.jpg)
Turnberry Isle played host to the first major captive conference of the year, welcoming 330 delegates to Florida to explore what may be in store for captives over the course of 2019
Turnberry Isle, Florida, played host to 330 delegates for the 2019 World Captive Forum (WCF), the first major captive conference of the year.
The venue is a namesake of the legendary Scottish golf course that has played host to four Open Championships and was a fitting venue for the captive industry to tee off for 2019.
In its 28th year, the event’s focus was on the opportunities and challenges facing the industry as it attempts to navigate the fairways, bunkers, greens, and hazards of the year ahead.
Talk of the duel, in the sun
The Turnberry course is notorious for the ‘duel in the sun’ between Tom Watson and Jack Nicklaus at the 1977 Open Championship, and speakers at this year’s conference focused on the captive industry’s own duel between micro captives and the Internal Revenue Service (IRS).
The IRS has registered two recent victories over the industry in the Avrahami and Reserve Mechanical cases and there were some objections raised by speakers at WCF to the IRS’s mindset on captives.
Sheryl Flum, managing director at KPMG, said the mindset most often employed by the IRS, that captives are bad and need to prove their value, needs to change.
Flum, who spent more than 10 years at the IRS, predicted we may see a change in the way the IRS examines captives.
She explained: “I believe that ultimately we’re going to see a more nuanced approach to the IRS’s examination of captives.”
“Right now they’re sending out information document requests, which are uniform, not specific to the facts of any individual captive. They already have the assumption that a captive is bad and it needs to prove why it is good. It is that mindset within the IRS that needs to be changed.”
Another speaker, Charles Lavelle, senior partner at Bingham Greenebaum Doll, said he believed an equilibrium would be reached concerning micro captives in three to five years.
He added: “If the IRS wins all the cases it will be a worse scenario than now and if they lose some it may be better.”
Lavelle also questioned the validity of the IRS’s current stance on the section 831(b) tax election.
He commented: “Through tax elections, Congress allows the taxpayer to choose how they want to be taxed. The only rational basis they will make the decision between elections on is by which election offers them a better tax result. How can it be bad to choose the economically better option offered by Congress?”
Emerging handicaps for captives
While ensuring the hazards and bunkers of the IRS are avoided is vital to the captive industry, it is important to acknowledge the emerging technologies that can help captives stay on the fairway and achieve greater success.
Blockchain is one of those technologies and Doug Alexander, digital enterprise architect, AXA XL, emphasised at WCF that its value is in the opportunity created through collaboration with peers, not the technology itself.
He said: “The value of blockchain technology is not the technology, it is the opportunity you create through collaboration with all of your peers. So, the more people that can collaborate, the value of the network grows exponentially and that creates efficiency for everyone.”
“Like any other technology it is going to continue to evolve but building those business transactions and relationships, and that collaboration, that is really the key. The technology just becomes part of the backdrop.”
Susan Joseph, B3i North America representative and speaker on the panel, agreed with Alexander on the importance on the collaboration offered by blockchain.
She explained: “If you agree on what you see you can collaborate without any friction.”
“The technology powers it, but in the end, it is a business process and application for an industry that can reinvent itself and create new business streams moving forward.”
Rocco Mancini, vice president of Marsh, discussed the issue of security relating to blockchain and highlighted the sensationalist media coverage of blockchain losses, especially related to bitcoin, explaining that “the majority of blockchain losses are caused by poor cybersecurity practices”.
He added: “I can never emphasise this enough, blockchain is only as secure as underlying cybersecurity practices. Having set practices and secure guidelines should mean good security.”
Another emerging technology that represents an opportunity for captives is cyber. According to Michelle Chia, regional underwriting manager at Zurich, the substantial evolution in cyber policies is caused by the “very, very quick” evolution of the threat landscape.
Chia commented: “The reason for that is the threat landscape has evolved very, very quickly because malicious actors want to stay ahead of the game and somehow make some sort of financial gain. Because they’re ahead of the game, everyone else, the ‘good actors’, have to try and get ahead of those ‘bad actors’.”
Chia added: “This market evolves so quickly. Technology evolves so quickly, so, it is important to stay plugged in with direct carriers in the cyber industry to ensure you have the right coverages and protection in place.”
Latin America
The conference’s location means it is popular with experts from the Latin American captive market, a region which Tim Faries, managing partner at Appleby, suggested is the new frontier for captives.
