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A Concept Ahead of Its Time: Creating and Operating a Virtual Captive

Future Concepts
May 12, 2016

The National Risk Retention Association (NRRA) has announced it is debuting a prototype virtual company called “Autonomous, RRG” at its 2016 National Conference. The purpose is to stimulate discussion and provide attendees with the experience of creating, in the NRRA executive director’s words, “what could quite possibly be one of the most financially successful RRGs ever devised.” coeditors John Salisbury and John Foehl want to contribute to that discussion by sharing their personal experiences in creating and operating a virtual captive.


Government Entities Mutual (GEM) started its captive reinsurance operation in 2003. When John Salisbury, the founding president/chief executive officer, accepted the position, he did so with the goal of creating a virtual captive. The net written premiums of this small captive were $4.6 million at the end of its first year of operation. Accompanying this smaller premium amount was a desire to limit the expense ratio (expenses/net written premiums) to 25 percent. This objective made it necessary to outsource most of the captive operations.

The in-house GEM president/CEO position was supported by a full-time executive assistant, making a total in-house staff of two. Marketing, reinsurance intermediary, underwriting, claims management, accounting, investment management, independent investment consultant, and computer software and hardware support were all outsourced services. The challenge was how to effectively and efficiently coordinate and monitor these services with in-house staff. Creating a virtual captive was the strategy that was implemented to achieve this goal.

The captive invested about $100,000 in technology that helped make its virtual captive goal a reality. The technology included (1) an imaging system accessible through a virtual private network, (2) creation of a robust website, (3) a virtual telephone private branch exchange (PBX) that directed calls to phones of both in-house staff and service providers, (4) non-operator assistance with anytime conference call capability, (5) e-mail, (6) fax to e-mail, and (7) a proprietary member accounting system and numerous other software applications.

A principal at the captive audit firm Johnson Lambert, whose offices were located in the metropolitan Washington, DC, area, was contacted to ask if the firm had any interest in performing accounting services for a start-up captive. There was one condition: they would need to use the captive’s imaging system that had multi-user access through a virtual private network. They agreed without knowing what should be charged for the service. While there was a risk to both the captive and this service provider, the ultimate charges were viewed as reasonable by both parties. The imaging software was installed and the staff was trained shortly after the start-up of the captive.

The treasurer function was also contracted with a finance professional who was provided access to the virtual private network that supported the captive operations.

Underwriting services were contracted with Milliman with access by GEM to the rating and underwriting. After a period of time, GEM purchased the proprietary underwriting package developed by Milliman and created a full-time underwriting position on its staff.

Initially, the claims services were contracted with Gallagher Bassett. Here, too, GEM had online access to claims files and was able to create claims reports. In its second year of operation, GEM hired an in-house claims professional and purchased and modified some inexpensive claims software to meet its needs.

Marketing and reinsurance intermediary services were contracted and located on the West Coast and were similarly enhanced by access to GEM’s imaging system and technology.

GEM was domiciled in the District of Columbia and physically located in Concord, New Hampshire. GEM had the capability to provide DC regulators with access to its financial and other records although it was not utilized.

In 2007, I (John Foehl) was hired to succeed John Salisbury upon his retirement at the end of the year. One of the reasons I accepted the job was the ability to physically perform my responsibilities from any location. In negotiating with the board, I indicated a desire to work from Connecticut at least 2 days per week, typically Monday and Friday. Recognizing the work Mr. Salisbury had done in creating the ability to operate virtually, the board agreed to this request.

During the latter half of 2008, my first year as CEO, GEM was due to be examined by the District of Columbia’s Department of Insurance, Securities and Banking (DISB). Working with the regulators, we were able to agree on a remote examination where the field examiners would not be present in New Hampshire but would be given complete access to GEM’s online databases. While the lead examiner was initially skeptical of the idea, she embraced it after seeing how easily information could be obtained, in many instances without the need for GEM staff to be involved.

I suspect the prior comment will raise some eyebrows, since many captives would not want to allow their examiners and auditors unfettered access to their information. However, beginning with Mr. Salisbury’s tenure and continuing through mine, one of the guiding principles of the company had been the practice of good governance. Therefore, GEM files should not contain any information we would be uncomfortable with sharing with our regulators, auditors, or members.

Similar to the regulatory examination process, GEM’s annual audit was also conducted on a virtual basis. We routinely conducted requests for proposals for audit services every 5 years under our governance policies. In 2008, we selected a new audit firm. The audit team visited GEM once—I suspect just to confirm we were in fact a real operating company with a physical location. After the one visit, the entire audit process was done remotely. We met with the senior partner and senior manager once per year at the company’s April meeting in the District of Columbia; other than those meetings, all work was conducted electronically.

The virtual aspect of the company also carried over in our relationship with our members. We typically did not need to issue binders because we could use our systems to create and e-mail signed copies of our policies immediately upon acceptance by the member. While this worked fine where GEM provided a working layer for reinsurance, it did create some problems where we participated in quota-share arrangements. Brokers would invariably ask us for a binder, and we would reply that we did not issue binders but could provide a policy instead. As the brokers became more proficient in using electronic policy issuance, these problems abated. However, we continued to run afoul of state laws early on when the states refused to recognize electronic signatures.

While GEM certainly was a leading-edge organization in operating virtually, today it is more common. What captives and traditional insurers need to be aware of is the growing interest in insurance FinTech. Given the size of the global insurance markets, entrepreneurs view it as a growth opportunity where, through the use of technology in underwriting and claims analytics and to reduce friction costs, they can disenfranchise more established players.

Those who ignore these trends do so at their own peril.


We are confident our readers would like to learn more about your captive experiences. Your coeditors would welcome your stories, which can be e-mailed to John Foehl or John Salisbury, or you can use the Contact Us form.

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