as an asset to the Arsenal team. His extensive risk management and data analytics at the ance industry, including the Alabama Captive knowledge in the RMI industry and honoura- Troy University’s Sorrell College of Business. Insurance Association’s (ACIA) Risky Business ble reputation in the educational community Earlier this year, Arsenal partnered with internship programme. made him the ideal person to bring in as a schol- Pappanastos to build scholarship, engagement, ar-in-residence with Arsenal,” he added. and opportunities for both Troy University Additionally, at this year’s ACIA con- and Arsenal. ference, there will be a focus on According to Troy University, this award was promoting student engagement by incor- established “to acknowledge those exceptional Arsenal also works with Pappanastos porating student-focused sessions and faculty members who, through meritorious and on several strategic recruitments and networking opportunities. selfless service, transform vision into reality”. ■
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The keystone
Temple University’s All organisations manage risk. Some manage risk governance practices and standards that exceed Michael Zuckerman better than others. All face a certain amount of regulatory compliance. risk not adequately treated by its current enter- discusses why now prise risk management (ERM) process giving rise Some captive managers apply Sarbanes Oxley more than ever to residual risk. The need to assess and manage (SOx) principles to the management of a privately independent directors residual risk is a cornerstone of ERM. Some would held captive to ensure that the proper controls say that residual risk is an ERM opportunity to are in place to prevent fraud, enable accurate are important to increase enterprise value. financial reporting, and provide a superior level of captive insurance governance. Moreover, there are multiple layers company governance A captive insurance company (captive) is a of captive regulation such as the domicile regu- strategic risk management tool used by many lations, captive manager’s financial reporting and organisations to manage risk and address resid- compliance, actuarial loss forecasting and reserve ual risk. For example, the 2001 terrorist attacks on certification, and the external audit. Why then is the World Trade Center in New York City focused so much being written about the need for inde- risk managers’ attention on the impact that a sin- pendent directors on captive boards? gle event can have on multiple exposures across the enterprise. This event highlighted the need The importance of independent directors for cap- for a mature ERM programme to manage the tive regulation and operation is growing, in part, interdependency of risk and the resulting resid- because it can increase the likelihood that the ual risk. Captives are an essential strategic ERM captive parent(s) (member insured) will achieve tool that continue to evolve as organisations its risk financing goals. Independent directors address an evolving and increasingly complex have proven successful in improving the mem- risk environment. ber insured’s governance. Why not provide the same benefit to the wholly-owned insurance sub- Captives are also privately held companies not sidiary, the captive? generally subject to the same regulatory scru- tiny as its publicly owned parent, for example. Successful organisations, for-profit or not for Single parent and group captives, however, are profit, are focused on meeting the needs of owned by public, private, and nonprofit organ- its stakeholders. To this end, organisations isations. A common thread among all captives are focused on meeting environment, social, regardless of its parent(s) legal structure is the and governance (ESG) standards because it is obligation to manage the captive following best the right thing to do, and will also improve an
16 www.captiveinsurancetimes.com Independent Directors
organisation’s reputation, value, and access to professional experience. Furthermore, they mon- perspective to ensure that the captive not only capital. A captive’s stakeholders include its mem- itor the company to ensure that executives act in meets its regulatory and stakeholder obligations ber insureds third party claimants (customers, the best interest of shareholders. The New York but exceeds them. I would also argue that the visitors, or patients), regulators, reinsurers, and Stock Exchange further defines an independ- independent director will improve the captive’s service providers, among others. I would argue ent director as one who the board “affirmatively ability to access underwriting capacity from the that the captive’s stakeholders also include the determines” has no “materiality relationship” reinsurance and capital markets. Investors such member insured’s investors, employees, vendors, with the company “either directly or as a partner, as BlackRock and Vanguard examine an organisa- credit rating agencies, community, and regula- shareholder, or officer of an organisation that tions’ financial condition, cash flow, governance, tors. And all of them would have an interest in has a relationship with the company”. Vermont, sustainability, ESG data and ratings, among other the successful operation of the captive. The cap- for example, does not require an independent material information, to identify and evaluate risk tive’s highest priority, therefore, is to protect the outside captive board director but examines the before investing