Most literature on the captives sector overemphasises the role of tax-efficient 831(b) captives, but this represents only a small slice of what a captive insurance programme can do, according to Matthew Queen, general counsel at Venture Captive Management.
The theme for the 2019 Captive Insurance Companies Association (CICA) conference is “Shaping the Future”. One of the key considerations is developing the next generation of captive insurance talent. Has this issue been an issue for Venture Captive Management?
Nothing lasts forever—even captive insurance managers. Like every other manager, Venture Captive Management (VCM) is cultivating the next generation of talent. That said, there is more to talent development than simply training the next captive manager.
Firms need to memorialise best practices to develop measurable, repeatable systems that can be improved upon over time. Talent is only the first component.
What has VCM done to shape the future?
Our firm is like any other. We all attend continuing education, work with mentors, and generally try to stay abreast of the dynamics of the captive insurance market. The future of insurance will likely require professionals who understand the basics of insurtech, who are conversational in multiple fields—as in learning to speak like an actuary, an accountant, and a programmer—and who can use captives in innovative ways.
Where do you see the captives industry heading? Have you noticed any talent shortages?
We have noticed a shortage of people who really understand what captives are. Growth can be great but a large chunk of the industry’s growth for the better part of the 21st century was due to the 831(b) market. Consequently, most of the modern scholarship surrounding captives focuses on a slice of the market.
“Firms need to memorialise best practices to develop measurable, repeatable systems that can be improved upon over time.”
This attracts a lot of professionals with a distorted view of the industry. Captives were never designed to be tax dodges. Modern captive insurance is more than just an enterprise risk policy in an offshore protected cell company.
Do you see any growth in the 831(b) area?
Absolutely, and we’re developing new 831(b) programmes all the time. But that’s just it—we’re developing programmes. There is an art to developing a new insurance company and there are a lot of transcendent skills that can be applied from one situation to another.
What have you done to prepare future-ready solutions for the captive market?
In April I’m publishing Modern Captive Insurance: Formation, Operation, and Exit Strategies. My treatise differs from most books on captives in that it focuses on what insurance is and how our industry creates new insurance companies.
We’re an inherently entrepreneurial wing of the risk financing industry and that’s frequently lost on practitioners. It’s not about solving problems—it’s about starting profitable programmes. This element is the future of captive insurance. If you’re not profitable to the client then you’re not likely to keep the captive programme.
Does your book contain anything new that isn’t covered in other captive insurance texts?
We developed the book with an eye towards memorialising best practices for sophisticated captive insurance managers. This required taking on some thorny issues such as state and local tax schemes, how to develop risk retention group programmes and sidestep state regulations, what the new tax regime means for offshore captives, and how to devise exit strategies for a captive.
What challenges do you see for the captive insurance industry?
Get ready to ask the big questions all over again. One of the key topics of the book discusses what constitutes insurance. Insurance is much more than a contract. It’s more of an emergent phenomenon that occurs when risk shifting and distribution are in place. As the economy continues to change, we should expect our risk financing needs to change.
One area that the Internal Revenue Service (IRS) has already identified is whether insuring against fluctuations in currencies can be an insurable interest. I think the 2015 RVI Guaranty v Commissioner case laid the groundwork for insurability of that interest, but the IRS released guidance that it does not consider it to be insurable. That’s just one future battleground.
The whole world of blockchain raises issues such as issuing insurance via tokens. What is the value of an insurance coin on a new blockchain? Can we calculate the value of a quantum of risk? These issues are interesting and half way to sci-fi, but likely to become real problems in the relatively near future.
Is there anything that CICA can do to prepare for the future?
Education is key, but education is not just for captive insurance managers. Brokers and agents need to be able to better identify situations that are good fits for captive solutions.
Many producers think that captives will end their commissions. That’s not true. Bad brokers lose clients. Captives have nothing to do with that and if the broker’s competitors are bringing the innovation then the broker should expect to lose the business whether or not a captive is in place.
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