[Read and watch] Understanding captive insurance: a need for ongoing education

In the second of two articles based on an online panel of experts, the need for more legal clarity, education and innovation in the captive insurance industry is underlined.

“The need for seasoned professionals with the right expertise becomes more pressing.”Anjanette Fowler

The US captive insurance market has undergone significant growth and development over the last decade, positioning itself as a key player in risk management and innovation. With an increasing number of businesses exploring the potential of captives, a form of self-insurance that allows companies to insure their own risks, the landscape has become more dynamic, facing new opportunities and pressing challenges.

In a panel discussion hosted by Captive International a number of experts from various facets of the industry, including actuarial consulting, tax advisory, and risk management, weighed in on the evolving challenges and innovative strides the captive insurance market is experiencing.

Watch the full panel discussion below.

One of the foundational challenges identified by panellist Al Rhodes, president and senior actuary at Sigma Actuarial Consulting Group Inc., is the continued need for education about what captives are and how they can be used effectively. “The education far surpasses what it was a few years ago,” Rhodes said, noting the significant progress made over the last decade. Yet, despite this progress, there remains a substantial gap in understanding among certain stakeholders.

He pointed out that while many have “heard just enough about a captive to know a little”, a comprehensive understanding of the benefits and complexities of captives is still lacking in some areas. The issue is not just educating potential users, but also regulators and other external stakeholders, particularly the Internal Revenue Service (IRS).

The IRS has increasingly scrutinised captives, particularly in cases where companies misuse captives to evade taxes rather than manage legitimate risk. This has led to what Rhodes describes as “a factor that people need to understand” as the IRS continues to intensify its focus on captive insurance. The need for clarity on what is permissible, and ensuring compliance with regulations, is a key challenge facing the industry today.

Michael Corbett, former chief regulator for captive insurance in Tennessee, echoed Rhodes’ concerns. He highlighted the IRS’s ongoing challenges with interpreting and enforcing section 831(b) of the US Tax Code, which allows small captives to pay tax only on their investment income, provided they meet certain criteria.

“The challenges from the IRS have been, to my mind, monumental,” Corbett said, suggesting that the ambiguity around the IRS’s guidelines has caused significant disruption. He argues that the IRS needs to provide clearer rules on how captive insurance should function, particularly in areas such as risk transfer and distribution.

“We thought we knew what the rules were, but the IRS seems to change them once a month,” he said, summarising the frustration many in the industry feel toward the ever-evolving regulatory landscape.

“Innovation has become essential in a risk environment that is constantly changing.” Al Rhodes

The challenge of talent shortage

Another challenge that is reshaping the captive insurance market is the shortage of talent. Anjanette Fowler, managing director at PNC Institutional Asset Management, noted that in her 30-year career, she has “never seen this persistent demand” for talent in the captive insurance industry. As the industry grows, driven by a rising interest in self-insurance and increasing regulatory complexity, the need for seasoned professionals with the right expertise becomes more pressing.

Fowler explained that the talent shortage stems from a combination of factors, including retirement of experienced professionals and the difficulty in attracting younger talent to the field. “Many young people don’t understand insurance, other than they have to pay car insurance,” she said. Captive insurance, which involves highly specialised knowledge in areas such as actuarial science, regulatory compliance, and tax law, is especially hard hit.

Fowler emphasised the need for industry organisations, such as the Self-Insurance Institute of America and the Risk and Insurance Management Society, to take a more proactive role in educating the next generation of professionals about the opportunities available in this sector.

Mikhail Raybshteyn, a tax partner at EY and co-leader of EY’s Americas Captive Insurance Services, agreed with Fowler, adding that the talent shortage is exacerbated by the fact that relatively few universities offer specialised programmes in risk management and insurance. “We don’t have enough schools that provide risk management or similar education,” he said. Raybshteyn noted that while some institutions are beginning to offer programmes, it will take years for them to establish the necessary expertise to meet the industry’s growing demand.

In the meantime, the industry is heavily reliant on a relatively small pool of professionals, leading to a dynamic where the same individuals move between firms without enough fresh talent entering the field.

“Some domiciles are more forward-thinking than others.” Michael Corbett

Regulatory and legislative challenges

In addition to talent and IRS scrutiny, the captive insurance market faces broader regulatory and legislative challenges. Corbett and Raybshteyn both discussed the difficulty of keeping captive insurance laws and regulations aligned with the rapidly evolving risk landscape.

“Some of the laws are somewhat archaic,” Raybshteyn said, pointing to the slow pace of regulatory reform in some states. He argued that the laws governing captives are not always flexible enough to allow companies to adapt to new risks, particularly those that have emerged only recently, such as cyber risks and COVID-19 pandemic-related disruptions.

Corbett added that while there are some efforts to update regulatory frameworks, the industry still faces an uphill battle when it comes to ensuring that captive laws are sufficiently nimble to respond to modern risk management needs. He noted that some domiciles are more forward-thinking than others, but many are still grappling with outdated regulations that don’t adequately address the types of risks that captives are increasingly being used to manage.

"The laws governing captives are not always flexible enough.” Mikhail Raybshteyn

Innovation in the captive market

Despite these challenges, innovation is reshaping the captive insurance market. Rhodes and Raybshteyn both emphasised that captives are increasingly being used to cover unique and emerging risks that traditional insurers are either unable or unwilling to cover.

From parametric insurance—where payouts are triggered by specific events such as hurricanes or earthquakes—to the use of blockchain for claims processing and smart contracts, the industry is evolving rapidly.

“Captives are now more innovative,” Rhodes said, noting that innovation has become essential in a risk environment that is constantly changing. He pointed to the trucking industry as an example, where telematics and advanced monitoring systems are enabling companies to better manage risk and, by extension, structure more effective captive insurance programmes.

Corbett highlighted cyber risk as one of the most pressing areas where innovation is taking place. Recalling a conversation with JP Morgan Chase’s chief executive Jamie Dimon, he explained that banks and other financial institutions are being targeted by billions of cyber attacks each day. To address this growing risk, Corbett’s organisation, Pinnacle Financial Partners, has joined a first-of-its-kind cyber-only group captive, where companies pool their cyber risks in a way that allows them to better share and mitigate potential losses.

“We’ll be in a much better risk distribution curve than we’ve been in before,” Corbett said, citing this as a prime example of how captives can help organisations manage complex, high-stakes risks more effectively than traditional insurers.

As the captive insurance market continues to grow and mature, it faces significant challenges, from regulatory uncertainty and talent shortages to the evolving nature of risk itself. Yet, at the same time, the industry is proving itself to be a hub of innovation, offering creative solutions to risks that are not adequately addressed by traditional insurance markets. By continuing to educate stakeholders, adapt to regulatory changes, and invest in new talent, the captive insurance market is well-positioned to meet these challenges head-on and play a central role in the future of risk management.

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