Nick Leighton traces the roots of Caledonian Insurance Services and points out what to look for in selecting an insurance manager.

Caledonian Insurance Services Limited (CISL) was established in January 2002, as a result of the rapid expansion in the captive insurance market. The Caledonian group has been involved in captive management since 1981, formerly through its trust operation. Two captives formed in 1981 remain under the management of CISL. CISL was preceded by the establishment of Caledonian Reinsurance SPC (a segregated portfolio company) in June 2001.

Both CISL and CRe SPC are fully licensed by the Cayman Islands government and supervised by the Cayman Islands Monetary Authority. The Caledonian Group is audited on a consolidated basis by PricewaterhouseCoopers.

At 30 June 2002 CISL managed 26 insurance clients with gross annual premiums of $155m and assets of $354m. In 2002, CISL licenced six new insurance clients, with another four new captives expected in the next six months. Included among these clients was an SPC formed by a South African sponsor, which is the first South African captive in Cayman for over 15 years.

CISL has established strategic relationships with key service providers in the US and Europe, and these relationships have now developed into a network of captive consultants - Strategic Captive Services.

The Caledonian group, formed in 1970, is a fully-fledged service provider in the Cayman Islands and the Isle of Man. In addition to captive management, the group also provides banking services, mutual fund administration, investment management and trust services.

Role of the insurance manager
The role of the insurance manager is key to the success of a captive. This relationship should develop into more than the usual `arms-length' service contract, and into one of mutual trust, respect and friendship. Ultimately the captive manager should be able to add real value to the long-term strategic viability of the captive to the parent organisation.

In order to conduct insurance business in a `captive-friendly' domicile, every licenced re/insurer (captive) must be represented by an insurance management company. These are usually one of two different types: a subsidiary of an international insurance company or insurance broker, or an independently-owned insurance manager.

The insurance manager will assume the position of one of the employees of the company. In that capacity, the manager will perform all the functions that would otherwise be undertaken by a standard insurer, including, inter alia:

  • captive formation and regulation - including liaison with the insurance regulator, completion of the relevant application form, financial forecasting, production of the business plan, ongoing due diligence, annual reporting to the insurance regulator, and monitoring of the captive's solvency margins;

  • captive administration and accounting - including day-to-day accounting, invoice and claims settlement, registered office services, provision of directors, budgets and forecasts, production of the annual financial statements and liaison with auditors, and all corporate secretarial functions;

  • underwriting and related services - including advising on insurance programmes, levels of retention and reinsurance, policy wordings, and related issues; and

  • cash and investment management - including in-house banking, cash management, letters of credit and specialist investment management services (through group companies).

    Selection considerations
    In choosing a captive manager the following considerations should apply:

  • depth of resources;

  • technical expertise;

  • proven track record;

  • strategic relationships;

  • personal relationships; and

  • ability to deliver.

    Performance review
    It is worth reviewing the performance of your captive manager every five years. Questions to ask include:

  • has the manager produced a rolling five-year plan, and is this reviewed regularly?

  • does the manager deliver reports within the appropriate time frame?

  • has the manager `added value' to the insurance programme?

  • does the manager have a good relationship with the regulatory authority?

  • are audit costs increasing above expected levels? To what extent is this to rectify errors produced by the manager?

  • has the manager recommended other service providers, contacts and/or business proposals that have added to the success of the captive?

    Strategic captive services
    Caledonian Insurance Services Limited (CISL) is part of an affiliation of service providers who approach captive formation and review from the claims perspective, as opposed to simply reacting to a capacity crisis.

    The company's approach is somewhat different from the standard `broker-produced' captive. In the first instance, a team of safety and loss control experts visits the client, and conducts a full review of safety measures. Once implemented, these measures form part of the presentation to fronting carriers and reinsurers and are part of the business plan.

    Similarly, a claims expert reviews the outstanding reserves and claims experience, with a view to identifying trends and other issues like over-reserving. Only when these teams have finished their review may the client be steered towards forming a captive. In some cases, the recommendation is to remain with the traditional market until such time as the safety programme produces results.

