CICA SPECIAL SECTION
Dennis Harwick reflects on the captive market prior to his retirement
The 2017 Captive Insurance Companies Association (CICA) international conference will be held March 12-14 in San Diego. The annual event has become one of the most important and informative captive meetings of the year. This year’s conference will be no less impressive, although it may be somewhat bittersweet for CICA’s president, Dennis Harwick. He will be attending his last conference after serving on the board for 12 years. He has advised the board that he will leave the association on June 30.
Harwick notes that, although CICA still faces many challenges, one of the most important is the growth and maturing of the captive marketplace. Today, he says, “Captives have become pretty mainstream stuff.” As a result, he says that “CICA will need to change its focus; it will need to begin to think and act much more like a conventional insurer.” Captive owners must explore ways to comply with organizations like the National Association of Insurance Commissioners and various regulatory authorities. “Additionally, more attention must be given to IRS regulations, as we are now a more mature industry and will certainly be more visible on the IRS radar screen.”
Speaking of the IRS, a key challenge for the captive industry is finally getting 831(b) captives (also known as micro captives) under control. A recent IRS regulation addresses modifications surrounding micro captives and recent tax abuses in which they have been involved. Although 831(b) captives have existed for over 30 years, it has only been within the last few years that significant abuses started showing up. The IRS has always believed, Harwick says, “that captives as a whole were considered scams.” Again last year, 831(b) captives showed up on the IRS “Dirty Dozen” list. A major reason is that some wealth planning marketers were suggesting that 831(b) captives were an excellent way to pass on wealth, but these entities lacked any valid insurance purpose. This caused closer IRS scrutiny and oversight, and tax scams soon began to show up.
A new IRS regulation (Notice 2016-66) was passed in 2016 to address certain shortcomings of 831(b) captives. Harwick notes that the risk transfer rule was revised to ensure that micro captives would be formed for the appropriate purpose. Original legislation was written to assist small farm mutual insurance companies, and the new rules were written to ensure that this purpose was considered.
The IRS also provided a significant benefit to captive owners. The original law was written with a maximum liability limit of $1.2 million. The limit has been increased to $2.2 million, with periodic increases based on inflation. “This is a major benefit for anyone considering forming a micro captive,” Harwick says. The difference between $1.2 million and $2.2 million is significant, and he believes it may expand the number of legitimate reasons to form a micro captive.
Another major issue for the captive industry, Harwick observes, “in fact for the entire finance industry, will be how the new administration is going to change captive regulation and whether it will apply to all finance-related legislation.” For example, what will happen to legislation like Dodd-Frank? “This is a question that will be answered over time, and it could have a major impact on the industry with far-reaching effects within many industries beyond the captive industry.” Harwick points out that such changes can occur rapidly, so CICA’s advocacy role will become even more important to the membership.
Another major issue is what will happen to the Affordable Care Act under the new administration. “The whole health care issue is up in the air, and no one knows where the ACA is going to settle,” Harwick notes. For most industry observers, the ultimate question is what the health care industry will look like when the new administration’s changes have been implemented. “There are a lot of dollars involved with health care, so it could be messy before it is over,” he comments. From CICA’s standpoint, “Where will captives fit into the solution?”
Assuming that 831(b) captives continue to increase in number, Harwick believes that some of the big winners could be middle market agents and brokers. If the property/casualty market eventually hardens, many captives will be pressed into service. Although numerous big-box captive managers have tried to service micro captives, most have encountered difficulty. This is primarily because they need to have a large number of these captives to make a significant amount of profit, and many managers began to develop a cookie-cutter approach to their service offering. In most cases, however, micro captive owners needed more individually designed services. As captive lawyer Tom Jones is famous for saying: “If you’ve seen one captive, you’ve seen one captive.”
Mid-sized agents and brokers need to look at the captive business differently than many big-box managers do. Middle market agents and brokers should be the ones who introduce their clients and prospects to the captive concept. Captive owners tend to stay involved in captives, so there is little turnover of accounts. This is a major advantage agents and brokers should be considering when looking at captives. The agent’s relationship with a micro captive participant likely will last much longer than a relationship with a conventionally insured client who believes it needs to bid its business every year or two. Additionally, the agent or broker can bring the remaining property and casualty business into the captive owner. Finally, assisting clients and prospects allows the agent or broker to be a partner with the captive owner, rather than just an insurance salesperson.
Harwick notes: “This will be a challenging period for quite some time with all the potential legislative changes that are possible over the next few months.” He also believes, however, that opportunities will emerge. “Captives are well positioned to take advantage of the rapidly changing financial landscape and emerging risks,” he remarks.
On a personal note, I have had the opportunity to watch CICA expand internationally and become an important captive resource. Over the past 12 years, I’ve seen the organization become a leading advocate for all captive owners; and when the need arose for individual domiciles to band together, CICA and its president were usually leading the charge. Dennis, it has been a pleasure to work with you, and I wish you well in your upcoming endeavors. One of my heroes was the late astronaut John Glenn, and I will never forget the phrase you could hear with his liftoff: “Godspeed, John Glenn.” Now I believe it is appropriate to say: “Godspeed, Dennis Harwick.”
Michael J. Moody, MBA, ARM, is the author of the articles in the CICA Special Section.