Fewer captives are being formed but they are more sophisticated and being created for the right reasons. Add to this a greater emphasis on risk management and talent and the industry looks in good health for the long term, says Daniel Towle of the Captive Insurance Companies Association.
Momentum within the captive insurance industry is shifting. For the second straight year we saw an overall reduction in the number of worldwide captive insurance companies—the first time we have had two consecutive years of negative growth. Several factors influenced this reduction.
First, we have been in a prolonged soft market and that trend continued in 2018. Further, the reduction in the US corporate tax rate has lowered any potential tax benefit a company might receive.
Added to that, the results of recent Tax Court cases have provided more clarity in the small captives space. This has caused a slowdown in the formation of small captives, and in some cases caused their closure.
However, lower numbers aren’t necessarily a negative if the net gain is that more captives are being formed for the right reasons. When captives are formed for non-risk management purposes, that is a negative for the industry and is the reason why the captive insurance industry has shown up on the Internal Revenue Service’s (IRS) ‘dirty dozen’ list.
This has hurt the reputation of our industry and does not reflect the vast majority of captive insurance companies that strive to form and operate following best practices. The Captive Insurance Companies Association (CICA) has been a long-time advocate of industry best practices and is well known for our mantra for captives: “do them right or do not do them at all”.
We have been hearing recent reports of markets firming up in certain lines of coverage, which is perhaps a sign this long soft market is beginning to change.
A hardening market means that captives are used better, and an increase in formations typically occurs. It also puts the spotlight on the benefits of captive insurance companies to help businesses handle the fluctuations in pricing that would otherwise occur in the traditional market.
The focus on the formation of quality captive insurance companies, along with the firming of the market, are good signs for the captives industry.
A sharper focus on top issues
As CICA president I continue to be impressed and invigorated by our membership and our volunteer leaders each year. Their willingness to fine-tune our focus to directly address the industry’s top issues enables CICA to provide valuable guidance and programmes.
Our international conference in March was a huge success with a new second-best attendance in our history. It brought together top thought leaders from our global market and an infusion of young professionals and students that created a new energy.
One of the best parts of being a domicile-neutral trade association is that we can bring together our members, regulators, and domicile association partners to address these challenges and opportunities. Our membership reflects the very best of the industry and our annual conference brings together arguably more thought leaders and intellectual capital than any other captive insurance event during the year.
Promoting best practice and overcoming reputational risks
What is often overlooked in a flurry of news headlines about recent tax cases and the IRS dirty dozen list is the many years of developing best practices that have helped businesses address risk management concerns through captive insurance programmes.
CICA constantly advocates for best practices, represents high integrity and the best interests of the overall captive insurance industry. The organisation has a wealth of knowledge among our members, many of whom are leading captive owners and organisations that provide a wide array of captive management, legal and actuarial services with the collective industry knowledge to create these best practices.
CICA’s newest guidance document, Commercial Insurance and Captive Insurance Industry: Commonly Accepted Practices, released earlier this year has been very positively received. The document provides a review of the structure and use of risk pools, addresses some of the common misperceptions, and provides guidance on commonly accepted insurance practices.
We hope other parties, including the IRS and the Tax Court, will consider what we have published as credible background information when reviewing risk pools in future audits and court proceedings.
Risk pools are an important element in commercial and captive insurance, but their use is often misunderstood. As a result, high-profile cases such as Reserve Mechanical v Commissioner paint activities such as risk pooling in a negative light that spills on to the commercial and captive insurance industries. We feel it is important for a domicile-neutral organisation such as the CICA to help explain the commonly accepted practices for creating and operating a risk pool.
Shaping the captives industry of the future
Attracting a robust talent pool and providing the career development resources to help young professionals grow their captive insurance careers continues to be a vital issue. CICA actively promotes the dynamic nature of the captives industry and the challenging and interesting careers it offers.
We are offering more ways for young professionals and students to get involved and providing more career development resources to help them grow their careers.
Reaching out to colleges and universities is important to creating awareness. I spoke at Temple University earlier this year and was very impressed with the risk management and actuarial science students there. They were interested and very engaged in learning about captive insurance.
At this year’s CICA conference we gave out the awards for CICA’s college essay contest, titled Next Generation Captive Insurance Solutions for New Risk Challenges. As great as it was to engage students, it was wonderful to see the interest from conference attendees. The educational session featuring presentations by the three finalist teams was our highest rated session at the 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. To help address this, we are giving young professionals a say in developing the programmes they need to prepare them to become the captive insurance industry’s next leaders.
This year we launched our NEXTGen Task Force which is bringing the voices of young and new professionals to the planning table. Their recommendations will help CICA expand its professional development and networking programmes which include a college student essay contest; a mentorship programme; a professional development track at the CICA conference; and partnerships with academic and credentialling organisations to help support students and seasoned professionals meet their education goals.
CICA is making a serious commitment to engaging young professionals in the captives industry, and we welcome individuals and associations to join the effort. We all need to play a role in promoting the captives sector to the next generation.
The industry is shifting. CICA will continue to promote industry best practices, advocate for the next generation of captive professionals and bring together the industry’s best at our annual conference.
Be sure to make plans to join us at our 2020 annual conference, March 8 to 10, at the Westin Mission Hills in Rancho Mirage, California.
Daniel Towle is the president of the Captive Insurance Companies Association. Visit www.cicaworld.com/
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