14 August 2013Analysis

In rebuttal

Now that the dust has settled from the 2012 elections and with the Supreme Court upholding the Patient Protection and Affordable Care Act making it the law of the land, one would think that 2013 would be a quiet time for the captive insurance industry. However, in recent months it seems the word ‘captive’ has become a pariah.

First, the Organization for Economic Cooperation and Development (OECD), a large influential non-governmental organisation based in Paris, issued its preliminary report Addressing Base Erosion and Profit Shifting (BEPS). Unfortunately, that report (and subsequent testimony to US House Ways and Means Committee—the principal Congressional committee on tax issues) contained casual reference to captives as a “key pressure area giving rise to opportunities for BEPS”—the OECD’s term for tax avoidance.

The Captive Insurance Companies Association (CICA), working in conjunction with the European Captive Insurer and Reinsurer Owners’ Association (ECIROA), has filed several letters with the OECD asking to be heard on this issue and objecting to the characterisation of captives as tax avoidance devices. The OECD’s initial response was dismissive in tone, but CICA and ECIROA will continue to challenge the OECD’s perception of captives.

Similarly, the New York Superintendent of Insurance recently issued the provocatively titled report Shining a Light on Shadow Insurance: a Littleknown Loophole that Puts Insurance Policyholders and Taxpayers at Greater Risk. Although it is easy—and undoubtedly accurate—to characterise this report as a political document, it again represents a casual broadside at the traditional captive insurance industry when the focus of the report (for those willing to drill down into its content) relates to a specific kind of transaction by New York-based life insurance companies utilising special purpose vehicles—sometimes called XXX captives—to reinsure certain liabilities.

Once again however, the word captive was used in this report in a casual and misleading way, especially since a full reading of the report makes it clear that the New York Supervisor of Insurance is not really even talking about the traditional captive insurance industry. Unfortunately, lazy grammar often makes for good politics.

Ironically, CICA found itself in the unusual position of commending the president of the National Association of Insurance Commissions (NAIC) for his response, chiding the New York Supervisor for going overboard and for calling for a vaguely worded national moratorium on captive insurance transactions.

My point is simple. Just when you thought things were settling down and we knew the political and regulatory landscape in which to operate, along come a couple of highly visible challenges to the underlying reputation of the captive insurance industry.

The challenge will be to educate those who do not understand that the vast majority of the individual players in the captive insurance industry are simply trying to find ways to transfer risk in a transparent and well regulated fashion. There is nothing shadowy about the traditional captive insurance industry. Every reputable captive adviser places tax planning somewhere down the list of reasons for forming and operating a captive insurance company (and accounting for tax benefits is neither sinister nor shadowy).

I suppose we are lucky to live in interesting times. I just wish we didn’t have to keep explaining the basics of the long-established captive industry to those in positions of influence who should already understand them.

On the other hand, a growing number of US jurisdictions have seen the light and passed captive enabling legislation. Since I wrote a similar foreword last year Florida, North Carolina, Oregon and Texas have adopted captive legislation.

When I field calls from reporters about a new state joining the list of captive domiciles, I try to explain that passing the legislation is the easy part. The hard part is convincing state legislatures to provide the resources to develop a strong, educated regulatory environment for their state. It often seems counterintuitive, but captive owners prefer knowledgeable and well-trained regulators— regulators who do not think that captives are just some watereddown version of a commercial insurance company, or, heaven forbid, a shadow industry.

The proverbial bottom line and forecast for the US captive insurance industry is clear: captives are here to stay. They’ve shown their staying power in the challenging times of a soft insurance market and they remain remarkably resilient.

Welcome to the world of captives.

Dennis P. Harwick, president

Captive Insurance Companies Association