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Issue 12 -- April 2006
At the recent CICA meeting I heard a lot about the requirements of corporate governance that owners of captives were trying to meet. Their own internal auditors required sign-off and justification of everything they and their managers do, not to mention the other service providers. Their external auditors, rubbing their hands with enthusiasm at all the extra work (and fees), are double-checking all that, educating themselves at the captive owners’ expense as they do so. Their fronting companies are demanding SAS 70 certifications to show that captives have gone through the reviews required. Readers have all heard horror stories about the cost and trouble this has caused. Most of us complain when we have to justify what we have been doing. But in captive circles I now hear, sometimes, admissions that actually it has made things better for the captive and its owners. I am still waiting for publication of success stories along those lines, though. In a session entitled “Standards for Captives, has the time come?” Michael Mead, an ex-president of CICA challenged me to make the argument in favor of captive standards. I did my best, using some of the Tillinghast TRACS financial standards and ratios that had grown out of the GACS (“Generally Accepted Captive standards”) that I had co-authored earlier. The audience was skeptical that any kind of standard, no matter how nuanced, would satisfy all the diverse interests looking at captives. My conclusion to that skepticism was that, in the absence of captive standards set by the profession (or the “industry”, as they like to call it), they would be set by others. By default the rating agencies, notably A.M Bests, would do it for them. Accreditation would pass from the “industry” to the rating agencies. Does it matter? I find a lot of different parties have an interest in whether their captive, or their client the captive “measures up”. Who are those that want to know whether captives measure up, and what do they consider most important? If you read the captive trade press or go to enough conferences, after a while the list becomes a little repetitive. The table below (on the right, etc) is my interpretation of some of them. My comments focus on what they are most interested in when comparing any given captive to other captives, or to some set of standards.
Example of successful accreditation: John Salisbury, President & Chief Executive Officer of Government Entities Mutual, Inc. reminded me that in the US, public entity pools already have an accreditation process. Since these are similar to captive insurance companies in their modus operandi, I asked him to tell me about their Advisory Standard Recognition Application of the Association of Governmental Risk Pools (AGRIP), a national organization. The process for gaining recognition is to self-certify that the standards are being met and to furnish the related documentation to AGRIP. AGRIP has a Member Practices Committee that reviews the application and related documentation and recommends approval or disapproval. Currently there are 35 public entity pools/insurance companies that have received recognition out of the 170 members. But he points out that in the state of California, whose economy is larger than some European countries’ and so serves as an example, there are an estimated 150 risk management pools, of which the California Association of Joint Power Authorities(CAJAPA) is a subset. CAJAPA has operated its own accreditation program since 1983. It has 101 pool members of which 43 are accredited. It is interesting to note that in California there are two categories of accreditation with different standards. Of the 43 CAJAPA accredited pools there are 33 out of the 101 accredited with excellence. Independent consultants are required to qualify for the accreditation. About 20% of the CA pools are accredited. The number of pools being accredited has been increasing. Many of the CAJAPA member pools are not members of AGRIP, but are increasingly attracted to join because of the accreditation program. The standards in the AGRIP process include
In addition to the ratios and financials, and the categories just listed, I would have added these to the requirements for an accredited captive:
And possibly the existence of membership modelling, or some technique for demonstrating to captive insureds that their business is being tracked or accounted for. Hugh’s views: I still think that some form of accreditation of captives is necessary and useful, if only to serve as a starting point in discussions with some or all of the interested parties in my table. I had started with the idea that it would be based on ratios and financials, but now realize that there is more to accreditation than financial measures. This article dealt with the generalities of the notion of accreditation of captives. In a subsequent article I hope to explore how to do it, who should or would do it, and the advantages to the captive “industry” of accreditation. The most important message in the California example about accreditation is that new members are attracted to join the organization because of its accreditation program. CICA take note. Can't get enough of Hugh's oft-irreverent views? You're in luck! Follow this link to all of Hugh's pearls of wisdom:
Hugh Rosenbaum, one of captive.com's friends and valued contributors, is a freelance consultant. Hugh can be reached by telephone at +4420 8883 6729 or by e-mail at hughro2@yahoo.com. Learn how you can spend a day with Hugh! Visit Hugh's Captive Consulting and Music Websites
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