Picture: Dan Towle, CICA's president
1 April 2018Accounting & tax analysis

Captive insurers face challenges in change

From US tax reform to post-Avrahami tax case concerns, and new captive structures gaining traction in the marketplace, the captive insurance industry is undergoing significant change.

With this change comes challenges, which was the theme of the Captive Insurance Companies Association 2018 International Conference, ‘The Challenge of Change’.

CICA president Dan Towle suggests that the industry is full of disruption as a result of cyber crime, natural disasters, regulatory changes, automation and new technology—and operating successfully in such a marketplace provides constant challenges.

“We’re focusing on the Challenge of Change because simultaneous change has become a constant that is driving the need for new strategies for business success,” says Towle. “By bringing together some of the most creative and innovative captive leaders in the world, CICA can help our industry find new approaches for using captives to manage risk and improve business results.”

Flying to Scottsdale, Arizona, Captive International caught up with many industry professionals and reported live on the various sessions all tying in with this central theme.

Small captives

In 2017, 831(b) captives came under fire following the outcome of the infamous tax case, Avrahami v Commissioner.

Since then, there are market observers who feel this has emboldened the IRS to go after more small captive structures.

The more recent cases include Reserve Mechanical Crop v Commissioner, Caylor v Commissioner, Wilson v Commissioner and Syzygy Insurance Co v Commissioner.

Chaz Lavelle, attorney at Bingham Greenebaum Doll, suggests that it is possible the IRS will overplay its hand and say that some of these cases are scams no matter what the facts are.

“If you’ve got a good set of facts that could win, it may lead to a positive trend for these cases,” Lavelle says.

A panel, ‘Enterprise Risk Captives—Getting it Right’ mentioned the increased premium threshold from $1.2 to $2.2 million had created a lot of opportunity for companies that would not have previously thought about captives.

And a number of states have been embracing small captives, for example North Carolina, Tennessee, Utah and Delaware.

“Some of the newer domiciles are trying to differentiate themselves—particularly in the US—through utilising the small captive election,” says Anne Marie Towle, captive consulting practice leader at JLT Insurance Management (USA). “Some of them have dedicated their space to the 831(b) captive.”

Citadel Risk, which formed cell captive Citadel Tennessee Captive Insurance Company in 2017, cited the simplicity of filing for 831(b) status under the regulations for protected cell structures in Tennessee.

Group captives

While captive formation growth has slowed in the last few years, a number of group captive programmes have seen their membership increase significantly.

Group captives, particularly within the medical stop loss space, are expected to grow quite rapidly, with 35 to 50+ new programmes formed in the last 10 years, a session ‘Case Study for Wellness & Benefits in a Captive’ showed.

The panel said such programmes can significantly contribute to healthcare cost containment and improve employee health in the US and in other major territories where employers offer employee healthcare programmes.

“We estimate group captive numbers in medical stop loss is closer to 50 nationally. It’s 5 percent of the total stop loss market,” says Tris Felix, director of Cornerstone Risk Solutions. “We feel as though group captive programmes could grow to be 10 percent of the market.”

Group captives were praised in another session by Gary Osborne, president of USA Risk Group, who suggested it as one of the only ways for smaller accounts to get direct access to the reinsurance markets, citing trucking companies and medical groups.

Agency captives

Agency captives continue to be a popular new take on the captive concept, aligning the interests of brokers and insureds.

Vermont introduced agency captive legislation in 2017, and other states such as North Carolina have already adopted them.

“By sharing the risk—having skin in the game—the agent is strongly incentivised to underwrite stringently,” says David Provost, deputy commissioner of the captive insurance division of the Vermont Department of Financial Regulation. “The reception has been very positive.”

Michael Serricchio, managing director of Marsh Captive Solutions said that agency captives that make the 831(b) election may also start to emerge.

“With the right fit with premium volume increased—there are tremendous opportunities to have agency captives that qualify as an 831(b)—there may be managing general agents or managing general underwriters considering these options,” he explained.

Richard Smith, president of the Vermont Captive Insurance Association, also supported the agency captive concept, but in general said that if captives are not part of a broker’s risk management discussion with their clients, they could end up losing their clients to an agent or broker that sees that as an opportunity.

“There are now opportunities for these brokers and agents to participate in a captive with an agency captive—just to make sure that their clients aren’t left behind,” he said.


The very nature of cyber risk is evolving as technology is becoming a more integrated part of all businesses—as such, the captive insurance solutions available are changing too.

Owen Williams, manager of XL Catlin’s captive centre of excellence, says that captives are being used to participate in a range of different exposures that are either relatively new to the clients—such as cyber—or exposures for which the traditional market has not met clients’ expectations, such as non-damage business interruption in a supply chain.

Another session, ‘The Risky Business of Cyber: From Traditional to Terrorism,’ noted that certain high profile breaches are starting to take more unconventional forms, switching focus from theft of financial assets to causing disruption.

Some of the losses in ransomware attacks such as NotPetya were upward of $300 million, says Stephen Viña, senior vice president and senior advisory specialist, Marsh Captive Solutions.

As of December 27, 2016, cyber liability policies were confirmed to be included under the US Terrorism Risk Insurance Act (TRIA) and available for reimbursement from the federal government. According to Viña, this has open up captives with cyber policies to the financial backstop provided by the TRIA programme. However, there are concerns around the wording of the programme with regard to the definition of terrorism and programme triggers.