Strong progress despite the headwinds
I had the honour of moderating a panel at April’s 2015 Risk and Insurance Managers Society (RIMS) Annual Conference on the topic
of “The Future Sustainability of Captives in a Regulatory World”.
Although the panellists and I were able to generate a substantial list of regulatory burdens that have been imposed in recent years on the captive industry, our conclusion was simple: even in a regulatory world, captive insurance companies will be an important and viable component of risk management.
The panellists included a prominent international tax lawyer, a well-known Washington DC-based lawyer specialising in regulatory issues and a corporate risk manager for a multinational corporation. Although there was plenty of discussion about US specific issues, there was an
equal discussion about the issues that captives face throughout the world, including specific references to the European Union, the Paris-based organisation for Economic Cooperation and Development (OECD) and the International Association of Insurance Supervisors
(IAIS) headquartered in Basel, Switzerland.
The long discussion and implementation of the EU’s Solvency II proposal has been developing for many years and will become a reality in the coming year or so. The IAIS has been seeking more uniform, or as they call it, “globally consistent” insurance supervision for over 20 years. In 2013, the OECD published its Base Erosion and Profit Shifting Report (BEPS) that highlighted captive insurance companies as an area of concern.
"THE IAIS INCORPORATED THE SUGGESTIONS MADE BY ECIROA AND THE PROPOSED PAPER EMERGED IN A FORM THAT IS LARGELY ACCEPTABLE TO THE CAPTIVE INSURANCE INDUSTRY."
Since then, various captive trade organisations such as the Captive Insurance Companies Association (CICA) and the European Captive Insurance and Reinsurance Owners’ Association (ECIROA) have attempted to influence and educate the regulatory bodies about the impact of their proposed regulations.
Of particular concern is the tendency to subject captive insurance companies to the rigours imposed on commercial insurance companies, when the consumer protection issues for captives are dramatically less relevant than for commercial insurance companies.
At ECIROA’s urging, Solvency II has addressed the difference between captives and commercial insurance companies through the principle of “proportionality”. Similarly, ECIROA worked with the IAIS recently as the IAIS was developing an “Application Paper on the Regulation and Supervision of Captive Insurers”. As a result, the IAIS incorporated the suggestions made by ECIROA and the proposed paper emerged in a form that is largely acceptable to the captive insurance industry.
ECIROA and CICA have both attempted to work with the OECD on its BEPS Report (and the various action plans that came out of that report). Unfortunately, the OECD has been either uninterested or unresponsive and has ignored repeated offers from ECIROA and CICA to work with the OECD to clarify how captives operate. Since transfer pricing appears to be one of the major concerns of the OECD, CICA has developed a publication called “Addressing the 2013 OECD Action Plan on Base Erosion and Profit Shifting: Guidance for Captive Owners and Managers”. It is available at the CICA website www.CICAworld.com.
The bad news is that there seems to be no end in sight for the increasing regulatory complexity surrounding the captive industry. It is easy to spend so much time worrying about the regulatory challenges that we overlook the continued advantages, both strategic and financial, of creating and utilising captive insurance companies.
The good news is that even with these complications, captives continue to grow and prosper.
Welcome to the world of captives.
Dennis Harwick is president of the CICA. He can be contacted at dharwick@CICAworld.com information visit: www.CICAworld.com