    Once the captive is established, Strategic Captive Services performs annual reviews of losses and safety to ensure continued compliance. "Captives rarely fail due to a poor business plan, but they are rarely successful without proper risk management and excellent claims and litigation management," says Nick Leighton of CISL.

    If the safety programme does not function, the frequency of claims will increase, as will the cost of the programme. If the claim/programme audit does not identify issues, those issues will arise when they are least convenient. If the captive lacks claims oversight, claims may be more expensive than they should be. `More expensive' may mean that the costs associated with defending a case could turn a claim of $10,000 into one of $50,000.

    As with any insurance company, one of the primary purposes of a captive is the payment of claims. The financial analysis of the business plan, the means and manner in which the letter of credit is acquired, the terms of contracts with fronting or excess carriers, and/or the licensing of the captive in its domicile can be moot without an effective claims and litigation policy. This is particularly true in the area of medical liability, although equally important for workers' compensation and general liability.

    A successful claim and litigation management programme includes such diverse disciplines as safety management, claim and programme auditing, claim/litigation oversight and reinsurance/subrogation collections. Each of these promotes the captive's economic vitality and each can only be partially successful without the others. Each of these skills are necessary for the long-term viability of the captive. And often, these areas are dealt with at captive formation and then forgotten until it is too late.

    For example, if the reinsurance/subrogation and tender programme does not work, the money due to the captive will be delayed, or may never arrive. Instead of a programme with a retention of $250,000, the programme will hold a real retention of the total cost of the programme, at least until the reinsurance pays. An effective claim/litigation management team can effectively reduce the cost of losses by at least 30% and often substantially more. Add that sum back into the captive surplus and deduct it from the anticipated letter of credit requirement, and it is easy to see how cost effective these measures can become.

    That is what an effective claim and litigation management programme can mean to a captive.

    Strategic Captive Services provides these services in one economical package, adaptable to the individual demands of each captive. From the simple segregated portfolio/cell to the $150m captive, the parent organisation is charged only for the services it needs, not for services that may be irrelevant to its operation.

    The reason any organisation decides to create a captive is to reduce risk abatement costs, including insurance and claims. This is also the function of Strategic Captive Services: reducing your risk abatement and claims costs ... and all to your captive's profit.

    Case study: medical risk indemnity
    In September 2002, a group of emergency physicians in Chicago formed a Cayman Islands-based insurer, called Medical Risk Indemnity SPC (MRI). The function of MRI is to work in conjunction with a risk management system designed by the physicians, by providing access to insurance and reinsurance markets for those emergency room (ER) groups that adopt this system, and as a consequence are able to control their frequency and catastrophe exposures more easily.

    MRI is the result of education, technology and risk management working in tandem. Over a number of years, the physicians developed an educational web-based software product that is now licensed for use by more than 9,000 healthcare providers throughout the US.

    The education and audit programme addresses high risk acute care factors and evaluates the decisions made by the physicians (after the event, of course). This allows other ER physicians to monitor and learn from their peers. Additionally, up-to-date emergency medical procedures are reported on the site, which gives the opportunity for these advances to reach the public arena far faster than would otherwise be the case. Cases involving missed diagnoses, with full legal analysis, are presented in detail. The objective is to educate the medical community in a structured and user-friendly format.

    Two further developments of this programme are risk assessment tools that can be used by emergency physicians during treatment. These tools take the form of either `templates' or software loaded onto a hand-held PC, which guide the ER physician through some of the more difficult areas of ER medicine, as well as tracking the patient's history, condition and treatment. These controls and risk tools help avoid errors in emergency medicine.

    The result is a system acceptable to reinsurers and fronting carriers, so that ER groups adopting the risk system are rewarded by available, reasonably priced liability cover in a difficult market. The owners of MRI have formed the company as an SPC so that these groups may, in time, benefit from the long-term reduction in claims resulting from these measures. The brokers for MRI are Gallagher Healthcare Insurance Services, and Caledonian Insurance Services Limited are the captive managers.

    By Nick Leighton

    Nick Leighton CA FIRM is managing director of Caledonian Insurance Services Ltd in the Cayman Islands. He holds an Economics degree and has more than 12 years' experience in the captive management industry. He recently won the IAU Board of Governors' prize for his dissertation on protected cell companies.