This year’s CICA conference in Tucson, Arizona, focused on the opportunities and challenges ahead for captives and the role they can play in the future
The Captive Insurance Companies Association (CICA)’s 2019 conference, saw Tucson, Arizona, play host to 563 delegates, from 39 states and 17 countries. CICA’s 47th annual conference focused on how captives could play a role in ‘shaping the future’.
Providing the opening address for the second consecutive year, CICA president Dan Towle, said the theme reflected the “powerful opportunity we have today with new technologies, new types of business, and new risks to address”.
“Risk managers need to anticipate opportunities and collaborate to have the risk management solutions ready for future business needs,” Towle assessed.
Towle said the past year has been “exciting, challenging and rewarding” and has held a few surprises, but he emphasised that the industry continues to be misunderstood, which offers both challenges and opportunities.
According to Towle: “The challenges come from addressing increased scrutiny on several fronts, whether it is the Internal Revenue Service in the US or the global impacts of the Organisation for Economic Co-operation and Development (OECD).”
He added: “Misunderstanding of how captives operate continues to proliferate, and CICA continues to take a leadership role in increasing the understanding of the responsible and correct use of captives and the importance of best practices.”
Towle added that CICA continued to act and advise according to the mantra “do captives right, or don’t do them at all”.
Two examples of doing captives right, Gary Bowers and the American Contractors Insurance Group (ACIG) were handed awards by CICA at the conference, with Bowers receiving the distinguished service award and ACIG receiving the outstanding captive award for its contributions to the industry.
The winner of the CICA ‘Next Generation Captive Insurance Solutions for New Risk Challenges’ essay contest for college risk management and insurance (RMI) students was also announced.
Temple students Angel Song and Alana Vicale took first place their essay titled “Captive Solution: Opioid epidemic in the US”. The essay contest is one of a number of ways CICA are trying to support young professionals in the captive industry and Towle said the contest had been as “exciting” as it had “confirmed that students do consider careers in captive insurance interesting and on the cutting edge in the insurance industry”.
He added: “We need the next generation to be our best advocates.”
Focus on youth
An increased focus on the importance of young professionals was reflected in the programme schedule at this year’s conference, with six of the 34 public sessions focusing on the issue, including three with current students on the panels.
Speaking on the ‘shaping the captive leaders’ panel, Sandra Springer, senior vice president at Captive Resources, said the talent crisis is here and is hitting the insurance industry hard.
Referencing the statistics that are regularly quoted on the talent crisis, that 400,000 employees will be exiting the insurance industry in a very short period of time, Springer said: “We all know that we have a shortage of talent, it’s been predicted, it’s been discussed but It’s here now and it’s hitting the insurance industry particularly hard.”
Springer added that this issue meant that growing organisations were “dually challenged”.
She explained: “They’re looking both for young professionals to fill the holes created by retirements and to attract new talent as part of their growth. We need to be proactively engaging these young people and selling captive insurance. We work in a very interesting field and we need to make sure we can describe exactly what that is.”
Providing evidence that many young professionals are well prepared to fill those holes, Sammy Szames, a student at Butler University, and Kevin Thompson, CEO of the student run captive and professor at Butler, presented a session on the Butler student captive.
Thompson, said the MJ Student-run Insurance Company, which was licensed in Bermuda in 2017 and works with big name service providers including Aon, KPMG, Conyers Dill & Pearman, and HSBC, was part of an education programme through which they were “trying to make students ready for the industry and to help solve the talent crisis”.
He added: “The 400,000 jobs represents an amazing opportunity for students with risk management experience and that is exactly what this captive is giving our students.”
Szames said his experience had driven his aspirations to join the captive industry. He commented: “The industry is starving for talent right now and I’m just excited to enter that workforce and keep learning. I know that is the track I want to go on, and that is how I’m going to get where I want to go.”
The importance of effective succession planning was emphasised in the session on ‘shaping the captive leaders’. One of the speakers, John Prescott, managing partner, Johnson Lambert and Company, said succession planning and recruitment did not come without significant effort.
He explained: “It is a day in, day out task developing leaders that you are confident will be in place five or 10 years down the road.”
Prescott also suggested that poorly executed succession planning is a primary driving force behind the increase in merger and acquisition (M&A) activity. He said there have been “a wave of retirements that have been happening and will be expected to continue” and “not coincidentally, there has also been a wave of M&A activity in our industry and that too is not expected to let up anytime soon”.
“I don’t want to oversimplify the reasons behind that M&A activity but certainly, a reason and a primary driving force is that the lack of ability to execute an effective succession plan has led to companies looking to sell to the next tier of firms above them. Every single week we see medium and small firms being gobbled up in our industry.”
