A Changing Captive Landscape (2006–Today)


 Color Legend
  significant to captives
  major external event
tax/regulatory matters
This period is characterized by the rise of micro-captives, cell structures, and pooling. Taxpayers continue to gain the upper hand in cases in the United States and in Europe. However, regulatory pressures such as Solvency II and the NAIC's risk-based measures take center stage, resulting in higher costs for captive owners. During this period, the number of captives increased to 6,939 in 2015.

This section of our captive timeline was last updated on January 30, 2017, with suggestions from our readers (see the Acknowledgments here). If you would like to submit suggestions for improvements, please send them using the Captive.com Contact Us form.

2006

Number of Captives
Upward Graph
4,936
per Captive Insurance Company Directory
Hugh Rosenbaum is awarded CICA’s first Distinguished Service award
CICA logoEach year thereafter another individual received the award, a practice that was imitated by other organizations, and led to a plethora of such awards. Some, like Mike Lusk, won them from several different awarding groups.
IAIS Position Papers on Captives
In October 2006, the International Association of Insurance Supervisors (IAIS) brought out an Issues Paper on Regulation and Supervision of Captive Insurance Companies. It was directed toward insurance supervisors. Alan Fleming and Diane Colton, then regulators in Guernsey, influenced key sections of this document. In 2015, IAIS produced a further guidance paper, Regulation & Supervision of Captive Insurers. It didn't seem to matter much to captives, though.

2007

Number of Captives
Upward Graph
5,120
per Business Insurance
XXX Captives
Triple X "captives" used by life companies are not really captives, but are licensed as captives. Heavily criticized by some regulators (e.g., New York) and some journalists (the New York Times, for instance), these were developed in response to overregulation of life reserves.
Cell Captive Estimate
CellsFirst estimate of the number of cells to be made indicates 1,700. This is a very low number that only counted those considered micro-captives. As we learned later, there are many more cells that actually numbered in the thousands.
CRADD Appears
Another captive directory created, this one by Pageant Media. It didn't last in hard copy, is only available electronically, and is considered incomplete by many.
IRS Withdraws Regulations Threatening Captives
Tom Jones-2 Bruce Wright 3

The regulations would have eliminated loss reserve deductions and were a threat to most single-owner captives for domestic and electing offshore captives. Industry effort spearheaded by a CICA/VCIA coalition, with technical support from Tom Jones and Bruce Wright, succeeded in neutralizing this initiative (a good omen for future bad regulation proposed by the IRS).

2008

IRS Rev. Ruling 2008–15
The "cascading principle" for assessing Federal Excise Tax (FET), it would have tried to follow and apply a 1 percent FET to retrocessional reinsurance all the way to the last reinsurer. Considered unworkable and unenforceable, it lasted for 7 years. Then the IRS appeared to abandon it after losing the Validus case.
Reciprocal Risk Retention Groups (RRGs)
Used for nonprofits, notably medmal captives, they offer advantages over classic RRGs, plus offshore reinsurer models. Reciprocals began to be used by more medmal captives owned by nonprofit hospital systems.
Marsh Captive Benchmarking Report
The first annual edition reports on 800-plus captives (1,000-plus by 2015). Marsh, the largest captive management company worldwide, managed about 25 percent of captives, most of the very large ones. The Report's analysis and conclusions are therefore indicative.
Clive Thursby Predicts Regulation
"Risk-based regulation of capital adequacy is a myth," he said. Working for A.M. Best at the time, he was in a good position to know. Soon thereafter, Solvency II came on the scene, with a whole lot more risk-based regulation than even Thursby could have imagined.
Subprime Crisis
The crisis sparked turmoil in all major financial markets, lasting several years. Insurance companies, though, were relatively unscathed. For a few years they gloated that they were more secure than major banks.
AIG Bailout
By American International GroupSVG version by JBarta - http://www.aig.com, Public Domain, https://commons.wikimedia.org/w/index.php?curid=24671149Its financial guarantee business almost bankrupted the whole company. Once the fronting company of choice, AIG's reputation dipped, even though its insurance operations remained solid.
IAIS Guidance Paper on Captives
The International Association of Insurance Supervisors (IAIS) followed up on its 2006 principles. The IAIS Guidance Paper on the Regulation and Supervision of Captive Insurers should be required reading for all supervisors in captive domiciles.
CICA Publishes Captive Best Practices Guidelines
A broad-brush of three topics (business alignment, corporate governance, and regulatory compliance), CICA would later follow up with more prescriptive guidelines for captive service providers.

