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Regulators welcome conduct code as captive industry responds to tax court losses

tax court

State captive insurance regulators generally praised a new code of conduct that aims to guide captive managers in ethical business practices, although some regulators see ways the code could be strengthened.

One domestic domicile has asked captive managers if they have adopted the code, but none of the regulators speaking with Business Insurance plan to require managers to adopt its provisions. The code was also driven in part to stave off a formal effort to regulate captive manager activities, but none of the regulators indicated a desire to formally license managers operating in their states.

The Self-Insurance Institute of America Inc. on Jan. 22 released the SIIA Captive Manager Code of Conduct, which covers five topics: integrity, conflicts of interest, confidentiality, advertising and practice management. It is intended to provide ethical business conduct guidance and address some of the criticisms directed at captive managers in recent court decisions.

Microcaptives, for example, have been targeted by the IRS in several lawsuits alleging they are being used as tax shelters rather than as true distributors of risk.

“It’s not going to address every criticism of the captive space, but I think it’s important for the industry,” said Ryan Work, SIIA’s Washington-based vice president of government relations. “Part of what we were looking for is not sitting here and letting others dictate what’s right or wrong — (but) to have the industry step up to the plate and be proactive about what some good practices are going to be.”

Regulators have noted for some time that there was no code or law that specifically addressed how captive managers conduct business, said Kevin Doherty, a Nashville, Tennessee-based member of Dickinson Wright PLLC and a member of the working group.

“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.”

The captive insurance division of the Tennessee Department of Commerce and Insurance has asked — but is not requiring — captive managers approved to operate in the state if they are adopting the code.

“When I heard that SIIA was championing this and a number of captive managers were part of the steering committee that brought this to the table, I said ‘Glory, hallelujah, this is great,’ because I think it’s the first step toward potentially creating a self-regulating organization in the captive management community, which I personally believe is something that should be on all captive managers’ radar,” said Michael Corbett, director of captive insurance with the Tennessee Department of Commerce and Insurance based in Nashville. “If they don’t do it, somebody else is going to do it.” 

Tennessee’s statute does not give Mr. Corbett the authority to require captive managers to adopt the SIIA code, but many provisions mirror expectations that he has for captive managers, and whether or not a manager has adopted the code will be referenced on the state’s website, he said.

The code appears to be SIIA’s attempt at making captive manager practices more uniform and consistent, particularly when it comes to new managers entering the business, said Sandy Bigglestone, director of captive insurance for the Vermont Department of Financial Regulation in Montpelier.

“Reading it, I thought it seemed pretty generic,” she said. “These are things that certainly I would expect to see in a contract with a management company between the captive and the manager.

The captive owner is not in the business of running an insurance company, typically, so captive managers do play an important role. (Captive owners are) hiring an expert to conduct day-to-day accounting, work with other (third-party administrators) in running the affairs of the captive insurance company, so having a code is probably not a bad idea, but the oversight of the captive manager has to be shared between captive owner and the board of the captive.”

Regulators need to play an important role in making sure they understand and approve who is managing the captives in their domiciles, but Ms. Bigglestone said she sees no need for regulations requiring licensing of captive managers.

“I don’t think we need to go that far, honestly,” she said. “We have an obligation to understand who our captive managers are hiring and that they’re qualified and that they have professional development opportunities within the captive management firms. I think there’s a good pool of talent and a lot of room for growth in that area, but I don’t think we have to go as far as licensing. Managers are service providers. If you have a well-written contract, a clear, concise contract between the captive manager and the captive owner, and the captive owner is engaged in oversight of its captive insurance company and you’re not relinquishing control to a captive manager, which could cause a conflict of interest, I think that it’s going to work really well.”

“If you go down the route of licensing, then you’re looking at the same level of service for a lot more money,” she added.

“Captive management firms fees are going to go up. It’s going to be less feasible for captives to operate. That could be very problematic.”

Travis Wegkamp, captive insurance director with the Utah Insurance Department in Salt Lake City, said he “wholeheartedly agrees with everything” in the code and plans to publish it on the insurance department’s website so captive managers “know that we’re in agreement with it and that we would expect them to operate in accordance” with the provisions.

“That said, we’re not interested in regulating captive managers and enforcing” the code’s provisions, he said.

In particular, he praised a provision in the practice management section that states service providers should be appointed by the board annually and one in the code’s integrity section that states captive managers should cooperate with the domicile regulators and inform their clients they have the obligation to do so.

But Mr. Corbett said he sees an opportunity to strengthen the code.

“The code of conduct is rifled with the word ‘should,’ and my hope is over time, on several of them, should will become must,” he said. “When you’re herding cats, using the word ‘must’ is not a good idea. This could go absolutely nowhere, or it could be the first step toward the management community realizing that they have to have some sort of standards by which they are all willing to be measured.”

Atlas Insurance Management in Charlotte, North Carolina, has pledged to adhere to the code, and Chairman Martin 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.







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