A Changing Captive Landscape

4,936

per Captive Insurance Company Directory

Each 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.

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.

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.

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.

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.

"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.

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.

Its 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.

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.

A broad-brush of three topics (business alignment, corporate governance, and regulatory compliance), the Captive Insurance Companies Association (CICA) would later follow up with more prescriptive guidelines for captive service providers.

Per Swiss Re, but there's no indication how that figure was determined.

Many feared FIO was supposed to take over regulation from the National Association of Insurance Commissioners (NAIC). It didn't, though, and has remained mainly an information-gathering office.

The number of new captives in the United States is primarily from mini-captives (831(b)s).

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.

6,125

per Business Insurance

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.

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

In 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.

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.

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.

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.

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.

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 (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."

6,618

Per Captive Review, the count includes 616 captives formed in 2016, of which 478 (78 percent) are in US domiciles. Most of the new US captives were small 831(b)s. The count still does not include cells. Business Insurance showed 6,700 at the end of 2016, which shows the kind of disparity that will always exist in these types of statistics.

Microsoft gives in without appeal to a demand for premium taxes by Washington State on premium directly paid to its Arizona captive on its Washington risks. Most had thought that if rules laid down in the Todd Shipyards case were followed, regulators would not prevail in such demands for premium taxes. Captive managers are very concerned about whether the Washington regulatory initiative would spread to other states that don't have self-procurement tax statutes.

6,337

per Business Insurance. This number excludes cells and series.

Although it slowed down economic activity, it encouraged captive formation and an increased interest in expanding existing captives to cover additional risks.

6,027

per Business Insurance. 

6,191—as with prior counts, this excludes cells and series—

per Business Insurance.