What to Expect as a New Captive Member

The first big step was making the decision to join a captive. Congratulations! Now what?

While each captive may be a little different, some things are similar. Let's delve into the responsibilities of your role and the basic financial knowledge you will need to know as a new captive member, as well as tips to help you get involved in your new position.

The Starting Point

To find a path forward, it is helpful to be familiar with the starting point. But the starting point may be evolving. Thanks to retiring Baby Boomers, what was once the status quo is now changing. It's important for proper orientation to your position to note these changes.

Long-time board members have institutional knowledge, while new members bring novel ideas. Striking a balance between the existing corporate strategy and encouraging new members to offer their perspectives can provide thought-provoking ideas for the future of the captive's direction.

For new members, historical context about the captive can be beneficial. Ask for a written history of why and how the captive was initiated. This information provides valuable insights and can continuously be updated so important details are not lost. A written history is helpful to preserve and refresh what's important to the captive's success.

Some new captive members may want to gain context in another way. One suggestion is connecting with older, long-term members or members of the captive management team. For example, have lunch with more seasoned board members – and maybe another new member before the first board meeting. This provides a chance to meet each other and start meaningful relationships in a less formal format than a board meeting.

Ask questions about your new role – how do you fit in? Typically, the board provides the long-term vision, and the management team provides the means to carry out the plan. Ultimately, all board members should keep the success of the captive at the forefront.

Along with the expectation of roles, a strong communication plan can keep everyone on track and make sure no one's perspective is lost.

Responsibility and Captive Finances

Being on a captive board brings a fiduciary responsibility to ensure the success of the captive. This entails being familiar with captive finances. The main financial focus is on the following documents:

• Balance Sheet: assets, liabilities, and capital of an organization at a particular point in time.
• Income Statement: revenues, gains, expenses, and losses to evaluate net income during a specific period of time.
• Cash Flow Statement: tracking inflow and outflow of cash used for operating, investing, and financing purposes.
• Stockholder Equity: assets available to shareholders after liabilities are paid.

An actuarial statement is prepared by an independent accredited actuary at least annually. Auditors and other regulators check cash flow to see if a captive's cash flow is positive or negative. Over time, a captive with positive cash flow can meet losses and expenses and, therefore, build investments and equity. If the captive is consistently cash-flow negative, problems meeting risk-based ratios will occur.

The components of the audit include:

• Qualifications of the appointed actuary, an individual, not a company.
• Scope of the opinion: assumptions and methods used, who provided the data, and what information was used to set reserves (statement of range of reserve estimate and method used to set actual reserves).

Loss Development

A new board member needs to be aware of "loss development" to better understand the financial well-being of the captive.
"When you join a captive program, the money to pay claims has an even more direct impact on your bottom line," says Beth Waldeck, AIC, CWCC, Manager of Claims and Risk Control Services. She adds, "Being in a captive gives you much more control over how your claims are managed and paid – take advantage of that!"

Nobody knows your business like you do, so Beth recommends planning ahead of time for how you want to track and manage your claims to set your organization up for success. Being in a captive means you also have many more tools and resources to help with the process. The fronting company, third-party administrator, captive management team, and your Captives Vertical team at AssuredPartners all have tools – and experience – to help you get the best outcome for your claims and, ultimately, your bottom line.

Insurance is an industry where the final cost of a "product" – in this case, a claim – is not known when the "price" is set. Additionally, the cost changes if the loss occurs during a policy period but is not known until much later. As more information becomes available, the amount of the claim reserve needs to be adjusted to reflect the circumstances.

Claim reserves are also impacted by other factors, such as inflation, increased punitive damages in class-action lawsuits, the growth of more and more litigation financing firms, and other environmental and mental health concerns. These elements cause the payout amount to change over time as the claim develops.

"Overall, the key to the success of a captive is having a robust loss control culture and strong claim management program," says Mike Lefever, CPCU, Captive Vertical Senior Account Executive at AssuredPartners. He adds, "When working with new captive members, we stress the importance of company-wide education and communication of these processes."

Recap

To be successful, look back to move forward. With proper expectations, captives can be a sound and smart strategy for managing risk. As a new captive member, it's important to be equipped with

information to better understand and answer the following questions:

• Is there a balance between the status quo and new ideas with Baby Boomers retiring?
• Is there a plan to pass on historical information and to connect long-term board members to new members?
• Are board members and management team roles clearly defined and communicated?
• Was the fiduciary responsibility of each member and what is needed for the financial soundness of the captive fully explained?
• Were the basics of claim development covered?
• Were the options for claim management and the importance of ensuring all employees understand the claim management process described in-depth?

Most importantly, as a new member, ask questions. Discussing what is significant can provide unique insights for long-term and short-term strategies that could benefit the captive.

AssuredPartners has a team of professionals who help you decide the best risk management solution for your business. We can guide you through the decision-making process and the transition from conventional coverage to a non-traditional strategy. Reach out to us at captives@assuredpartners.com to discuss all your options.