This is a brief interview with Matthew Queen. Matthew is the General Counsel & CCO for Venture Captive Management. We hope to be able to dive in and publish more articles, interviews, videos and podcasts all about captive insurance. Stay tuned.
Matthew, can you spend a few minutes and describe who you are (unless you are a Yankees fan ?) and what you do at Venture Captive Management?
Nobody should be a Yankees fan unless they were born in Manhattan. And even then, use discretion. My ticket to the captive insurance dance is through the legal profession. I was recruited out of insurance defense to serve as general counsel for a boutique captive manager headquartered in Atlanta, GA. We provide turnkey captive insurance management solutions for group captives, single parent captives, and risk retention groups. In addition, we’ve been retained by a group to manage a new MGA operating in the automobile nonstandard space. Like virtually everyone in the insurance field, I did not set out to be an insurance professional. I fell into insurance after law school. I was an accountant with KPMG right after law school, as most firms were not hiring during the recession. Later I started my own law firm providing Door Law services. Basically, anything that came through the door was my specialty for that day. Over time I developed a healthy client base and was absorbed into a plaintiffs firm and litigated all manner of cases. After a few years in the plaintiffs’ realm, I was recruited into a large insurance defense firm and handled much larger, complex cases. My broad background in accounting, exposure to captives back at KPMG, and knowledge of litigation made me a good fit for this role. Sometimes I feel like I’m a professional generalist building a useful but hard to define talent stack as I progress in my career.
Can you describe the benefits of a company forming or participating in a captive insurer?
Control and profit. The best captives are owned by mercurial business owners who delight in controlling every step of negotiation. Captives create the opportunity to retain underwriting profit lost to admitted carriers as well as direct access to the reinsurance markets. Middle market businesses can directly negotiate swing plans with reinsurers and set up the opportunity to turn the insurance cost center into a profit center. This is a sophisticated strategy frequently unavailable to those who just buy insurance through a standard broker. Further, captive owners can leverage the profits in the captive to deploy capital for any number of business needs. For example, one of our skilled nursing facility owners distributed dividends from his captive to finance the construction of a dialysis clinic to serve his senior care residents. That strategy improved his overall business and was implemented without incurring a dollar of debt.
What are some of the lines of exposure where captives have successfully been implemented?
I love to joke that we can underwrite a ham sandwich. Captives are interesting in that we explore the fringe of what can be insured. Obviously, the vast majority of premium in our captives are for general liability, professional liability, workers’ comp, and benefits. However, you can create captives to provide warranties, kidnap and ransom coverage, or even foreign currency fluctuation coverage. Captives are infinitely flexible and should be a consideration when evaluating unique risks that the market struggles to underwrite.
Can captive be used to cover multiple exposures? Can a company use a captive to cover a property for both, say, flood risk AND cyber, as an example?
Yes, we do this all the time. Our policies are generally ISO policies, but we also manuscript coverage for multiple risks. The only issue is ensuring that we have enough capital in the captive to cover the exposure. Theoretically, cyber risks are so large that there may not be enough capacity in the market to cover the risks. Thus, we need to clearly define what we think the captive can cover and work with our actuaries to ensure that we have proper capitalization to maintain solvency.
Is it prudent to set up a captive, if the ONLY benefit is from a tax standpoint?
No. Never. Nein. Do not do this. It was always a bad idea to let the tax tail wag the dog in the captive insurance world. Now that the IRS has identified the 831(b) election [small captive insurance company filing status] as a Transaction of Interest, it is foolish to try this scheme. Tax shelters work well until the IRS chases after them. Then they’re radioactive and can get you in big trouble. The good news here is that the 831(b) scandals have largely ended the unethical uses of captives and most of the captive managers left standing are the ones who were doing everything right in the first place. That being said, captives do, in fact, have a significantly positive tax effect on businesses. Using this tax benefit is not unethical. You just need to make sure that you’re actually running an insurance company. This means issuing policies, adequately capitalizing the captive, conducting annual rate and reserve studies with an actuary, conducting and annual audit, etc. Act like an insurance company and you’ll have nothing to worry about.
Are captives immortal? How difficult is it to wind one down, especially one that has been covering long-tail exposures such as workers compensation or product liability?
