A new code of conduct for captive managers aims to guide them in ethical business practices and address some of the criticisms directed at them and perhaps stave off a formal effort to regulate their activities.

The Self-Insurance Institute of America Inc. released the SIIA Captive Manager Code of Conduct, developed over several months by a working group to provide guidance to captive managers in their insurance and reinsurance businesses and educate and protect current and potential clients, the organization said in a statement on Jan. 22.

“Over the past several years, with a regulatory focus on captives in general and captive managers, there were lot of internal discussions at our captive committee level about proactive ways that the industry could set some professional standards in a concise and understandable way,” said Ryan Work, vice president, government relations, for the Self-Insurance Institute of America Inc. in Washington. “There’s been criticism of captive managers and there’s also been a proliferation of them over the past five or 10 years. Certainly with recent (Internal Revenue Service) scrutiny and even some court cases, there’s been criticism of captive management practices. I think part of the code stems from that and also setting some sort of bar to help regulators, to help policymakers, to help potential and existing clients identify what to look for in a good captive manager.”

“It’s not going to address every criticism of the captive space, but I think it’s important for the industry,” Mr. Work continued. “Part of what we were looking for is not sitting here and letting others dictate what’s right or wrong – to have the industry step up to the plate and be proactive about what some good practices are going to be.”

In 2018, a U.S. Tax Court judge ruled that a microcaptive for a mining company was not operated as a “bona fide insurance company,” with the mining company benefitting from the tax advantages afforded to captives, but bearing little real risk. That ruling followed a 2017 ruling by a different judge at the court in the so-called Avrahami case that was also a victory for the IRS.

On any issue fundamental to the captive, “it is incumbent upon the manager to make sure the client gets adequate advice,” said Kevin Doherty, a Nashville, Tennessee-based member of Dickinson Wright PLLC and a member of the working group. “The manager should not, based upon the advice, be in the position of advocating for questionable schemes. Indirectly, I think it helps alleviate the concerns that Avrahami raised.”

Regulators have noted for some time that there was no code or law that specifically addressed how captive managers conduct business, Mr. Doherty said.

“We were concerned there would be a regulatory effort started,” he said. “This was something that hopefully all captive managers would not have a problem endorsing and it helps stave off any kind of formal regulation.”

“Beyond that, there was a desire to give some specificity to the types of things a manager should be expected to do,” Mr. Doherty added.

“I think if we’re right about what our responsibilities are about how a captive should be managed, if people adhere to that, that should address issues about corporate governance,” said Martin Eveleigh, chairman of Atlas Insurance Management in Charlotte, North Carolina, and a member of the working group. “It’s impossible to persuade everybody that what you’re doing is legitimate and sensible, but at least if people are adhering to a certain standard, you’re in a better position to make the case that things are being done properly.”

The code covers five canons: integrity, conflicts of interest, confidentiality, advertising and practice management.

“We wanted something people could coalesce around without controversy,” Mr. Eveleigh said. “We weren’t looking to regulate people. We were looking for something that captive managers could buy into.”

The biggest challenge centered around getting the language right rather than what to include in the code, he said. “What it really came down to was making sure there was nothing that implied criticism or imposed unfulfillable obligations.”

In the integrity section, the code states that captive managers should not willfully violate any laws or regulations, should be familiar with the federal and state laws that regulate captives and insurance transactions, and should cooperate with the domicile regulators and inform their clients they have the obligation to do so. The integrity section also specifies that captive managers should represent accurately their qualifications and capabilities to serve prospective and current clients, among other things.

“If you’ve never managed a risk retention group before, don’t try to manage one and give the impression that you manage them all the time,” Mr. Doherty said.

Captive managers should avoid conflicts of interest, but the code notes that it is common practice in the captive industry for a manager to provide multiple services to the same client, which can create a potential conflict of interest. But “the use of proper disclosures and checks and balances can prevent a potential conflict of interest from becoming an actual conflict of interest and allow a captive manager to properly and ethically provide multiple services to the same client,” the code stated. “Where providing multiple services to the same client, a captive manager should ensure full disclosure and employ appropriate checks and balances.”

“We struck the right balance for a starting document,” Mr. Work said. “I think at the end of the day, some folks on the task force wanted more teeth and some wanted less and we came to a good consensus.”

Atlas has pledged to adhere to the code and Mr. Eveleigh said he hopes it is adopted more widely. “I can’t honestly see anything in there that a reputable manager would find objectionable in terms of signing up to it,” he said.

SIIA has put together another working group to revisit the code on an annual basis and examine how to include educational content based on professional conduct for its members and perhaps some enforcement mechanisms, Mr. Work said.

“We see this as an ongoing, living breathing document,” he said.

“Right now, this is just a suggested ethical code and companies can abide by it or not,” Mr. Doherty said. “I do think the regulators are going to expect you’ve agreed to endorse the code and if you don’t, you’re going to have a lot of trouble doing business in certain jurisdictions.”