Management Fees

August 05, 2014

WTbutton2012
For captive management, both alternatives are seen but most common is a flat fee with perhaps some annual increase factors part of the management agreement. Percentage of premium arrangements (standard for many other functions such as brokerage, underwriting, TPA, etc...) while less common would be seen more often with RRG structures than other captive arrangements.

For captive management, both alternatives are seen but most common is a flat fee with perhaps some annual increase factors part of the management agreement. Percentage of premium arrangements (standard for many other functions such as brokerage, underwriting, TPA, etc...) while less common would be seen more often with RRG structures than other captive arrangements.

The only fee that you would normally see being tied to asset size would be the investment management fee and related trust and/or custody agreements (an agreement normally separate from the captive management agreement).

Common factors that would affect the captive management fee are: the captive type, the size, number of lines of business, fronted vs. direct writer, whether NAIC type filings are required, how many states the entity operates in (for RRG's), and frequency and timing of reporting.

Our firm typically uses a flat fee structure for captive management so I am less familiar with what percentages to expect under a percentage of premium structure, but for pure captive management (does not include underwriting, claims or other similar services) something in the 2-3% subject to a minimum fee would probably be in the ball park.

If you go with a percentage of premium approach I would suggest that you include provisions in your contract where the percentage declines as the premium level grows and/or that you have some form of provisions that controls the growth of the management fee.

The manager has a minimum amount of services that it must provide regardless of size and as such they will want something to protect themselves (a minimum fee). While there is no doubt that the amount of work required by the manager increases by a good margin as the captive grows it is not a straight line but rather a curve with the amount of work increasing quickly in the early stages and then leveling once it reaches a certain size.