Small captives continue to be popular but must exercise caution

In light of recent IRS scrutiny and pending case law decisions, the captive insurance industry must self-police and ensure it promotes industry best practices.

This is according to a panel at the CICA 2018 International Conference, “Enterprise Risk Captives - Getting it Right,” featuring speakers Michael Serricchio, managing director of Marsh Captive Solutions; Steven Miller, national director of tax at alliantgroup; Thomas Cyr, partner at KPMG; and Adam Miholic, assistant vice president, Marsh Captive Solutions.

The panel acknowledged that there has been a slowdown in the formation of new captives.

“Generally what we’re seeing is that larger captives and middle market captives are growing, but liquidations are happening,” said Serricchio.

He said he has not seen a slowdown in 831(b) captives, in fact the increased premium threshold from $1.2 to $2.2 million has created a lot of opportunity for companies that would not have previously thought about captives.

“Avrahami cases and some of the literature out there is helping us police the industry and get it right,” he said. “You’ve got to have a company willing to take risk, willing to take loss and willing to put up capital.”

A number of states have also embraced small captives, for example, North Carolina, Tennessee, Utah and Delaware.

However, other jurisdictions have taken a different approach. “Some domiciles don’t want to be viewed as a small captive jurisdictions,” said Miller.

Miller also noted that in his practice he had not seen a drop off in small captives being formed.

Serricchio added that he is starting to see more agency captives emerge.

“With the right fit with premium volume increased - there are tremendous opportunities to have agency captives that qualify as an 831(b) - there may be MGAs (managing general agents) or MGUs (managing general underwriters) considering these options,” he explained.

The panel stressed the important of having a reasonable business plan with a well-thought out feasibility study.

Cyr added that captives - not just small captives - can offer flexibility in coverage that the traditional market is not selling.