2009

Number of Captives
Upward Graph
5,525
per Business Insurance
Reinsuring Pensions (2009–13)
The first non-US pensions reinsured to a captive; Coca-Cola does it for the United Kingdom, Ireland, Germany, and Canada. Could have been a door-opener for many others, but the practice was slow to catch on.
International Financial Reporting Standards (IFRS) Takes Hold Outside United States
The accounting standards gain support. Differences with the Financial Accounting Standards Board (FASB) are a cause for consternation among captive owners, as regulatory compliance becomes more and more onerous for captive owners, increasing costs.
Bermuda's Special Purpose Insurers (SPIs) 
Bermuda created and started licensing SPIs as Class 3. By 2015, there were 75–80 of them. Not captives at all, they are short in duration and participate as sidecars or stand-alone property cat reinsurers. Also, they are much more lightly regulated than captives and typically owned by hedge funds.

2010

Captive Premiums Reach $60 Billion 
Per Swiss Re, but there's no indication how that figure was determined.
Federal Insurance Office (FIO) Created 
Many feared FIO was supposed to take over regulation from the NAIC. It didn't, though, and has remained mainly an information-gathering office.
Captives Increase Despite Soft Market (2010–)
Increasing GraphThe number of new captives in the United States are primarily from mini-captives (831(b)s).
Healthcare Reform
The Patient Protection and Affordable Care Act (PPACA), shortened to "Affordable Care Act," began to have effects on healthcare captives as medical groups consolidated and gobbled up independent physicians. Healthcare captives grew substantially.

2011

Number of Captives
Upward Graph
5,745
per Business Insurance
Dodd-Frank Act 
On the section on premium taxes and who should pay them, there was a great deal of discussion about whether captives were affected or not; turned out not to be seriously affected. But, concern about self-procurement premium taxes began to mount.

2012

Number of Captives
Upward Graph
6,125
per Business Insurance
Post-Retirement Benefits Reinsured to Captives 

Coca-Cola sought approval for reinsuring US post-retirement benefits into its US captive. Finally cleared in 2016, it didn't spur a lot of other captive owners to try the same thing, though.

RIMS Conference 
Only 7 domiciles exhibited, down from a dozen or more. The reason appeared to be conference fatigue and the high cost of exhibiting.

2013

Number of Captives
Upward Graph
6,560
per Business Insurance
New York Times Attacks Captives 
Captives attacked as a "shadow industry" by New York's Insurance Commissioner, then the Times. The main thrust was against life insurance XXX "captives," but perception was of all captives. Industry sources reacted swiftly to neutralize, but it was too late.
NAIC Accreditation Standards 
The National Association of Insurance Commissioners (NAIC) started accreditation standards for multistate reinsurer initiative. Originally intended for life insurance-owned "captives," the danger of captives getting caught up in NAIC restrictive regulation becomes real. The initiative was dampened following objections from captive-friendly state regulators. Many predict it will reemerge.
Non-Admitted and Reinsurance Reform Act 
Part of Dodd-Frank for captives, it was mainly about premium taxes. Attention to self-procurement tax, which many had been ignoring, caused confusion and several captives to redomicile to state of home office.