its clients’ money. Why wouldn’t financial security of its member insureds increas- character, reputation, financial responsibility, reinsurers seek ESG information about the cap- ing stakeholder value. insurance experience, and business qualifica- tive and its member insureds before agreeing tions of the officers and directors or members of to commit its investors’ capital to provide pro- The current pandemic has proven how benefi- the governing board. Therefore, the independent gramme terms? cial a captive can be to its member insureds as director can bring stability to the captive man- a source of capital in turbulent times. Why then agement process because of her independence, Some reinsurers are refusing to underwrite put a captive at risk, unnecessarily, by not provid- integrity, and appropriate experience. To this certain classes of business based upon ESG ing it with the benefit of an independent voice end, the independent director must have the standards and incorporating ESG data into its with the appropriate risk management expertise? necessary governance, risk management, and underwriting process. Certainly, reinsurers are The captive board has a legal duty to act in the alternative risk financing/transfer experience to currently examining the governance and finan- best interest of the captive, but member insured be effective. Moreover, the effective independ- cial condition of a captive’s member insured operational factors can destabilise the board’s ent director will: before offering terms. The presence of an inde- decision-making process. The captive board can pendent director will improve the captive’s case be influenced by factors unrelated to the cap- • Assist the captive strategic planning that it has strong leadership, governance stand- tive’s best interest because of their competing process, including designing and cre- ards, risk control, and protects its stakeholder role as an officer or manager for the member ating solutions to manage the member rights and interests. insured, which can adversely impact liquidity and insured’s evolving risks solvency. An independent director can prevent • Enable the captive board to analyse better The current pandemic has taught us valuable this from happening. and evaluate programme options lessons about business continuity management • Enable the captive board to avoid making and resilience. Organisations will continue to use The Merriam-Webster dictionary defines decisions without regard to merit captives to design innovative risk management ‘independent’ as “not subject to control by oth- • Be a trusted adviser that can act as a con- and risk financing solutions for evolving business ers”. The Stanford University Business School trol against fraud continuity threats such as business disruption, Corporate Governance Initiative defines out- • Provide oversight for the captive’s cyber-attacks, and catastrophic property perils side independent directors as outside directors ERM programme such as storm surge, to name a few. This innova- with no “material relationship” to the company tion will require access to both reinsurance and [including the member insureds or captive insur- The Airmic 2019 Captive Governance Guide does capital markets. And the independent director ance company]. An outside director is one that an excellent job of explaining both the benefits will enhance this process. is not an employee of the firm and contributes of and the qualifications of an independent cap- to the organisation by advising management tive director. The qualified independent director Furthermore, the captive must provide eco- on strategy and operations, drawing on their will provide the needed balance, objectivity, and nomic, and risk management value to its member
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insured’s while managing its own operational, There are several potential drawbacks to using The Airmic guide does provide this guidance. The financial, and strategic risks. An independent independent directors. member insured, for example, should assess the director acting in good faith without conflicts board performance annually, establish term lim- of interest will bring the necessary objectivity An independent board member may not be as its, and avoid selecting an independent director needed to reduce the captive’s enterprise risk. familiar with the member insureds operations, with any close family ties to the captive board, An independent director can also be an arbiter operational and strategic risks as would an inside vendors, or member insured employees involved to diffuse any potential differences between the director. Inside directors can also co-opt an inde- with the captive operation. captive board and its captive manager, actuary, pendent director. auditor, and reinsurance broker. Again, the cap- In conclusion, the independent director, if ade- tive is a private company and not usually subject Furthermore, an independent director may quately vetted and managed, at the very least, to the same regulatory scrutiny, depending on not be qualified to advise on captive insurance should positively impact the captive’s access to the domicile, that a publicly traded company operations. The member insured can overcome underwriting capacity as well as the acquisition would be in terms of governance, including the these potential drawbacks by selecting the and cost of directors’ and officers’ liability insur- need for an audit committee. appropriate individual. ance for the captive board.
