By Katie Kuehner-Hebert
Existing captives -- and those contemplating forming captive insurance operations -- can learn how to navigate what lies "just over the horizon in this era of change" at the upcoming CICA 2013 International Conference -- New Horizons!, to be held in Palm Springs, Calif.
The conference name "quite literally" reflected the sentiment of the program committee when it asked, "What is it that's going on out there that keeps you awake at night?" said CICA President Dennis Harwick.
"The conversation just kept coming back to there's something just over the horizon we all need to be concerned about -- the impact of the presidential election, the new health care law, the fiscal cliff, the entire regulatory environment," Harwick said.
Such hot button issues, as well as emerging trends in the captive industry, will be discussed at the conference, to be held March 10 to 12.
Ron Calhoun, health care practice leader with Aon Risk Solutions, will be one of the panelists to outline how captives can help health care organizations address the challenges of the new health care law in a session, "Affordable Health Care Act -- Now What?"
"The Affordable Care Act has served as a tipping point for accelerating the evolution of various payment transformations on both the statutory and commercial fronts," said Calhoun. "Many of the health care providers that are currently navigating these payment transformation challenges have established alternative risk vehicles that were created to navigate a different set of historical challenges."
Whether driven by participation in the Medicare Shared Saving Program, the Hospital Value-Based Purchasing Program, the Bundled Payment for Care Improvement Initiative, a Medicaid demonstration project or one of the commercial accountable care strategies, many of the health care provider organizations insured by these alternative risk vehicles will be measured with greater frequency by a variety of different clinical and patient care quality measures.
"These alternative risk vehicles can be utilized to support these new business models," Calhoun said. "Additionally, as health care provider organizations begin to re-evaluate their landscape of risks, they have a unique opportunity to assess ways in which their alternative risk vehicles can be utilized to insure these exposures andsupportrisk mitigation strategies that may be necessary to manage this new landscape of emerging risks."
In a session, "The Changing Regulatory Environment," panelists will discuss how captives stand to be impacted by the myriad regulatory developments -- not only on the state level, but also federally and worldwide.
"There are a lot of things happening in European regulations that are starting to be important to U.S. regulators," said Deborah Lambert, managing partner at Johnson Lambert LLP, and one of the panelists.
"For example, the European regulators have Solvency II, a broad regulatory scheme for monitoring the financial stability of insurance companies. In the U.S., regulators have their own mechanisms, but they are increasingly starting to converge, and captives are now or soon will be dealing with that convergence," she said.
Another major topic is the uncertain impact of federal insurance regulators in the United States, Lambert said. Historically, the industry has been regulated by the states, but the Treasury Department's new Federal Insurance Office, has the potential to either replace or supplement the current regulatory scheme.
"How that might impact the industry is still very uncertain," she said. "While we tend to fear the unknown, there may be some very interesting opportunities for captives created by this changing U.S. regulatory landscape."
Dan Richards, chief executive officer at Global Rescue LLC, will be one of the panelists presenting case studies of organizations that have designed "out of the box" coverage through their captive to retain the risk associated with exposures, in a session, "Unusual and Creative Captive Utilization -- Case Studies."
"We founded Crisis Services Co., or CSC, a little over three years ago for the purpose of providing underwriting to risks associated with medical security evacuation and crisis events that impact our clients -- meaning our operating company, Global Rescue," Richards said. "We saw an opportunity to participate in some of the tax advantages that come with having a captive, to participate in some of the profitability associated with the underwriting, and to be able to move a little bit more nimbly -- since we understand our business better than a third party ever will."
Panel moderator Anne Marie Towle, a senior consultant at Willis Global Captive Practice, said there are many companies that are interested in structuring a new captive or utilizing their existing captive for unusual transactions or unique types of risk.
Some of these risks are supply chain risk, reputational risk or others that may be cost prohibitive to place in the commercial marketplace, but can find a good solution in a captive insurance company, she said.
"I urge companies to work with captive experts who can assist in the formulation of pricing their risks in a captive," Towle said. "Expertise is needed when it comes to the methodology which aids with approval by the captive regulators. These 'outside of the box' types of coverage are not easily priced with standard industry data."
