The Captive Insurance Companies Association (CICA) board of directors chair Scott Beckman opened the 2016 International Conference in Scottsdale, Arizona, by explaining the reasoning behind the event’s ‘expand your horizons’ theme.
The Captive Insurance Companies Association (CICA) board of directors chair Scott Beckman opened the 2016 International Conference in Scottsdale, Arizona, by explaining the reasoning behind the event’s ‘expand your horizons’ theme.
“[It was designed] to challenge people to reach deep inside and push their creative buttons and find a place to enhance the value of their captive operations,” explained Beckman, quoting author Claude Bristol when he said: “You have to think big to be big.”
CICA’s latest Captive Market Study, released every year during the international conference, revealed that captives are indeed thinking big, with 48 percent of respondents planning to cover cyber at some point in the future, making it the most popular non-traditional risk.
A further 36.4 percent already provide cyber cover through their captives, while a resounding 76.3 percent said it is the hottest emerging risk at the moment.
Speaking at conference, Peter Joy, executive vice president at Aon Insurance Managers, said of cyber risk cover: “There is certainly a lot of discussion, however, after only three people in the audience raised their hand when asked if they use it, there is a concern. There is a lot of conversation, but not a lot of action.”
Other popular emerging risks to receive notable mentions in the market study were supply chain at 42.5 percent and medical stop-loss at 39.1 percent.
Sean Rider, who serves as a managing director of consulting and development in Willis Towers Watson’s global captive practice, commented: “We are seeing people use medical stop-loss in captives and reinsurance on the back end because of cost.”
Ken Arguello, risk manager for claims and captive programmes at Dow Corning Corporation, went on to discuss the study’s other findings, claiming that the figures were not surprising.
The study showed that 73.7 percent of respondents believe that a captive’s ability to plug holes in an insurance programme makes it valuable. Arguello added: “Another reason is its tax benefits.”
Some 36 percent of respondents believe that not being able to obtain useful information is the biggest barrier to optimising a captive, followed by 32.3 percent who believe communicating the value of captive to management is a barrier.
The biggest challenges faced when attempting to set up a captive are time and resource management, said 36.1 percent, and a lack of management approval and interest, according to 21.5 percent of respondents.
Arguello believes that captives managers can overcome these challenges with “more communication and involvement with and between all service providers; support and stronger representation by CICA; and by demonstrating the value of adding captive programmes”.
In another session, focused on cyber risk solutions, cyber risk was likened to a bar of soap because it’s “always slipping away”.
Panellist Michael Douglas, director of business development for captive insurance at Aon Risk Solutions, made the comparison as the panel discussed how the cyber threat is transforming from simple credit card fraud into major data breaches at large corporations.
The example of the recent attack on the power grid in the Ivano-Frankivsk region of Ukraine was given. During that cyber attack, hackers planted a virus that erased the programmes that engineers used to monitor equipment.
The virus left 103 cities without power for six hours and another 186 cities partially in the dark because devices that route power and change voltages had been disconnected from the grid.
Despite the obvious criminal element to cyber attacks, it’s worth bearing in mind that the threat can come from within.
Stephanie Snyder Tomlinson, national sales leader for Aon’s professional risk solutions practice, explained that the cyber threat is further complicated by the identity of bad actors, who aren’t always external criminals but are often employees of the business.
Peter Mullen, CEO of captive and insurance management within Aon’s global risk consulting group, said captives have reacted accordingly. “In our last survey, 1 percent of clients were putting cyber into their captives, however, that has since increased to 2.5 percent.”
He went on to reveal that 60 percent of Aon clients do not buy cyber coverage. In addition, he said that the number of clients that are considering accessing cyber coverage through captives has increased three-fold.
Alec Cramsie, in charge of underwriting US risks for Beazley Group’s technology, media and business services team in London, offered up information as the key to figuring out the right cyber solution.
He explained that data and analytics can provide guidance on the financial impact of the decisions about cyber risk and insurance, including on how different programme structures can affect specific organisations.
Douglas discussed the current state of the cyber marketplace, pointing out that capacity fluctuated in 2015 both domestically and abroad. He also explained that coverage has continued to expand in both breadth and limit availability for middle market accounts, but not large accounts.
He added that stronger data is being gathered as more breaches are reported and retentions remain stable and varied for middle market accounts, but noted some material increases for larger accounts. He also said that pricing is continuing to trend upwards, especially in those industries that are most affected. “Some industries are seeing increases of 100 percent to 400 percent and those figures are not uncommon.”