Often, the full captive board acts as the audit The Airmic 2019 Captive Governance Guide Moreover, it will provide the control needed committee, for example. An independent director, does go into some detail about how the inde- to ensure that the captive will have the sol- however, can take on the role of an audit com- pendence of independent directors can vency and liquidity to be there to support its mittee, providing an objective and disinterested be impaired. member insured’s business continuity recovery conduit for the captive service providers much from the next adverse event that impacts the the same way that a formal corporate audit com- The question, however, should not be whether entire enterprise. mittee does for whistleblowers and the internal an independent director is an appropriate gov- and external auditors. ernance standard for a single parent or group The independent director, if responsibly man- captive, but how do we manage the risk that aged, will provide the necessary stability I would think that the member insured’s audit an independent director’s independence could needed for innovative and effective captive committee would want the captive to provide become impaired. insurance programmes. ■ this control against possible fraud, and other gov- ernance failures. A well-governed captive must manage its underwriting, compliance, reinsur- “The independent ance credit, liquidity, and solvency risks without concern for the member insured’s budget and director, if responsibly cost of risk allocation issues. managed, will provide Moreover, the member insured’s board, whether the organisation is publicly traded, private, or the necessary stability not for profit, has ultimate responsibility for the needed for innovative oversight and governance of the entire enterprise, including its captive. Boards must ensure that and effective captive the organisation is addressing its material risks. If the captive board loses its objectivity threat- insurance programmes” ening its liquidity or solvency, it could trigger a Michael Zuckerman credit rating review or event-driven liability for Associate professor the member insured’s board. Temple University Fox School of business
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Learn More About ProSight’s Captive Oering Malta Focus - By Maria Ward-Brennan
Adapting to change
Malta has a strong grip on the captive market in Europe, especially in PCCs, but as uncertainties surrounding COVID-19 play out, the country looks at how it can adapt to remain competitive
Malta is a small island nation located in the the basis for the integration of the single market However, he suggests initial reactions “seem Mediterranean Sea just south of Italy with a for insurance in Europe. to be positive vibes, particularly as the review population of about 450,000. For a small coun- addresses several topics, including aspects of try, Malta has a lot to offer, and not just for the The system is based on a forward-looking and proportionality and better practicality in the millions of tourists that visit each year. The risk-based approach, requiring the highest regulatory interaction between operators in country also boasts a well-established insur- risk management standards and active mon- the industry and the regulator, which should ance sector operating for both domestic and itoring and steering of the risk an insurer is improve things for the typical operator size nor- international clients. facing. It ensures fair competition and con- mally found in the Maltese market”. sistent consumer protection across the EU Malta established its captive insurance market in and allows insurers to provide their product 2003 and as of 2019, it was home to 62 captives. cross-border. PCCs
Being a member of the EU, Malta is entitled to EU However, Solvency II has added a lot of complex- Malta’s biggest selling point is its protected cell single passport right, which means any captives ity to the process and structures of companies companies (PCCs) market, this is because Malta that are based in Malta, can provide insurance and supervisors, presenting a significant regula- is the only full EU member state that has PCC leg- in the other EU/EEA member states using their tory burden. Which is why the current Solvency islation, which came into force in 2004. Maltese license without having to apply for a II is under review. The EU launched a consulta- separate license in each of their chosen countries. tion on Solvency II review earlier this year and will A PCC is a corporate structure in which a single release their feedback at the end of 2020. legal entity consists of a core linked to several However, like all EU members, Malta has to adopt cells that have separate assets and liabilities. The and follow the Solvency II Directive, an EU law Commenting on the Solvency II review, Julian central core organisation is linked to individual that codifies and harmonises the EU insurance Boffa, regulatory advisor at Ganado Advocates, cells and each cell is independent of each other regulation, which came into effect in 2016. The says “it is still early days to fully understand the and the company’s core, but the entire unit is still directive is the first common supervisory frame- impact of the Solvency II review on Malta’s insur- a single legal entity. A PCC is sometimes referred work in the EU and sets global standards. It sets ance industry.” to as a segregated portfolio company.