2014

Favorable Tax Cases 
Gavel on DeskIn Rent-A-Center, Inc. & Affiliated Subsidiaries v. Commissioner, 142 T.C. 1 (2014), and Securitas Holdings, Inc. & Subsidiaries v. Commissioner, T.C. Memo. 2014–225 (2014), the uncorrelated risk entities argument was finally upheld. Ratio of premium to capital and surplus considered irrelevant to captives, and parental guarantees acceptable if not required by fronter.
FATCA Requirements Begin 
In the Foreign Account Tax Compliance Act (FATCA), the US Treasury continued to attempt to collect information on foreign financial activities. The result was more paperwork for offshore captives and higher fees to managers. Even non-US captive owners of non-US captives must report US risk premiums. This was "last straw" for some captives that redomesticated to avoid it even though 953(d) electing offshore captives could avoid most of FATCA.
Captive Investment Portfolio Indices Launched
Launched by London and Capital, the portfolio indices specialized in investment management for offshore captives. Three indices, from low to higher risks, allowed captive owners to compare performance every quarter. This was another stone in the pile of developing captive standards.
NY State Tries To Tax Captives 
Bruce Wright 3 Rolled back to status quo ante by industry efforts and led by Bruce Wright, the initiative would have required the income of a captive of a corporate group located anywhere that was doing business in New York (even if headquartered in another state), to be included in calculating the income for New York State income tax purposes if the premium income was exceeded by the investment income.

2015

Number of Captives
Upward Graph
6,939
per Business Insurance
Terrorism Backstop Renewed 
By Pauljoffe at English Wikipedia, CC BY-SA 3.0, https://commons.wikimedia.org/w/index.php?curid=4661480Terrorism Risk Insurance Program Reauthorization Act (TRIPRA) passed. Captives could access it, since they were considered licensed insurance companies. When originally enacted as TRIA, the law was touted as a reason to form or own a captive. Few captives actually did, though. Marsh reported only 23 percent of its 375 US captives did. In the United Kingdom, Pool Re provided a similar backstop, with similar low participation by captives.
Study of Examination Costs Revealed High Cost 
Some Risk Retention groups, not the largest ones, paid up to $350,000. Average costs revealed in this study for all captives were about $25,000. Some states no longer require them for single-owner captives.
Attack on BEPS 
Organization for Economic Cooperation and Development (OECD) included captives in attack on basis erosion and profit shifting (BEPS), also known as tax avoidance. Overly clever schemes for shifting massive profits from royalties and payment for intellectual property rights to tax-free places, such as Luxembourg and Bermuda, started with international pronouncements and then hit the headlines. Big names like Starbucks and Google were implicated. Captive spokesmen reacted vociferously, but it didn't help.
Micro-Captives (831(b)s) Rules Changed 
Maximum increased from $1.2 million to $2.2 million, but acceptable ownership definition reduced interest in forming them. A lower number of micro-captives formed in 2015 in anticipation.
Micro-Captives (831(b)s) Included in IRS "Dirty Dozen" List
Captives, specifically micro-captives, were included in the Internal Revenue Service (IRS) "Dirty Dozen" scams to watch out for. Tax shelters were always on the list, and this year abusive 831(b) captives were included as scam tax shelters. The IRS repeated the warning in its 2016 list. The IRS has always had it in for captives in general, but this listing of 831(b) captives specifically showed how tax-planning abuse of captive insurance does not go unnoticed for long. Worse than inclusion on this "Dirty Dozen" list were listed transactions. In 2002, agent-owned captives (or producer-owned reinsurance companies, nicknamed PORCs) were included as listed transactions but removed again in 2004.
Delaware Captive Count Up by 750 
DelawareThis was due to a change in statutes putting business units of series limited liability companies (LLCs) on the same footing as captives, further muddying the captive statistical waters since some analysts rejected the notion of including cells in counts of the number of captives.

2016

Internal Revenue Service (IRS) Notice 2016–66
Took aim at micro-captives (831(b) captives) as "transactions of interest," requiring disclosure by owners, managers, and material advisors within 90 days. Seen by many as an attempt to snuff out abusive use of micro-captives.
Solvency II Implemented 
It affected captives domiciled inside the European Union. Europe's biggest domicile, Guernsey, is not inside the European Union, but fronting was affected for reinsuring EU risks to captives located outside the European Union.
US healthcare reform
group of doctors "US healthcare reform (also called "Obamacare" by many) is stimulating a massive health provider consolidation trend which means fewer but larger hospital-owned captives. In particular, this affects Cayman as the largest domicile for healthcare captives."