Captives last as long as they make sense. When business owners are ready to sell their business the captives generally enter into voluntary run-off. Running off a captive can take a very long time for captives providing workers comp or other long-tail liabilities. This process can be sped up with a commutation agreement or a novation. Some companies specialize in taking on captives’ liabilities and will manage the runoff for the business owner to facilitate a quicker exit from the captive. There are numerous exit strategies available to captive owners and the one that makes the most sense should align with the business owners’ goals.
You are a new book author…can you share the name of the book and a link to it?
Yes, the book is called: Modern Captive Insurance. You can pick it up here: https://www.americanbar.org/products/inv/book/364285368/
Why did you write a book?
I was struggling with a state and local tax issue with a captive a few years ago and eventually cobbled together an answer after reading through 8 different sources. It occurred to me that if I was struggling then others were, too. Way too many books on captives focus on the 831(b) election and overlook underwriting, policy manuscripting, captive management, and the business of insurance. My book fills that void and addresses several issues never explored by any other treatise on captive insurance.
Can you describe what the process was like? How long did it take?
Thank God for Light Townsend. He helped me to write the book in only 1 year. Without him, I think I’d still be writing the treatise. The process was time consuming but very simple. I outlined every single topic I thought relevant and created the table of contents for the book. Then, I used Lexis Nexus to find every law review article exploring each topic. Then I downloaded all the law review articles on each topic and read them until I noticed the sources starting to repeat themselves. This was the basic approach. The chapter on underwriting was a little different as most law professors do not visit that area, but the vast majority of the insurance industry is well studied by the legal profession. So, 150 law review articles later I had enough source material for the book.
If you had to do it over again, would you?
Absolutely – but not any time soon! Writing a book is a labor of love. I had a method that worked well for me but it was a large chunk of my free time for over a year. I told my wife to treat it like getting a masters in insurance as all of my nights and weekends were consumed by it. But I will likely write another book as I’ve got that bug in me. Ever since I was a kid I’ve written stuff and this book is just another one of my writing pursuits. Sometimes I feel like an author who got distracted by accounting and the law. Also, writing this book was a huge boost to my professional knowledge. It turns out that studying your profession like a monk for a year does wonders for your general knowledge of the subject. I’m no captive insurance master but I do know enough to converse with any CEO about their risk profile. That’s not something I could necessarily say when I started this position a few years ago. I also learned a lot more about topics that I had no idea were so intertwined with captives. ERISA, for example, is a massive body of law generally governing employee benefits. If your captive offers health insurance then you really need to know how ERISA interacts with captives or else you can end up in a lot of trouble. That’s not necessarily something we have the time to train on the job. Finally, I really enjoyed seeing the frontier. When you read scholarship on a subject for long enough you start to see the contours of the law. Read a few hundred cases and you may start to see some coherence to the madness. The world of insurance is as complex as it gets but there is a logic to the Supreme Court, the states, and the interplay with things like the Constitution.
Any advice for would-be writers?
If you’re writing fiction: Just write until your fingers fall off. You’ll eventually get something worth reading out there. But if you’re writing non-fiction I suggest treating your book like a business. Modern Captive Insurance exists because there was no book like it out there. Trust me, I’ve read every single book on captive insurance. When I didn’t see what I was looking for I went out and made it. That’s business 101. So, if you’ve got an interesting perspective or thought out there make sure you know what the market looks like and see if you can fill a gap that the market needs.
About Nicholas Lamparelli
Nick Lamparelli is a 20+ year veteran of the insurance wars. He has a unique vantage point on the insurance industry. From selling home & auto insurance, helping companies with commercial insurance, to being an underwriter with an excess & surplus lines wholesaler to catastrophe modeling Nick has wide experience in the industry. Over past 10 years, Nick has been focused on the insurance analytics of natural catastrophes and big data. Nick serves as our Chief Evangelist.
Nick Lamparelli is a 20+ year veteran of the insurance wars. He has a unique vantage point on the insurance industry. From selling home & auto insurance, helping companies with commercial insurance, to being an underwriter with an excess & surplus lines wholesaler to catastrophe modeling Nick has wide experience in the industry. Over past 10 years, Nick has been focused on the insurance analytics of natural catastrophes and big data. Nick serves as our Chief Evangelist.