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Ian-Edward Stafrace, chief strategy officer at Atlas He says: “This intends to offer legal certainty in a Commenting on this, Boffa notes that the Insurance PCC, explains that he has reviewed space that is otherwise unregulated and touches enforced COVID-19 lockdowns across the world hundreds of enquiries since it came into upon several issues including types of authorisa- have and will continue to have a significant force most of which intended to directly write tions, legal personality, and the applicability of impact on the different markets. to consumers. law on smart contracts.” He says: “The captive market will need to He continues: “Potential cells most likely to be Stafrace suggests that with these devel- adapt to the new realities which will face it feasible are cells with expected premium vol- opments and having full access to the EU moving forward.” umes in excess of €1 million.” single market, cells based in Malta can be “ideal digital insurers”. “We are seeing mergers of large interna- “We have seen smaller exceptions where loss tional groups and which naturally result in ratios are predictably very low or where the cell PCCs can be seen as sandbox platforms to consolidations at the captive level as well, is needed for more strategic reasons. The best experiment, incubate, launch and scale new tech- but at the same time mergers are a time fits are usually focused on one or a very small nology-driven business models at a far lower cost of opportunities.” number of products with low limits or event and capital than a standalone insurer. exposures and covering short-tail risks, with lim- “The trend is normally for captives to exploit such ited if any liability exposures included,” he adds. Stafrace adds: “They help break the barrier to opportunities rather than shrink operations. This entry for new captives or start-up insurtechs is possibly leading to the trend of captives to Cell captives will remain popular solutions for unintentionally created by regulation.” look at their parent’s customer base and branch captives because of the economies of scale they out (or expand) non-pure captive offerings”, offer, according to Boffa. “These are exciting times with the financial he adds. services community merging with the tech He notes: “Many a time, captives’ main strug- start-up community to shape the future of He explains that Malta’s small size has always gle, particularly in the initial phase, is resource the sector.” meant that rapid adaptation was a “strong point” requirements, including technical resources.” in its approach to the challenges facing it. Boffa notes that the MFSA has an ongoing con- “Solvency II has introduced very heavy govern- sultation process which will result in the issuing Malta’s future suggests that the country’s reac- ance requirements which might be very onerous of guidelines in relation to technology arrange- tivity to challenges is certain to mean further for smaller captives. Cell solutions are therefore ments, ICT and security risk management and growth in the local captive industry, according ideal as the governance burden is taken care of outsourcing arrangements. to Boffa. by the PCC core”, he adds. He states: “The developments on these guide- The uncertainties surrounding COVID-19 are not lines is certainly a topic which should be expected to disappear any time soon, Boffa high- Small but mighty followed by captives, insurance undertakings lights that the jurisdictions that are first to adapt and intermediaries alike, as high new governance to the new realities “will be the ones who can Looking at how Malta can keep competitive in benchmarks will be probably set.” best accommodate the new projects and objec- the captive market, Stafrace explains that the tives of the captive industry”. Maltese government is keen to make Malta a blockchain capital of Europe with the crea- Adapting to new realities “On that basis, Malta should certainly be at the tion of the Malta Digital Innovation Authority top of the list when it comes to the selection and a framework for the voluntary certification The captive market is always heavily influenced of a jurisdiction where captive owners wish of distributed ledger technology and related by the ongoing realities of the parent companies to invest in to host their captive solutions,” service providers. and the groups within which they lie. Boffa concludes.■
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