Captives: widely misunderstood
Captives do not trap cash for their owners, according to a panel titled Debunking Common Captive Myths, speaking at the Cayman Captive Forum.
Data show in 2018 Marsh-managed captives had $108 billion in capital and surplus, and loaned $67 billion back to parent companies, dispelling the notion that captives trap capital.
“But even if they did, trapping you cash is still better than handing it over to the commercial writers,” quipped Julie Robertson, partner at Honigman.
In fact, Robertson said, by taking risk off captive owners' balance sheets, captives actually give owners better access their own capital.
It was just one of a long list of myths the panel busted.
There is still a common misconception that captives are only launched in hard markets, the panel noted. In fact, Marsh data show a steady trend of increasing captive launches, that only started to tail off in the last few years when captive launches have slowed. This is despite a soft market that has lasted many years.
Robertson said this misconception probably has its roots in the 1980s, when the market had hardened very suddenly, coinciding with an 18 percent spike in captive launches. But any link has now disappeared, she said.
Robertson warned that many captive owners have never seen a hard market. Brokers and other service providers have a duty to prepare them for what is coming, she said, because the experience of being a captive owner in recent years will be quite unlike what they will experience in coming years.
Ellen Charnley, president of Marsh Captive Solutions, insisted all industries will benefit from thinking about captives, debunking the myth that they are relevant only for a few select industries. “I have yet to find an industry that cant find value in a captive,” she said. She highlighted Marsh data showing a weak correlation between the amount of premiums paid by an industry and the number of captives in that industry. Financial services and healthcare were the top two industries for numbers of captives, but healthcare was further down the list in terms of premiums.
Similarly, the view that captives are primarily of interest to larger companies was also dispelled. Marsh data show the largest number of captives have premiums of less than $1.2 million. The biggest area for captive growth going forward will be in the middle market sector, added Charnley.
Captives are also more diverse in terms of their coverage than many people realise, the panel argued, insuring an extremely broad range of risks, including coverage as exotic as terrorism insurance, which captives can access direct from the Fed, courtesy of the Terrorism Risk Insurance Program (TRIA), which looks set to be extended. “I strongly recommend you use your captive to access that,” said Charnley. “It is the best form of free reinsurance out there.”
Marsh data show 15 percent of captives write cyber coverage, and 5 percent write medical stop loss. “These numbers will grow in coming years,” said Charnley.
Robertson noted that while captives may be exempt from corporate income tax, they pay a host of other taxes, including Federal premium taxes, state premium and procurement taxes and others. This dispelled the notion that captives are a tax dodge. In 2018, Marsh-managed captives with premiums of $58 billion paid taxes of $2.18 billion, noted Charnley.
Ruth Goodell, senior vice president at Trinity Health, said her board felt more comfortable with having a captive because it did pay tax. “There was some concern about the optics of having an offshore captive,” she said. “We want to pay tax, we want to be good corporate citizens. We are not hiding our money.”
Robertson said the impact captives have on human capital is something that is not spoken about enough. “Innovative captives are doing a lot for human capital through things like employee wellness programmes and insuring against workplace violence,” she said.
