November 14th - 17th, 1999
Hyatt Regency Miami, Florida

Shutdowns and Windups: Has Your Captive Run Its Course?

Sanford Bragman, VP Risk Management, Tenet Health Systems
James M. Dineen, Principal, The Knowledge Guild, Inc.
Moderator: Robert J. Rosser, SVP, Skandia International Risk Management

Tuesday, November 16, 1:45 - 3:00 a.m. 
 

"Be Careful in Closing Captives, Expert Warns"

When shutting down a captive insurance company, the parent company needs to be as careful as they were when they first launched the captive, experts said.

"Use common sense," said Sanford Bragman, vice president of risk management for Tenet Health Systems, Dallas. "You go through a great deal of analysis to create a captive, you need to do just as much analysis and due diligence to take it down. Pay attention to the nitty gritty."

James M. Dineen, principal of the Knowledge Guild Inc., agreed, suggesting the use of a business plan when shutting it down. "You want to make sure you've covered every base and don't leave anything out."

Bragman and Dineen spoke Tuesday at the Ninth Annual World Captive and Alternative Risk Financing Forum.

Captive insurers are special-purpose companies formed to insure the risks of a company, association or group. To take advantage of more-favorable tax and regulatory structures, they are often based offshore. However, a growing number of captives are finding homes in U.S. states that have adopted captive-friendly regulations.

Bragman said his company was winding up a successful captive only because it has sold the business the captive was formed to insure.

Dineen's company helped Bank of America consolidate four captives into one. The bank acquired the captives by acquiring other banks. By combining the captives, the parent company saved administrative expenses, he said.

Even if a company decides to keep its captive, it can still take advantage of the soft market by renegotiating with reinsurers, Bragman said. He said he had saved 30% with another captive that is still viable.

To close a captive, the parent can transfer the captive's assets and liabilities to another captive or entity, Dineen said. Otherwise, the captive can stop writing new business, but it might take several years to wind down the company completely, he warned.

For Bragman, that was a drawback in using the captive to assume outside risk.

"What looks good one day can turn sour quickly," Bragman said. He noted the captive that he's winding down wrote insurance for an outside company that distributed Latex gloves and Phen-Fen diet medication, both recent targets of class-action lawsuits. While the policy specified that the coverage didn't apply to manufacturers, unbeknownst to the captive, the distributors were also manufacturers. The Latex glove and diet pill makers' general liability insurers have sued the captive in an attempt to force the captive to help pay defense costs for huge class-action lawsuits, Bragman said.

Even when a captive's business has been transferred out, the shell company may retain value. "You can sell it. It may be a nice acquisition as long as it doesn't have liabilities," Bragman said.