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Book Review:
Captives and the Management of Risk
by Kathryn A. Westover

Reviewed by John Salisbury, CPCU, ARM
President Captive.com, llc

The Art of Captives

Alternative risk transfer (ART) professionals have been anxious for one of their own to share and document the core body of knowledge of a growing captive industry. The good news is that day has come!!

Captives and the Management of Risk, by Kate Westover, International Risk Management Institute, Inc., 2002, promises to quickly achieve recognition as the authoritative text for alternative risk financing mechanisms. The author labels these entities "captives."

The 200-plus page text is easy to read, very well-organized and packed with the knowledge and experience of a dedicated captive management professional. Whether you are a student, an aspiring professional, considering the possibility of a creating or participating in a captive, a captive board director, or industry veteran, Captives and the Management of Risk has much to offer.

The text jumps off to a strong start with an introduction to alternative risk financing mechanisms: risk purchasing groups, self-insurance pools, and captive insurance companies. An excellent overview of the elements of captive insurance and the types of captive insurance companies follows. Chapter 1 and each subsequent chapter end with discussion questions and key words and phrases to understand.

Author Kate Westover divides the remaining chapters among four parts that reflect her expansive knowledge, practical experience, and observations gained from more than 15 years of specialization in alternative risk transfer mechanisms. The four book parts are: Understanding Risk, Captives as Risk Retention Mechanisms, Captives as Risk Transfer Mechanisms, and the Legal Environment of Insurance.

Three chapters in Part 1 -- Insurable Risk, Managing Risk, and Financing Risk -- provide a condensed version of much of the knowledge gained by those who have completed Associate in Risk Management (ARM) professional designations. However, these chapters build on that knowledge in many ways specifically relevant to captives. Selected issues addressed in these chapters include the types of risks captives can insure, a "holistic" approach to identifying and quantifying organizational risk and a captive's role in risk financing.

For those in the captive profession looking for a benchmark to identify whether a captive has achieved its potential, Westover indicates "…the full value of a captive insurance company is realized when it is used not simply to finance risk but to facilitate the management of all facets of operational risk." For most of us this means there is much that remains to be done, ensuring full employment for captive professionals in the future!

The focus of Part 2 of the book is captives as risk retention mechanisms. Chapter 5 discusses how a captive can reduce costs, fronting, and differences between commercial insurers and captives. Chapter 6 deals with captive accounting and taxation of captive income. The final chapter in Part 2 contains a great discussion of the types of policies and the opportunities for flexibility in captive policy forms and risk financing techniques. It concludes with the benefits of multi-year/multi-line policies and captive pools. The text includes an interesting case study of the demise of Hopewell, a retrocessional pool of captives.

"Captives As Risk Transfer Mechanisms" is the theme of Part 3 of Captives and the Management of Risk. The initial chapter of this part discusses actuarial risk prediction approaches, rating, limitation of risk and calculating the total amount of risk retained by a captive. This is basic and important information for captive management and governance. The focus of Chapter 9 is reinsuring the captive. The chapter provides a clear understanding of the regulation of reinsurance, impact of reinsurance on captive statutory financial statements, and types of reinsurance.

The final chapter of Part 3 provides information on risk transfer mechanisms that may be understood to a lesser extent in the captive community and may therefore be under utilized: finite risk protection, loss portfolio transfers, and risk securitization. The chapter also contains a brief discussion of the financial impact of ownership structures.

The final section of Captives and the Management of Risk is devoted to "The Legal Environment of Insurance." Forming a captive is the subject of the first Chapter in Part 4. Here, the author suggests that the term "captive feasibility study" means different things to different people. Westover stresses the importance of specifically defining the scope and purpose of such a study. She points out that such a "… study becomes, in essence, a business plan, with actuarial support for the loss assumptions, a description of any reinsurance protection behind the captive, and an explanation of how the capital requirements of the selected domicile will be met."

Chapter 11 also provides additional background for all those considering formation of a captive. It identifies the information requirements of a captive feasibility study. The factors important to determining which domicile best fits the needs of the captive and its insureds are outlined. Westover includes a description of the four different approaches to regulatory oversight.

While the descriptions are useful, inclusion of an exhibit that identified the specific regulatory approach of the primary captive domiciles would add value to the book.

Another helpful exhibit poses some key questions that should be considered during the captive formation process. This chapter is packed with additional information for those with looking to develop a captive insurance company.

"Operating a Captive" is the focus of Chapter 12. A very important topic here is the responsibilities of directors. There are some practical tips on avoiding illegal insurance activities, issuing and distributing company policies, captive reports and filings. Financial statements and performance reporting for the insureds and the Board of Directors are discussed. This chapter concludes with an observation that should challenge single shareholder captives: "Group captives tend to be significantly better than single shareholder captives at using captive meetings for discussion of risk management issues with stakeholders."

The text concludes with a look at "Future Directions." The final chapter focuses on new ways captives can and are contributing to enhancing the relationships of captive owners with their customers, suppliers, joint venture partners and employees. Examples cited are bank-owned captives who reinsure customer risks, contractor risks, and employee benefits. Future trends in unrelated business and up-to-date information on federal regulation of employee benefit captives are provided.

A great bonus to the Captives and the Management of Risk text is the captive insurance glossary. The glossary and text index will surely see frequent use as this new text develops the readership and recognition it deserves.

Many thanks and well-deserved congratulations to Kate Westover for her contribution to her profession and the captive insurance industry!!!

General shipping guidelines: For domestic shipments, please allow 2 weeks for delivery. Should you have questions about your order, you may reply to the e-mail that confirms your order or call IRMI at 800-827-4242.

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