Focus on challenges
There was an optimistic atmosphere throughout the conference, and even when the numerous challenges facing the captive industry were discussed, often a pragmatic stance was taken, focusing not on the issues but on solutions.
On the “perennial challenge” of finding experienced and qualified captive regulators, Steve Kinion, director, Bureau of Captive and Financial Insurance Products, Delaware Insurance Department, said that International Center for Captive Insurance Education (ICCIE) training could provide a solution.
He said that the proliferation of US captive domiciles, of which there are now nearly 40, was creating “strains in regulatory departments”.
Kinion noted: “It is a perennial challenge to find regulators with captive insurance experience because it is a relatively new facet of the insurance industry. In Delaware, we have attempted to address that with the ICCIE training designation. This is one way to address the issue of finding qualified captive regulators.”
Another regulator speaking at CICA 2019, Dana Sheppard, associate commissioner, Risk Finance Bureau at District of Columbia Department of Insurance, Securities and Banking, called for the industry to work together to police bad actor risk retention groups (RRGs) or the National Association of Insurance Commissioners (NAIC) might look to alter the way they operate.
He said: “Anything is fair game for the NAIC if we don’t do a good job of policing RRGs properly. It is important.”
The aggressive stance taken by Washington state insurance commissioner Mike Kreidler on captives was a hot topic, especially following Costco’s recent settlement, which means the Washington commissioner has now collected around $4.4 million in settlements from captives, with the captive insurers of Costco and Microsoft having settled.
Mikhail Raybshteyn, Americas captive services deputy leader, EY Global Captive Network, suggested there was no clear answer to whether more US states will emulate Washington’s stance. He said: “I don’t think there is a clear cut answer. We haven’t had an indication from states outside Washington that don’t have captive laws that they’re going to follow suit.”
In another session, David Provost, deputy commissioner for captive insurance at the Vermont Department of Financial Regulation, took a different stance, arguing that Washington is a unique case.
Provost commented: “There are large corporations and no income tax for businesses. The large corporations like Microsoft are paying a relatively small amount of tax, so it is hard for them to stand up. I don’t know if it will bleed over because Washington is unique.”
Paul Owens, CEO of global captive practice at Willis Towers Watson, was tasked with summarising BEPS and Brexit on the ‘political climate and the future of captives’ panel. In opposition to the views of some other industry experts on Brexit, Owens warned it was a major problem for the industry due to the issue of passporting.
He explained: “For our industry, this is a major problem, without guidance from the government or authorities, on the 30 March, no one knows if insurance policies are going to be valid.”
On BEPS, he served a stern warning to the North American captive industry, saying that the whole captive industry “is under a direct attack through this” and that “this isn’t scaremongering, this is coming”.
He added: “OECD BEPS applies to the US as much as any European country.”
Focus on emerging risks
Emphasising the theme of shaping the future, emerging risks also featured in the conference programme, with cyber, blockchain, and cannabis all discussed.
Michael O’Malley, managing director at Strategic Risk Solutions, highlighted the increasing trend in captives being used to cover cyber liability. He noted that driving that trend was that captives offered “control, capacity, and cost, and, like most coverage lines, those are traditionally the three forces that lead to captive use”.
“People think that of the perception of cyber as a low-frequency high severity risk a captive isn’t a good fit,” noted O’Malley, “in our opinion, it is worth looking at the captive to access reinsurance capacity to solve that because you can manage retentions through reinsurance and exert some more control in that structure.”
Another panellist, Fred Eslami, associate director at A.M. Best, suggested that a large part of the growth in the cyber captive market space was through smaller companies.
He said: “The expansion of the market into small businesses will increase and will continue to increase over the next few years. Big companies already have coverages.”
There were mixed opinions on the potential opportunities that cannabis could provide for the captive market.
Sheppard, speaking on the ‘regulatory hot topics’ panel, suggested that if the current Schedule I classification was lifted on cannabis, captives could be perfectly suited for the risk.
He noted: “Captives have always led the way in terms of new risks, so this is perfect.”
However, Provost suggested the window for captives to provide coverage for cannabis risks may be short.
“If there is a need it might be a short window,” stated Provost. “My bet is that once cannabis becomes legal or is no longer a Schedule I prohibited substance the commercial market will step in and maybe there won’t be a need for captives.”
The prospect of future change
Whether it be a new wave of captive insurance professionals, emerging risks, or the continued regulatory and reputational challenges facing captives, what was clear at CICA 2019 was that the captive industry was excited by the prospect of future change, and what that could mean for the market.