Another session, "Successful Strategies for the Exploding Small Captive Market," will address the proper construction of business plans for small captives.
"The closely held company is the portion of the captive market that has been expanding fastest over the last decade -- after all, any firm in the Fortune 500 that wants a captive has one," said Chaz Lavelle, a partner at Bingham Greenbaum Doll LLP.
"First, alternative risk transfer has become much more mainstream, so the closely-held company owner is much more open to exploring it," he said."Secondly, the service providers have developed cost-effective methods for a smaller company to operate a captive.
"In addition, over the last decade, the number of domestic captive jurisdictions has mushroomed and there is much more leveling of the regulatory differences between offshore and onshore jurisdictions.These increased opportunities and resulting competition have increased the number of captive insurance companies," Lavelle said.
Peter Kranz, a senior vice president at Beecher Carlson and another session panelist, said there are some significant tax benefits, under IRC 831(b), which make it that much more appealing for smaller companies to form captives whose premium volume is below $1.2 million per year.
"But organizations should form captives for legitimate risk financing purposes only, and not just for the tax benefits, as there is a risk if they don't understand the insurance," Kranz said. "Micro captive benefits can best be captured for legitimate risk financing purposes with highly profitable, or low loss rate, lines of business, such as surety bond coverage for a stock transfer agent, a tenant liability program or medical stop loss coverage."
Jeffrey K. Simpson, director at Gordon, Fournaris & Mammarella, is a panelist on a session, "Cell Captives: A Dynamic Landscape Continues to Evolve."
"Series LLCs are extremely popular right now, because they are incredibly flexible and they offer both cost relief and capital relief," Simpson said. "They are easy to use, they cost less and you can design them just about any way you like. "
James Weisz, attorney, captive owner of Gadsden Insurance Co., and another panelist, wants to set the record straight about cell captives.
"Sometimes scholars, insurance company managers, attorneys and others write articles and say a lot of different things about cells and variations of cells, like series business units," Weisz said. "Frequently, there is legitimate academic debate, but it is also possible that the author is expressing concern that is motivated more by a vested interest in the status quo than reasonable academic disagreement."
That can be frustrating and difficult for a potential captive owner to evaluate and the industry can lose credibility, he said.
"If they choose to do nothing because they are uncomfortable with the nature of the debate, then they don't get the benefit of the captive and none of the service providers get any of the entrepreneur's business," Weisz said.
Ryan Ralston, senior consultant at Spring Consulting Group LLC, is one of the panelists who will discuss the benefits of forming a group captive in a session, "Group Captives: When Do They Make Sense?"
"Building a group captive makes sense when you want to lower your cost or increase your focus on good risk management, but it's cost-prohibitive to build your own captive, or there's too much risk to take on within your own captive," Ralston said. "A group captive makes sense when you can find like-minded companies to share the risk, share the cost and share the benefits."
One of the biggest benefits of having a group captive is that it creates new competition in the marketplace for premium dollars, he said.
"That new competition does wonderful things to lower costs or premium rates," Ralston said. "It allows groups to reinvest those savings in safety and loss control, which can lead to reduced losses, which will ultimately lead to healthy underwriting profits which then can be shared back with the group."
Captives can learn how to tweak their investment portfolios in a session, "Investing in Today's Economic Environment: Why the Recovery is Different This Time."
Daniel Wallick, a principal at the Vanguard Investment Strategy Group and one of the panelists, said the country's very slow recovery is accompanied by extremely low bond yield, which impacts captives' investment portfolios.
"Typically, when people think of conservative, they think of minimizing risks, but the question is, what is the right risk in today's environment?" Wallick said.
Historically, it has been risk of losses as captives want their positions to maintain a structure that minimizes the possibility that those assets decline, he said.
"But given that bond yields are so low, captives are also now facing risk of shortfall, as they just can't generate enough money," Wallick said. "So the question arises, is there a new definition of conservative, given these persistent market conditions?"
KATIE KUEHNER-HEBERT, a freelance writer based
in California, has more than two decades of journalism experience and expertise in financial writing. She can be reached at email@example.com.
March 1, 2013
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