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By Cyril Tuohy

The Captive Insurance Companies Association is turning 40 this year, and the organization's leadership believes the time has finally come for CICA to develop a more formal advocacy program.

Once it does, will CICA lose its original reason for being, which was to serve as a forum to discuss issues common to the industry?

"Five years ago, if you said to CICA you'll need this, we said we would prefer remaining domicile neutral," said Dennis Harwick, president of CICA. "Those are days gone. We need someone centrally watching the horizon. We need to get people out there earlier than in the past."

The watershed moment came five years ago, on Sept. 27, 2007, when the IRS announced a proposed rule change without warning. The change, which would have prohibited many onshore captives from deducting discounted loss reserves, was first noticed by the joint tax advisory committee of CICA and the Vermont Captive Insurance Association. It galvanized both associations into action.

In the end, the IRS' proposal was defeated, but only after a furious lobbying effort by Coalition for Fairness to Captive Insurers, a joint body made up of CICA and VCIA.

This "rifle shot" reaction to the IRS proposal, in the words of captive legal expert Skip Myers, left a mark on CICA's leadership.

Ever since winning the loss reserves fight, CICA has been looking for a "scout, to be in the crow's nest," with the intention of giving the industry plenty of advance notice to changes in federal and state laws affecting captives, Harwick said.

"CICA needs to come together on national issues," said Karin Landry, former chairwoman of CICA, and one of the driving forces behind the push for a lobbyist.

CICA hopes to announce the appointment of its first government captive affairs expert at its annual international conference at the Westin Kierland Resort in Scottsdale, Ariz., March 11 to 13, Harwick said.

That expert will be working for an expanding industry.

Since its founding in 1972, CICA has grown, with members who represent more than 1,000 organizations.

Vermont, the leading U.S. onshore captive domicile with more than 450 members, announced the creation of 41 new captives in 2011, bringing the total to 590 active captives licensed in that state, according to the Vermont Captive Insurance Association.

In 2010, industry profitability jumped 49 percent and policyholder dividends were up 73 percent to $454 million for a composite of 194 U.S. captive insurance entities, according to data from A.M. Best Co. Inc. last year. Net premiums earned by U.S. domestic captives alone reached $4 billion in 2010, A.M. Best said.

Captive formations have continued throughout the soft market, analysts also said. "We're no longer a cottage industry," Landry said. New states have jumped in. New Jersey licensed its first captive in 2011, and Tennessee revamped its captive law last summer to bring it up to date.

VCIA, which has traditionally gone to bat for the captive industry on federal and state issues, has a responsibility to Vermont first. What if issues come up that affect one state, California or Arizona, for example, who is going to step up and lobby on behalf of the industry there?

The regulatory environment has changed, CICA leaders said. With "regulation coming on strong," Harwick said, the industry, which has "never had a central voice," has realized the time has come to hire a full-time lobbyist to champion the cause of a "balkanized" industry facing federal regulation.

SLEW OF REGULATION

The Non-Admitted Reinsurance Reform Act, which took effect last July, has raised new issues related to premium payments allocated back to the state in which a reinsurer or a captive is domiciled. Aggressive regulators are going to be able to test the constitutional boundaries of what constitutes an admitted and a nonadmitted insurer, Harwick said.

"Some states take the position that they can take a tax on nonresident risk," Myers said. "The leapfrogging over all the constitutional issues is a perfect example of where it would help to have more on the ground and government representation."

A bill introduced by U.S. Rep. Richard Neal of Massachusetts would cap the amount of nontaxed reinsurance premium an insurance company paid for reinsurance to a foreign affiliate, a Bermuda-based captive, for example, may come up for a vote.

Backed by a coalition of 14 U.S.-based insurance companies, proponents argue that reinsuring their business has everything to do with managing capital more efficiently and nothing to do with evading U.S. government taxes.

Coalition spokesman William Berkley, chairman of W.R. Berkley Corp., said the Neal bill would "level the playing field for insurers."

Opponents argue that disallowing the reinsurance premium deduction violates tax treaties, would raise reinsurance rates charged to U.S. companies, and could shrink the supply of reinsurance.

The bill is opposed by the Washington D.C.-based Coalition for Competitive Insurance Rates, which includes the Association of Bermuda Insurers and Reinsurers, and the Risk and Insurance Management Society Inc. CICA has signed a petition to oppose the denial of deductibility of payments to affiliated foreign reinsurers, on the grounds that the bill would disrupt the insurance marketplace.

All of this action seems to indicate that the industry does need a champion on the hill.

"I don't see the issues in Washington diminishing over the next few years," said Richard S. Smith, president of the Vermont Captive Insurance Association. "That shift in power in financial services industry has shifted from New York City to Washington." The new Federal Insurance Office headed by Michael McRaith only adds to the ascending importance of Washington as the center of financial regulation, Smith said.

Beyond the Non-Admitted Reinsurance Reform Act and the Neal bill, captive industry leaders are keeping a close watch on amendments to the Dodd-Frank Wall Street Reform and Consumer Protection Act, Solvency II, and the International Association of Insurance Supervisors, which is looking at how captives should be treated globally.

CICA has advocated on issues in the past. On Solvency II, for example, CICA has been supportive of the European Captive Insurance and Reinsurance Association's position on proportionality.

Myers said CICA could remain true to its credo of being "domicile neutral," and CICA leaders said the group would stay clear of favoring one domicile over another, particularly since it's not clear how or if CICA could even lobby at the state level.

"CICA will not take sides," Landry said. CICA is in the business, she said, of backing the interests of the industry as a whole before Congress, the IRS and the National Association of Insurance Commissioners.

Members always take precedence over domiciles, said CICA Vice Chairman Dirk Heim, and most of the domiciles already have associations representing them in the first place. "They are narrowly focused on those issues and we don't want to compete with them," Heim said.

Landry also said CICA needed a voice before the American Association of Insurance Services, a policy forms and rating organization for the property/casualty industry, and CICA will want to keep a close eye on the nearly formed Federal Insurance Office.

Taking positions will in the end will move the entire industry forward, Landry said.

Brady Young, president and CEO of the captive management company Strategic Risk Solutions Inc., said CICA is the "logical organization that could speak objectively on behalf of the entire captive industry." CICA, he also said, would be viewed by lawmakers with more credibility than domicile-specific associations.

"It's good to have another voice out there," said Dave Provost, deputy commissioner of the Vermont Captive Insurance Division.

CYRIL TUOHY is managing editor of Risk & Insurance® magazine. He can be reached at riskletters@lrp.com.

March 1, 2012

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