3 March 2014Analysis

Facing down the bullies

The captive industry is growing up. By most accounts, there are more than 6,000 captives out there now and any hardening of the insurance market will surely increase that number. However, we are suffering some growing pains.

As a young association administrator I learned an important lesion: little good comes from raising your profile in a legislative or regulatory setting. A corollary to that rule is that not much good can happen when legislators or regulators notice you!

2013 was a year when a lot of regulators seemed to notice the captive insurance industry. Unfortunately, most of them seem to have assumed the worst, or relied on unsubstantiated perceptions that anything that doesn’t fit within their preconceived notions of what an insurance company should look like must be up to something bad.

The most dramatic example of this phenomenon occurred when the Organization for Economic Development and Cooperation (OECD), the Paris-based non-governmental organisation that recommends economic policy for its 34 member countries (which includes most of the developed economies in the world) decided to characterise captive insurance companies as a tax avoidance device.

“There is a growing cry from regulatory and supervisory bodies for uniformity and harmony—the underlying meaning of which is that all insurance companies should be treated alike.”

Early last year the Captive Insurance Companies Association (CICA) caught wind of the fact that the OECD was going to release a report on Base Erosion and Profit Shifting (BEPS). Unfortunately, within that report the OECD—without any substantiating facts—casually asserted that captive insurance companies are a device to circumvent taxes, without any reference to, or acknowledgment of, the fact that captives are a legitimate risk transfer tool for stable business operations and are a highly regulated industry.

Despite the fact that the OECD’s BEPS report invited interested parties to meet with the OECD, it quickly became apparent that the OECD had no interest in hearing any other point of view and is in fact going to ignore comments from its own Business and Industry Advisory Committee from which, heaven forbid, they might learn more about the actual nature of the long established captive insurance industry.

CICA and its European partner—the European Captive Insurance and Reinsurance Owners’ Association (ECIROA)—will continue to address the OECD’s Action Plan to implement the BEPS report, but it is clear that there are storm clouds ahead.

Similarly, there is a growing cry from regulatory and supervisory bodies for uniformity and harmony—the underlying meaning of which is that all insurance companies should be treated alike. This is not an encouraging sign for the captive insurance industry. Rather, it is an indicator of the inevitable regulatory imperative that there must be a one-size-fits-all rule out there that will work to regulate all insurance companies.

For many years, I have repeated the pithy phrase “when you’ve seen one captive insurance company, you’ve seen one captive insurance company”, as a way of conveying the notion that, by definition, captives are created for diverse business needs and reasons. Ironically, at a recent meeting of the insurance regulators from the various US states, that phrase was used as a criticism of the captive insurance industry. How dare they (captives) be so different from each other (and from commercial insurance companies)! Again, the assumption is that something different must be something wrong.

Lest you think I’m a pessimist, I’m not. I just think that the captive insurance industry is growing up and will have to face a process of increased scrutiny. We have a lot of friends, including all the companies and organisations that have discovered the strategic benefits of utilising a captive for their risk financing or risk transfer needs. In addition, the regulators themselves in active captive domiciles will help demystify the captive industry to their less educated colleagues.

Unfortunately, in the meantime we’ll have to deal with the additional scrutiny and with those who assume that anything different must be something bad. This too shall pass.

Welcome to the world of captives.

Dennis P. Harwick, President

Captive Insurance Companies Association