• Efficient use of capital
• Constant review of insurance and reinsurance programmes
• Effective investment strategy
• Adherence to onerous compliance and ever-changing regulatory requirements

Although the efficient use of capital in a captive, and maximizing shareholders returns, may not be the primary objective of a captive, shareholders certainly won't allow money to be used to capitalize the captive if they are not going to receive at least a minimal return. In fact, they may even require a higher return from the captive than from the core business because the captive involves risk taking.

The insurance market is an extremely dynamic environment, with soft and hard market cycles tending to become shorter. This means that the captive's insurance programme - including reinsurance structures - needs constant reviewing in terms of cost and structure; and optimal attachment points in terms of reinsurance cover and insurance capital.

Generally, captive owners have not scored badly with regard to the effective use of capital and regular review of insurance programmes. But one area where they lag behind is the captive's investment strategy and maximizing investment returns to support the insurance programmes.

The reason for this is that, when establishing a captive, the business plans that are provided to the board and the regulator focus on the insurance programme, the associated underwriting risks and the minimum capital required to cover these. Initially, there is little focus on investments. What's more, captives are not regarded by their owners as investment vehicles. Underwriting results and reinsurance costs are traditionally the primary objectives of a captive. The other traditional viewpoint is that a non-life insurer's investments should be low risk and highly liquid, so there is little emphasis on maximizing investment return in relation to underwriting risk. Another reason that there is less focus on investments is that operational captive managers are often traditional insurance people who don't have a lot of exposure to investments, nor do they understand the crucial elements to an insurance programme of asset-liability matching.

Best practice also comes into play in terms of the strategic plan of a captive, in relation to the bigger picture of the parent group. Like any other business unit within the parent, the captive should have a strategic plan with clearly defined objectives and goals, with senior management accountable for achieving these. Because captives operate in a fast changing environment, the strategic plan should be a "living" document, with goals and objectives frequently reviewed.

The composition of the captive's board and conduct of its board meetings is another area where best practice should be maintained. The board should consist of a majority of active non-executive directors (who will inevitably be from the parent company); but also one or two active, independent non-executive directors. These individuals should be selected for their expertise and experience of local and international insurance markets, and should have the ability to network internationally and locally with key industry players like direct insurers, reinsurers and the broking community. The captive's board can also play a very important role in advising the parent company on issues like tenders for placement of reinsurance out of the captive. The board should meet at least twice a year and meetings should be scheduled to coincide with the annual renewal of the parent?s insurance progamme and the captive's financial year end.

Compliance with ever-evolving regulatory requirements is not an easy task and places an additional onerous responsibility on an insurance company's directors, who must fully understand the duties imposed on them in terms of different legislation and regulations.

Captive owners who get the most out of their captives are those who recognize that the captive does not operate in isolation, it is a fully fledged subsidiary of the parent and should be treated as such. As a member of the local insurance industry it should play a proactive role in the development of the industry and participate in relevant industry associations. Unfortunately, this vital aspect of relationship management is seldom found in a captive because this type of service is generally provided by the marketing department and top management of the parent company who, typically, have little to do with the insurance industry. The most successful captives embrace the concept of networking; forging strong relationships with the local regulator, reinsurers and brokers, accountants and auditors and, most importantly, its "clients", who are normally the group divisional heads or CEOs of business units within the parent company.


For further information please contact:
Herman Schoeman, MD of Guardrisk
Telephone: +27 11 669-1001

Issued by:
Melanie Davis, PR@Work
Telephone: +27 11 615-3309 / +27 83 225 7450