He said the region represented a “a significant opportunity, which has been a long time developing”.
Faries added: “The gap in the Latin American market can also be viewed as an opportunity. There are hundreds of companies in the region whose risk financing and management could be improved through a captive. We view this as a significant opportunity for the growth of captives. We think Latin America is the new frontier for the captive concept.”
Another of the panellists, Javier Mirabal, enterprise risk management consultant at Javier Mirabal Risk Management, highlighted that there were 233 privately owned companies in the region with revenues above $1.25 billion in 2017, characteristics he suggested made them candidates to own a captive, but just approximately 115 Latin American captives.
According to Mirabal, the main cause of this gap is company governance issues.
He explained: “The main issue is not financial problems, the numbers are there. The main barrier is company governance issues, such as how to connect captives to the domestic legal framework or how to explain to the stakeholders that you are including a financial vehicle outside your country, just for optimising your risk financing process. There is a lack of knowledge of how the captive works and how to use it. There may be people with that knowledge but they often don’t have the operational level in the company to enact change.”
The British, open?
As with almost every captive conference, Brexit made the cut as a topic for discussion. Dominic Wheatley, chief executive of Guernsey Finance, suggested that Brexit represents a “significant opportunity” for domiciles holding good relationships with the UK.
Wheatley predicted that Brexit will happen, despite current uncertainty, but suggested that the impact on the majority of global captive domiciles would be minor.
He said: “I don’t think Brexit will be a particularly significant issue for the market. I don’t think it will make the EU more hostile. The EU will continue to be a difficult trading partner for insurance generally.”
However, he noted that there could be a significant opportunity for jurisdictions that had close relationships with the UK.
He expanded: “What will change and could be quite interesting is that the UK will no longer be on the other side of the EU border. The UK has given Gibraltar certain assurances that it will keep its direct access to UK insurance.”
“There is no obvious reason why Gibraltar should be uniquely given an advantage in the marketplace and therefore it will be open for other jurisdictions to seek the same sort of directness as Gibraltar has to be able to write insurance directly into the UK.”
“There are significant opportunities there for jurisdictions with good relationships with the UK.”
In regulation
Golfers have been long haunted by the idiom ‘drive for show, putt for dough’, which emphasises the importance of finishing a hole well.
The WCF organisers appear to have employed that mantra for the conference, as the penultimate session, ‘2019 regulator concerns’, was perhaps the highlight.
Steve Kinion, director of the Delaware Bureau of captive and financial insurance products, Sandy Bigglestone, director of captive insurance at the Vermont Department of Financial Regulation and Wheatley (who is in fact not a regulator) addressed industry issues in an honest and engaging manner, in addition to involving the audience, who at times could not hold in their passion for the subject matter.
Bigglestone highlighted the importance for regulators to take responsibility when licensing captives and the need for the business of captive insurance to be “aligned with insurance”.
Bigglestone explained: “It should be a tool for risk management and risk financing, done in a private setting under a captive insurance company.”
“As captive insurance regulators we need to take responsibility for what we have created. We need to take accountability for what we have created and we cannot license a captive insurance company for any purpose other than insurance.”
There was some heated discussion over the role of the National Association of Insurance Commissioners (NAIC) in the session, but Bigglestone said the industry had been “very fortunate” to have the NAIC as a ruling body.
She added: “It was originally created for commercial insurance companies operating in the US and those standards can be a basis for regulating captives.”
“We do not need to follow every step of the laws.”
“It can be a basis for our regulation and setting standards for captive insurance. It has served us well for other types of entities, such a risk retention groups.”
Kinion noted that there was difficulty in finding experienced talent to regulate captives.
He said: “It has been a perennial challenge to find experienced regulators. Some regulators do multiple jobs including regulating captive insurance companies.”
In the session, Wheatley added that if the captive industry is to evolve it is important that the industry has “new ideas and talent at all levels”.
He added: “Innovation can come from the industry but it can also come from regulation.”
Staying on the fairway
On the back of a year in which the captive industry faced some tough challenges, such as adverse market conditions and legal issues, there was a very optimistic atmosphere as the industry drove off the first tee of the captive insurance conference calendar.
The focus at this year’s WCF was not the problems themselves, but the solutions the industry could offer, both to the challenges it faces and as an alternative to commercial insurance.
