Captives: onwards and upwards


Dennis Harwick and Les Boughner

Captives: onwards and upwards

Les Boughner and Dennis Hardwick outline the state of play facing the industry and how captives are responding to changing regulatory conditions.

Captive insurance companies continue to be a vibrant, growing contributor to the economic community, even in a depressed economic cycle. While the rate of captive growth may have slowed somewhat, domiciles continue to report new formations. For example, Vermont—the largest of the US domiciles in terms of captive numbers—licensed 30 new captives in 2009 and 17 new captives through the first six months of 2010, including its 900th licence issued to a captive insurance company.

Globally, captive domicile expansion continues. Vanuatu recently established itself as a new domicile in the South Pacific and more than 30 states in the United States have enacted captive legislation, including New Jersey, which finalised legislation last month. In Europe, Malta continues to expand as a gateway to the EU, facilitating the ‘passporting’ of financial services, and the sector continues to strengthen globally.

Co-operative association

The Captive Insurance Companies Association (CICA) is a domicileneutral trade association for the sector. Consequently, CICA does not get involved in supporting or opposing domicile legislation, but rather partners with the various domicile associations, such as the European Captive Insurance and Reinsurance Owners Association (ECIROA), the Vermont Captive Insurance Association (VCIA), the Hawaii Captive Insurance Council (HCIC), the Bermuda Captive Owners Association (BCOA) and the Insurance Managers of Cayman (IMAC), in advancing the interests of the captive insurance industry. Furthermore, CICA works with other insurance-related trade associations such as the National Risk Retention Association (NRRA) and the Risk and Insurance Managers Society (RIMS) to represent the whole alternative risk financing industry.

Although CICA is domicile-neutral, it monitors developments likely to impact the global captive industry and facilitates the sharing of information to interested parties, and has evolved to become a forceful advocate for the captive community. Recently, for example, CICA— alongside the NRRA—took steps to oppose the position taken by the State of Nevada in restricting the ability of the Alliance of Non-Profits for Insurance, a risk retention group, to issue automobile liability coverage in the state. CICA has likewise presented the industry’s position to the President’s Working Group on Financial Markets, supporting the continuation of the Terrorism Risk Insurance Act (TRIA) and the support that it extends to insurance companies.

Responding to Solvency II

Solvency II is currently the most significant issue that could potentially have a profound impact on captives internationally. The accord being enacted by the EU is being carefully monitored by CICA, the European Captive Insurance and Reinsurance Owners Association and other captive associations. Responding to developments, CICA and ECIROA recently co-sponsored the European Captive Forum—the forum’s programme focusing upon the implications of Solvency II to the captive industry.

While many view Solvency II as a serious threat, the final financial impact on captives has yet to be established, and some within the industry even see the imminent regulations as an opportunity to legitimise captive insurance companies. Either way, once a framework has been established for Solvency II , captive domiciles outside of the EU will need to determine whether they will seek to implement similar solvency requirements in order to achieve equivalency under Solvency II.

The Bermuda Insurance Monetary Authority (BIMA ), for example, has been monitoring developments closely, and it appears that it will seek equivalency under Solvency II , while the Cayman Islands will likely not take the step, opting for a ‘wait and see’ approach. US domiciles, for their part, may find their own solvency requirements being addressed by the US -based National Association of Insurance Commissioners (NAI C), with several NAIC task forces closely monitoring international solvency developments. The NAIC Solvency Modernization Initiative (SMI) task force in particular is tracking the various NAI C working groups charged with solvency and regulatory concerns in order that its members can stay abreast of developments. Final solvency requirements for Solvency II will undoubtedly influence the recommendations of the SMI task force.

Future prospects

The use of captives for employee benefits, both in the United States and globally, continues to be a very exciting development, with considerable material, financial and risk management ramifications. Until recently, incorporating employee benefits into existing captives was moving at a glacial pace for a variety of reasons. In the US, companies are required to obtain Department of Labor approval for any Employee Retirement Income Security Act (ERISA) benefits before they can be ceded to their captive. The approval can be obtained under a fast-track approval process, provided the request follows well-defined captive structures previously approved. To date, more than 30 approvals that have been granted under this process.

CICA continues to support and actively promote the use of captives for financing employee benefits. CICA’s well-attended seminar in Washington, DC in October was dedicated to the topic, featuring eight captive employee benefit sessions led by industry experts.

In summary, the captive industry is alive and well—even in these tough economic times and despite facing soft insurance market conditions. Companies and groups continue to see the benefits of utilising captive insurance companies, despite the soft market. Just imagine the explosion of captive formations when the market invariably hardens—the time when the formation of captive insurance companies really takes off.

Dennis Harwick is the president of the Captive Insurance Companies Association (CICA). He can be contacted at: Les Boughner is executive vice president and managing director of Willis Management and former chair of CICA. He can be contacted at: les.

CICA, captive, insurance, formations

Captive International