The conference would not have been complete without a discussion on the state of play of micro captives, whose presence on the Internal Revenue Service’s (IRS) ‘Dirty Dozen’ tax scam list for a second year running has forced them back into the limelight.
The ‘Dirty Dozen’ list calls out tax scams that the IRS will be targeting in the coming year, and micro captives using the 831(b) tax code election, whose premiums equal less than $1.2 million per year, remain within its sights.
Conference attendees heard that making the 831(b) tax election is not always the right choice for micro captives. Daniel Kusaila, tax partner at Crowe Horwath, noted during a comprehensive session on these captives that meeting the $1.2 million premium limit did not automatically qualify an insurer as a candidate.
Net operating losses can’t be carried forward or back from a year in which the company elected 831(b), he explained, while underwriting losses can’t be used to offer consolidated taxable income. “If your company has huge losses, you may end up getting hurt,” added Kusaila.
But Kusaila did concede that micro captives are gaining in popularity, thanks to a greater understanding of alternative risk mechanisms, catastrophic events, the financial crisis and the abundance of US states catering to captive insurance.
This has led to the increased scrutiny of aggressive captive structures that do not have a non-tax business purpose, explained Kusaila.
Tim Tarter, partner at tax law firm Woolston & Tarter, said: “There is no surprise that 831(b) captives are under IRS scrutiny.”
Tarter noted that the captive industry is under the impression that all micro captives are under IRS scrutiny, however, it is just a select number, he assured attendees.
“Just because the IRS is conducting an audit does not mean that anyone has done anything wrong,” said Tarter.
The Protecting Americans from Tax Hikes Act of 2015, which passed into law in December 2015, reins in certain micro captive abuses that the IRS is currently combatting.
Those provisions are effective for the taxable year beginning after 31 December 2016.
He also discussed what has remained the same, noting: “The amendments don’t have anything to do with the definition of insurance.”
“The arrangement that qualified as insurance before the amendments remains a good insurance arrangement after the amendments.”
Anne Marie Towle, vice president and senior captive consultant in Willis Towers Watson’s global captive practice, went on to discuss the most publicised amendment, which will increase the premium limit for 831(b) qualification.
She explained: “The increased premium limit now creates opportunities for captives between $1.2 million and $2.2 million to consider the 831(b) election.”
“The premium limit increase also creates opportunities for groups to develop captives to address key exposures with $2.2 million providing a material amount of funding.”
Another popular session discussed the evolving horizons of employee benefit captives, hosted by Peter Bandarenko, a senior consultant and head of new market development at Spring Consulting Group.
Bandarenko revealed the most popular lines of coverage to put through an employee benefit captive are group life and disability, although attempts are being made to broaden their horizons.
He used his panel session to analyse the results of a survey that his firm has conducted to find out how clients such as Coca Cola and Deutsche Bank are using their employee benefit captives.
According to Bandarenko, 57 percent of respondents are considering the inclusion of additional coverage lines in their captives.
The most popular was cyber risk. Other lines included product warranty, terrorism risk, reputation risk, product recall and credit risk.
This follows results that showed that 86 percent of surveyed companies are meeting their financial objectives with their employee benefit captives, which are allowing them to regroup carrier underwriting profits and introduce third-party risks to obtain better distribution and drive tax efficiencies.
The remaining 14 percent of respondents cited “merger and acquisition activity fundamentally changing [their] captive strategy” as one reason for not meeting their objectives.
Bandarenko pinpointed the biggest challenges to expanding the use of an employee benefit captive, including “regulatory hurdles, the US Department of Labor process [for obtaining coverage approval], and fronting/insurance carrier reluctance”.
He added that “building organisational alignment between risk and HR” remains a problem, as does “obtaining [the] approval of senior leadership for adding employee benefits to your captive”.
He finished by explaining how far benefit captives have come in the last 15 years.
He noted that 15 years ago captives were not common for benefits financing, companies also often perceived obstacles, there were territorial restrictions and there were only a few employee benefits reinsured by captives.
He suggested that people now feel more involved and aware of benefit captives, and that there has been enterprise risk financing movement, an expansion in domicile choice, and that regulatory hurdles are being minimised.
He concluded his session by adding that he believes companies are now looking at captive solutions as the next step in cost savings and control.
