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Time for captive accreditation? Increasing interest by regulators may force captives to self-regulate or face more stringent By Michael J. Moody, ARM, MBA According to the latest statistics, there are in excess of 5,000 captives worldwide. This number increases dramatically during hard market conditions in the property and casualty insurance market and recently has been growing despite the current soft market conditions. Many experts predict that the captive movement will continue regardless of the insurance market conditions. As a result of this growth, one topic that has continued to receive attention is the issue of captive accreditation. Despite the growth in the captive insurance industry, there is no single, formal accreditation process for captives. A number of industry experts have indicated that it is now time to develop that process. Early efforts Over the years, there have been a number of efforts to formalize a captive accreditation mechanism. One of the early efforts was provided by risk management consultants at Tillinghast. Initially they advanced their “Generally Accepted Captive Standards,” which was used as a benchmark in their consulting projects, to determine the quality of a captive. Over the years, the standards have been revised to what is known today as Tillinghast Recognized and Accepted Captive Standards (TRACS). Among other things, TRACS provides guidance with regard to operational excellence for captives. This includes criteria for capital management, loss reserve adequacy, prudent funding, and investment policy. Additionally, the TRACS program provides a wide variety of financial performance ratios that can be used to further benchmark a captive. A more recent alternative risk financing accreditation approach has been provided by the Association of Government Risk Pools (AGRiP), which has established a formal recognition program. The AGRiP recognition program is based primarily on a self-evaluation approach of compliance with the association’s Advisory Standards for Public Entity Risk and Employee Benefits Pools. AGRiP was organized in late 1998 as a membership organization for North American public entity pools. The Association is a successor to the Pooling Section of the Public Risk Management Association, and its members include a wide variety of public entity organizations. Included in AGRiP’s membership are state agencies, cities, towns, counties, educational entities and special districts pools. While the core of the AGRiP accreditation process is a self-evaluation based on published standards, the pools must also furnish all related documentation, in addition to their evaluation forms. AGRiP then has its Member Practices Committee review the application and documentation, and then they provide an approval or disapproval recommendation. Today, according to published records, there are 170-plus members of AGRiP, of which about 35 pools have received approval and recognition of their pool’s efforts. More formal approach A much more formal approach to accreditation has been provided by the California Association of Joint Power Authorities (CAJPA). The Association has been operating its accreditation program since 1983. In essence, the program is made up of two separate categories of accreditation. The first category is known as “Pre-Accreditation Review” which allows potential applicants a method of submitting a preliminary review to a CAJPA Accreditation Manager/Consultant. This stage of the accreditation process requires the applicant to share the results of the preliminary review with CAJPA; however, it does not require an on-site review. Any deficiencies are noted by the Accreditation Manager/Consultant along with recommended corrective action in order to bring the JPA into compliance with the standards. However, the results are not shared with CAJPA’s Accreditation Committee. The next stage is full accreditation. This process involves a much more detailed examination of the JPA. Included in this review are all legal and operational documents, risk management, loss control and claims management programs, as well as all statutory compliance issues. In addition, an on-site visit is scheduled with the Accreditation Manager/Consultant and the person(s) responsible for the pool’s management. It is estimated that 43 members of the CAJPA’s 101 pools have been fully accredited. A different view In October 2006, a new player joined the accreditation discussions. This was when the International Association of Insurance Supervisors (IAIS) presented an issues paper titled “Issue Paper on the Regulation and Supervision of Captive Insurance Companies.” The IAIS is an international association made up primarily of insurance commissioners and supervisors. While the issue paper provides a generous background about the captive movement, it also incorporates IAIS “core principles.” While these principles are not intended to be accreditation standards, some people believe that is the direction that will be followed. According to the issues paper: “The IAIS Insurance Core Principles provide a globally accepted framework for the regulation and supervision of the insurance sector.” It goes on to note that the core principles apply to the supervision of insurers and reinsurers and provides the basis of evaluation of insurance practices and procedures. However, the supervision must take into account the nature, risk and size of the captive’s business. The IAIS insurance core principles cover a broad range of topics and offer a significant amount of excellent information for both regulators and captive owners/managers alike. Among the important topics addressed in this issues paper are general principles such as conditions for effective insurance supervision, information sharing, preventive and corrective measures, and enforcement or sanctions. Other principles that are discussed include regulatory systems, corporate governance, risk, liabilities, investment strategies, amount and type of capital required and solvency-related issues. Another important section deals with fraud and anti-money laundering principles. Next steps The accreditation issue has been picking up speed during the last 12 months or so. A number of 2006 captive conferences held specific sessions regarding captive accredita-tion. One of the suggestions is that the Captive Insurance Company Association (CICA) take the lead in the accreditation process. According to Dennis Harwick, CICA’s president, the Association has been asked to review the matter of captive accreditation. Accordingly, Harwick notes that at the last board meeting, following the CICA annual conference in March of this year, the CICA board began to consider the accreditation issue. “The board passed a motion,” stated Harwick, ‘to create a task force to evaluate the need to develop a best practice program for captive members and their boards.” Harwick points out that the Board was concerned about trying to develop accreditation standards, due in large part to the diversity of the captive industry and, as a result, they will consider best practice standards. The task force was requested to report back to the CICA board in a timely fashion, most probably at the June meeting, says Harwick. He also notes that a key concern for CICA is how the regulators will view this matter. If they are in favor of this best practices approach, it will be helpful in advancing CICA’s involvement. Conclusion Some within the captive movement believe that the industry must be proactive and develop its own accreditation standards. They maintain that unless this action is taken soon, other parties will be allowed to decide on the standards. The publication of the IAIS issue paper would appear to confirm that position. However, the real question is: Does the captive industry really need to have accreditation standards? Clearly, there is current oversight of the captive from a variety of sources. Oversight is provided not only from the domiciliary regulator, but also from the captive manager and the captive’s board of directors. In the case of a single parent captive this may be adequate; however, the group captive would appear to offer more of a challenge. But even here, should the credibility of the group captive become an issue, they could choose to secure an A.M. Best rating or some equivalent rating mechanism. Bottom line—while the concern about establishing and maintaining the credibility of captives is valid, many believe that there are currently adequate safeguards in place to resolve this matter. * |
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