By CYRIL TUOHY, managing editor of Risk & Insurance®
Cyril Tuohy interviewed Dennis P. Harwick, president of the Captive Insurance Companies Association, about the recent discussions in Washington, D.C., regarding taxing offshore insurance companies.
All the talk has many in the captive insurance world wondering how seriously to take the discussion, given the number of times the Obama administration has spoken of closing tax loopholes and collecting money it believes is rightfully due the U.S. government.
Members of CICA, scheduled to meet this month for their annual convention in Orlando, Fla., where the tax issues will be addressed in several sessions, will be looking for guidance regarding federal legislation affecting captives.
Q: With all the noise about cracking down on offshore financial fiefdoms, the Obama administration could on the surface be perceived as unfairly targeting captives in its search for more Treasury revenue. Is that really the case?
A: There's been a lot of chatter. The people in the industry who are close to the issues in Washington have been tracking what is really happening and the answer for now seems to be "nothing specific."
There's always a concern on the surface and we're always asking, "Will something come up that will give the captive industry heartburn in one way or another?"
Those concerns may keep some of us up at night. But the reality is that captives, either onshore or offshore, have not faced any tangible proposals from this administration, at least any proposals that have required any regulatory or legislative action.
Anything offshore, of course, makes a convenient political target, so that's what we've all heard about in Washington in the last few months. But as far as I've heard, nothing substantive has been proposed.
It's important to understand that captives, in and of themselves, are not a tax avoidance device. They may, of course, be part of a strategy of tax planning, but I don't think there has been any significant proposal that really affects captives other than chatter on the airwaves.
What is really getting people in the captive industry heated up are two or three topics that are going to come up again and again at the annual conference of the Captive Insurance Company Association in Orlando in March.
The first is the possibility of building value by setting up a healthcare cooperative utilizing a captive. Regardless of what happens with healthcare legislation in Washington, people are going to be talking about healthcare captives.
Many companies are saying that they have to take charge of their healthcare costs and those same people are saying that healthcare captives might be a way of dealing with that. So, healthcare is on the agenda for companies regardless of what Congress decides on the issue.
The other session that we're looking forward to is the release of the CICA-developed "Best Practices Guide for Utilizing Service Providers."
CICA released a similar best-practices guide in 2008 on corporate governance, business alignment, and regulatory compliance, which was very well received by our membership, as well as by companies looking for guidance to entering the captive industry.
This latest best practices guide that we're releasing at the 2010 annual conference in Orlando is about how best to utilize service providers, with specific guidelines for using captive managers, actuaries/consultants, auditors and lawyers. The new guidelines are about 26 pages long and the entire industry will find them useful.
Q: What prompted the creation of this document?
When we published our original best practices guidelines, people told us that they needed a neutral source for information on utilizing service providers. Obviously, the needs of individual captives will be unique, but there was clearly a need for general guidelines on utilizing the various kinds of service providers to the captive industry. The development of these guidelines was driven by captive regulators and captive owners. Then the proposed guidelines were reviewed and supplemented by the various service provider groups:captive managers, actuaries/consultants, auditors, and attorneys.
I sat in on the attorneys group, for example and it was helpful for the attorneys to remind captive owners that attorneys need to be independent advisors, in other words that attorneys need the independence to tell captive owners when they're doing something wrong. In the end, both sides brought content to the best practices guidelines that the other group might have overlooked.
The second item that we look forward to revealing at the annual conference is the always eagerly awaited results of our annual Fronting Survey. We reveal the results of that survey every year and our membership relies heavily on our survey to understand what's going on in fronting and reinsurance. We're also going to have a number of regulatory-related sessions, which we expect will be very well attended, given all the talk in Washington about taxing captives and regulation of the insurance industry.
We have a regulatory update that will discuss National Association of Insurance Commissioners (NAIC) issues and the impact of Solvency II. We also have a session on the captive redomiciling, both offshore to onshore, and also within onshore domiciles.
We've had sessions on redomiciling before, and this one will look at the onshore and offshore redomiciling issues in particular, along with moving a captive to a domicile within the onshore market.
We'll also have a session on IFRS accounting issues, and we will have a session on the "Financial Measures that Matter: Across the Globe," which ties in with Solvency II in Europe.
Q: Clearly, CICA members have a lot to look forward to this month at the annual meeting. How are members feeling about last year? How did 2009 stack up for the captive insurance industry?
I've not seen comprehensive numbers yet for the industry in 2009, but from what I've seen, the growth has been steady, but incremental. Smaller domiciles like Utah and Kentucky have continued to grow significantly but from a smaller base than the larger domiciles like Vermont.
Vermont had 39 new captives in 2009, and it is approaching the 900 total licensed captives milestone. The Cayman Islands had incremental growth as well last year. So there was clearly growth last year in the face of a difficult market when prices remained soft despite everyone waiting and waiting for the hardening that never came.
All in all 2009 was a modest year for captive growth, generally speaking, but even so there was growth, which is most the important point to remember. I also remember last year everyone holding their breath and wondering when the hard market would kick in. Well, it never showed up.
Redomestication in 2009 is another widely discussed issue. I was talking to a group of captive industry experts just yesterday, and they mentioned that they'd noticed a general trend for bringing captives back onshore.
One of the reasons mentioned was that the U.S. captive domiciles had matured and had both the service infrastructure and stable regulatory environment for a captive to operate. Others mentioned that political correctness had compelled some companies, particularly publicly held ones, to come back onshore.
Hence, the newfound interest in redomesticating. Even onshore, some captives have changed domiciles to be closer to where the parent company and its operations are located.
March 1, 2010
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