Beginning with Dr. Alex Young’s keynote speech on the potential impacts of space weather, much of the emphasis of the 2018 World Captive Forum was on identifying the challenges the industry will face moving forward and the steps that can be taken to weather the storm.
Beginning with Dr. Alex Young’s keynote speech on the potential impacts of space weather, much of the emphasis of the 2018 World Captive Forum was on identifying the challenges the industry will face moving forward and the steps that can be taken to weather the storm.
In his speech Dr. Young, associate director for science at NASA, explained to delegates that societies ever-increasing reliance on technology means space weather has the potential to “completely devastate the power grid” and cause trillions of dollars of cost.
The speech was received with great interest, particularly due to its relevance after the record year experienced in relation to weather-related disasters and catastrophe bonds in 2017.
Flood of changes
The most important challenges identified for the industry were related to the flood of incoming changes in taxation and regulation.
Changes to Brexit, Solvency II and the EU blacklist were discussed, but as of the conference was US-based, much of the focus was on the US tax reform, federal activity, the EU/US Covered Agreement and state income law changes.
Speaking on the hot topics panel alongside Tom Jones of McDermott Will & Emery, was Bruce Wright of Sutherland, Asbill & Brennan, who warned captive owners in the US to take note of developments relating to the new cyber compliance law in New York.
The New York Cybersecurity Regulation, which became effective 1 March 2017, requires financial services companies to adopt a cybersecurity programme that “ensures the safety and soundness of the institution and protects its customers”.
Wright explained that as the National Association of Insurance Commissioners has adopted a similar cyber compliance model all US captive owners need to pay attention.
According to Wright, while it is no bad thing for the industry to have to be more careful concerning cyber security, captives in New York have had issues with complying to the stringent regulations, which emphasises the protection of electronically maintained non-public information.
Wright said: “The question is how all the other states are going to deal with this.”
“We are going to likely see this go through the country and the question is how are the jurisdictions with captive laws going to respond with regards the operations of captives when and if these laws are adopted.”
Forecasting danger
During the panel on Brexit, base erosion and profit shifting (BEPS) and other international regulations, Ciaran Healy, director of consulting at Willis Towers Watson’s global captive practice, advised captive owners to ensure they had their “defence ready”.
Addressing the US market specifically, Healy warned that the presence of the Organisation for Economic Co-operation and Development’s BEPS framework is going to be felt in the US market with the full implementation a year away.
Healy said that the BEPS framework had already been a gamechanger in the European captive market and with tax sensitivity at the highest it has ever been, similar impacts will soon be felt in the US captive market.
The BEPS framework is an initiative that brings together over 100 countries aimed at harmonising tax regulations internationally and giving tax authorities more power.
Healy suggested that the impact of BEPS in the US had been underestimated slightly, but that with full implementation a year away, the presence will begin to be felt as soon as local tax authorities start using the powers BEPS brings.
He commented: “Potentially it has been misinterpreted, the interpretation was that it is a European phenomenon and it’s a European problem, but it’s not its a global taxation framework renovation and that includes the US.”
“A lot of captives were probably set up in a period of time when tax sensitivity wasn’t quite as high. For a lot of those captives the owners may need to reassess the captive footprint where it is and what it is doing and for companies looking to set up captives in the US the whole substance thing is going to be more on the agenda than it was previously.”
According to Healy, captives that are set up for the right reasons and properly conducting business need not be worried.
He explained: “As an industry BEPS isn’t something to be fearful of. If you’re doing your risk management and risk financing arrangements for the right reasons and if a captive is set up for legitimate economic and risk management reasons there’s nothing to be fearful of.”
He added: “Those captives that have been utilising tax arbitrage, they probably should be a little bit afraid of what BEPS and the anti-tax avoidance measures are bringing in.”
A perfect storm for micro-captives
It was clear that the fallout of the Avrahamis’ verdict was still being felt throughout the conference, with the case and Judge Holmes’ verdict a talking point in almost every session and workshop.
Speaking in the pre-conference workshop on fundamentals and recent developments, Dan Kusaila, tax partner at Crowe Horwarth, suggested a “perfect storm” may be on the way for micro-captives.
Kusaila explained: “From an 831(b) perspective, the Internal Revenue Service (IRS) come up with the Dirty Dozen list and for three years running 831(b) companies have been on it. Avrahami came out with the unfavourable ruling for 831(b) companies.”
“We’ve had the Form 8886, that’s like putting together a nice diary and sending it to the IRS and saying ‘here’s everything I am telling you about my captive’. Not only is there the risk of sending that to the IRS, but it’s costly to put together. So you’ve got all this and then add in the the drop of the 21 percent tax rate and those companies have a perfect storm coming.”
There was a reflection from some that this may not be a bad thing, one attendee went as far to say that bad micro-captives are soiling the industry and questioned why regulators are letting them do this.
Clearer skies ahead
Though the conference was largely focused on the potential challenges ahead, it was not all doom and gloom. In fact, with the conference coming early in the year, there was a lot of positivity from many delegates both reflecting on their 2017 figures and their 2018 predictions. One regulator even predicted that his domicile growth would “explode” over the coming year.
The Latin American captives panel provided a warm finale to the conference’s first full day.
Speaking on the panel, Bartolome Massot-Cristino, assistant vice president at Quest, described the continued growth of the Latin American captive market as “very impressive” considering the political instability across many of the domiciles.
Massot-Cristino revealed that the predicted figures for the Latin America market show a 2.5 percent average growth in 2017, an increase from the 2.2 percent growth in 2016, and he expects continued growth in 2018.
Massot-Cristino said: “The latest outlook by Mercosur, which is the common market in Latin America, is telling us that the outlook is very good and it will continue for the foreseeable future. Considering the political situation across these countries, a lot of political instability, we think these figures are very impressive.”
The Latin America market was hugely affected by the global financial crisis, as it lowered the price of commodities, and between 2010 and 2016 there was a deceleration in market growth, but according to Massot-Cristino this changed in 2017.
He explained: “For the last six years, from 2010 to 2016, we saw a deceleration in market growth. So, 2017 is the first year in seven years that we have seen an increase in growth and that is the outlook for the foreseeable future.”
Massot-Cristino puts a large part of the change of fortunes is down to a wave of young talent flooding the Latin America market.
He said: “The world is changing. A lot of young students who went to Europe and the US to study economics and finance—they are accountants and lawyers—very well educated young professionals are going back to their home countries.”
“What we have to realise is that these young people know what we do in more developed economies and they are doing it now in Latin America. That’s what makes it so interesting, this is the moment to divert more resources to the region.”
Another member of the panel, Esperanza Mead, principal of Actuarial Factor, suggested that due to its current size the Latin America market represents an excellent opportunity for growth.
“Today in the world we have approximately $90 billion in annual written premiums for captives. Out of that less than $3 billion comes from Latin America. That means there is an opportunity to grow captives in Latin America.”
