This year’s Vermont Captive Insurance Association (VCIA) conference focused largely on the current talent crisis in the insurance industry.
This year’s Vermont Captive Insurance Association (VCIA) conference focused largely on the current talent crisis in the insurance industry. Although there is currently a lack of interest from the younger generation, it was positive to see that a lot of young interns were in attendance at the conference.
A panel that consisted of Troy LePage, senior internal audit manager of HAI Group, Zach Finn, professor and director of Butler University, Susan Molineux, associate director, A.M. Best, Rachel Libowitz, senior associate, CapVisor Associate, discussed the next generation of captive leaders.
LePage said that research shows only 4 percent of college students currently consider going into the insurance sector—which is not good news considering a large number of the current industry are due to retire in the coming years.
Finn explained that there are two sides to the talent crisis—supply and demand. Reflecting on the demand side, he said: “We have 295,000 positions that need to be filled by 2020 to 2022, that’s a lot of people that we need to attract to the insurance industry.”
Speaking about the lack of insurance degrees, he explained: “It’s not that you have to have an insurance and risk degree to be a great insurance professional but if you can only replace a baby boomer with half a Gen X-er, we need a faster way to onboard this talent, and an insurance and risk management degree is really the best way to do that.”
While discussing the lack of insurance professionals, Finn added that the industry needs to create an awareness of how the insurance sector plays an important role in the economy.
At another session addressing the lack of young talent entering the industry, panellists discussed the benefits of a captive and how it can be used as a tool to attract a new generation.
Dan Kusaila, partner at Crowe, said that although there is a “big need for employment, and our talent pool coming out of university will not even entertain it”.
When students were asked why they didn’t want to entertain the insurance industry, they described it as “old and boring” and “not technology-driven and not sexy enough for them”. Other reasons included being “not innovative enough”.
Kusaila said that even though there is only a 1 percent unemployment rate in the insurance industry, “we need to think outside the box and start thinking about how we can help our own organisations”.
He said: “Firms need to think how a captive can help in other ways that have not been thought of before and it could be a win-win for the captive as well as the employees.”
Anne Marie Towle, executive vice president at Marsh, noted that retaining talent in any organisation can be challenging.
However, she suggested coverages that could be offered to an employee through a captive include cell phone insurance, wedding coverage, student loans, home warranties, trip insurance and pet insurance, among others.
When doing research, it was found that 89 percent of millennials would prioritise benefits over a pay rise. Kusaila said: “They value the benefits more than they do the cash, they value lifestyle, they value family more than being in the office.” However, it’s not just for the younger generation, Towle suggested a captive could cover other benefits to suit the older generation.
Kusaila said it doesn’t matter on the size of the captive, “the sky is the limit, have a think about what the law will let you do, what will the business let you do, and the attitude towards the captive”.
Talking tax
During the annual tax update session, a panel, which included Tom Jones, senior counsel, McDermott Will & Emery; Chaz Lavelle, partner, Bingham Greenebaum; Bruce Wright, partner, Eversheds Sutherland, discussed the issues around the Internal Revenue Services (IRS) court cases against section 831(b) captives.
One of the big problems in the Syzygy’s v Commissioner of Internal Revenue case was when the premiums decreased, the taxpayer switched captive managers, which according to Lavelle, “is what the court was concerned about”.
Lavelle explained the court was also concerned about “the precise determination of the premiums, they also said the captive manager did not testify on exactly why the pooling entity would have been a good entity for federal tax purposes”.
He said that “you can’t use the risks that were assumed from the pooling entity in returning your risk distribution”.
The audience was asked if they thought the pooling entity has to be an insurance company for tax purposes, for the captive to count risks assumed from it for risk distribution purposes.
Although the majority of the audience answered yes, Lavelle said it is “irrelevant” whether or not the pooling entity is a valid insurance company.
He explained that “risk distribution is determined by whether it is assuming the risks of unrelated people and it seems to be irrelevant whether or not those risks come directly from the insured or from an entity that is an insurance company that does qualify as an insurance company for tax purposes or an entity that doesn’t qualify as it has an obligation to pay a third party when a contingency occurs, that to me is an unrelated business”.
In the tax court decision, Judge Ruwe found that the arrangement between captive insurer Syzygy, its parent company High Tank and Manufacturing, and its fronting carriers, were not insurance transactions, meaning the Syzygy’s section 831(b) election is invalid and it must recognise the premiums it received as income.
Judge Ruwe, therefore, ruled that the captive’s fronting carriers were not bona fide insurance companies and therefore Syzygy did not distribute risk and did not accomplish sufficient risk distribution for federal income tax purposes through the fronting carriers.
He found that the arrangement between Syzygy and its fronting carriers “looks suspiciously like a circular flow of funds” and that the fact that the captive owner sought higher premiums led the court to believe “that the contracts were not at arm’s-length but were aimed at increasing deductions”.
Lavelle said captives should go the “extra mile” and that “it’s not hard to follow the tasks the courts provided”.
He added: “In today’s world, captives are in a hard market with the Internal Revenue Service and courts.”
A mission to Mexico
During the conference, VCIA also revealed that they will be sending a delegation of government, regulatory and industry representatives to Mexico in 2020, to highlight the state’s captive insurance industry.
In collaboration with the US Commercial Service, the trade and promotion arm of the US Department of Commerce’s International Trade Administration, the delegation will lead captive insurance educational forums hosted in Mexico City the week of 23 March 2020.
The educational forums will include participants from Vermont’s captive industry and feature informative panel discussions, educational content and networking opportunities designed for Latin American insurance and risk management professionals interested in forming a captive insurance company.
Ian Davis, director of financial services, said: “The goal of this trade mission is to increase awareness of Vermont as the leading US domicile for captive insurance and highlight our state’s mutually beneficial trade relationship with Mexico.”
“We look forward to meeting with corporate leaders, industry executives and prospective captive owners from across Latin America during the educational forums and related engagements.”
David Provost, deputy commissioner of captive insurance in Vermont, added: “There is a growing interest in captives among insurance and risk professionals in Latin America.”
“Our aim is to help ensure that the captive concept is well understood and communicated, including the benefits of being in a reputable onshore jurisdiction like Vermont.”
Rich Smith, president of the VCIA, commented: “We have a number of captives that do business in Mexico and Latin America.”
“As the captive market in the region continues to grow, we want to make sure those companies know Vermont is open for business.”
Industry recognition
At the event, the annual awards ceremony to honour active members of the captive sector saw Len Crouse, a former Vermont captive regulator, and now a partner at JLT Towner, being presented with the honorary member award.
Ed Koral, a specialist leader at Deloitte Actuarial & Insurance Solution Group, was given the captive crusader award.
The industry service award went to Chaz Lavelle, a partner at Bingham Greenbaum Doll, where he started at as an associate back in 1977.
Lavelle said: “The captive industry is a great industry, I was very thrilled to get the award for service to the market but hundreds of people deserve recognition for the service they give and the roles they play.”
He added that whether those in the industry “are sitting on committees, doing board work, lobbying legislators, working with regulators to get best practices or sharing their knowledge by speaking on panels or otherwise writing articles” they all contribute in one way or another.
