Pictured: Dan Towle
6 August 2018Analysis

Fuelling innovation

It has been an exciting first year as president of the Captive Insurance Companies Association (CICA). I continue to be impressed and invigorated by our membership. Our International Conference in March was a huge success with the second-best attendance in our history. It brought together top thought leaders from our global market and exemplified how when you bring together intellectual capital from around the globe amazing results can happen.

Captives are an invaluable tool in every risk manager’s toolbox and our industry drives innovation in the market. It is an exciting time to be a part of our dynamic industry.

Our industry has challenges and is often misunderstood. One of the best parts of being a domicile-neutral trade association is that we can bring together our members, regulators and our domicile association partners to address challenges. CICA has taken a leadership role with many issues affecting our industry and that will certainly continue. We plan to build upon our member benefits and to have CICA play an even larger role in advocacy for the captive insurance industry, and in representing captives on a global level.

The market for captives

Looking back, 2017 was a continuation of a prolonged soft market. Growth among captives worldwide had a negative net growth, meaning there were more closures than new captive formations for the first time. Overall growth was down with a total of 498 new captives being recorded, down from 616 recorded in 2016. Three-quarters of those new formations were in the US, followed by 88 in Bermuda and the Caribbean. There were 17 new captives formed in Europe and 11 were formed in the Asia-Pacific market.

The three largest domiciles in the world—Bermuda, Cayman and Vermont—all had net negative growth in their number of active captives this past year. However, gross written premium, which is perhaps a better measure, has remained strong among all of them. The majority of growth worldwide continues to be in the small captives sector in the US with continued strong interest of captives utilising the 831(b) tax election.

Europe continues to experience distractions in the market such as BEPS, Solvency II and Brexit, which have undoubtedly hindered some of the growth there. Asia is still in the infancy of its captive insurance growth, and as a result it will take some time before captives gain traction there.

The small captives space continues to be an area of interest in the news because of the IRS Notice 2016-66 and the continued listing on the IRS’s ‘Dirty Dozen List’. Despite controversy with small captives, Congress increased the premium volume allowed to be written in 831(b)s by another $1 million last year and tied it to inflation, which was seen as a positive advancement. Many of our members service the small captives market as it continues to grow at a rapid pace.

2017 was an important year for court rulings. Avrahami v Commissioner, not surprisingly, confirmed many of the ways not to operate a captive insurance company. More cases are on the horizon and will likely shape the future of small captives taking the 831(b) tax election. CICA and the entire industry will be watching closely.

Overcoming reputational risks

The reputational risk we face as an industry could be detrimental if captives are deemed not to be doing the right things. This is a serious risk and one of the reasons CICA has worked so hard to take a leadership role in developing best practices.

One of the most important practices that we developed is for small captive insurance companies, which is the adage of ‘do them right or don’t do them at all’. I would emphasise this is a best practice not simply for small captives—it applies to captives of all sizes. CICA’s Small Captives Task Force is actively updating our guidance on small captives and we hope to release the updated guidance later this year.

The captive insurance industry has a long history of being misunderstood by various regulatory entities throughout the world. Whether it is the IRS or the OECD, our industry needs to be better understood or this trend will only get more burdensome. We have seen this with requests for data from the IRS in Notice 2016-66 and the OECD with their BEPS audits. If we don’t change this trend, we should expect more regulatory agencies to have confusion and more interest in additional oversight.

This year, a major step forward was achieved when the sitting National Association of Insurance Commissioners (NAIC) president, Julie Mix McPeak, attended the CICA conference. This provided an outstanding opportunity where we could advocate with her publicly and behind closed doors, including having a captives regulator-only meeting. This was a huge symbolic achievement with the legitimacy of captives strengthened by NAIC’s attendance and participation.

It also laid the groundwork for more cooperation and understanding between the captive insurance industry and the NAIC, and is a tremendous advancement for the entire sector.

Shaping the future

I expect continued growth in the marketplace despite the soft market. As businesses take a longer-range strategic perspective on their overall risk management, we will see new captives formed to address emerging and non-traditional risks. We will also see a growing need for a robust talent pool engaged in learning the captives industry and developing strategies for optimal use of captives.

This is why CICA champions the dynamic nature of the captives industry and the challenging and interesting careers it offers. Efforts have included building relationships with risk management programmes and getting our messages out through channels including social media, where we can reach more young professionals. CICA is developing partnerships with universities and creating opportunities for shared learning by involving students in its International Conference.

Career growth is a top priority for many young insurance professionals, with some studies citing 62 percent saying it’s a deciding factor on the industry they choose. CICA has several new programmes designed to support career growth in the captives industry. Through a new partnership with the International Center for Captive Insurance Education, CICA is providing students who have earned their Associate in Captive Insurance (ACI) a complimentary one-year membership with CICA. This will grant them all our membership benefits, including allowing them to participate in our mentorship programme, which can be a key component to career advancement.

CICA’s new mentorship programme is the first of its kind for the industry and has been well received by an overwhelming audience. The programme has attracted such attention that CICA has been contacted by other captive insurance associations (including Bermuda and Vermont) about partnering with CICA or seeking counsel on how to launch a similar programme. The programme continues to grow and fills an important void in the industry.

The captives industry grows stronger when we work together in partnership, and CICA can be a catalyst for bringing people together. CICA is committed to helping the captives industry prepare for and shape the future by bringing together the industry’s best minds to share knowledge, generate new ideas for captives and foster careers in the sector.

I look forward to hearing from you.

Daniel D. Towle, president, Captive Insurance Companies Association