Special Section CAPTIVES MOVE TO THE FOREFRONT By Michael J. Moody, MBA, ARM The alternative markets continue to increase their market share within the commercial property and casualty insurance arena. By far the largest growth area is in the captive insurance arena, with both single-parent captives and group captives experiencing significant growth over the past 12 months. In order to provide ample educational opportunities to those interested in captives, a number of domicile-specific conferences have been held over the last year. However, one of the largest gatherings was last year’s 33rd Annual International Conference of the Captive Insurance Companies Association (CICA), attended by more than 400 people. There are a variety of reasons for this impressive growth. Certainly, the quality speakers from an assortment of service sectors and captive owners who provided overviews of the current captive movement, as well as trends to watch in the future were part of the impetus to attend. But even more important is the fact that captives have come of age. They are no longer considered just an alternative to traditional insurance when times are tough but, rather, are viewed as a viable risk transfer mechanism for ever greater numbers of businesses. This makes the current captive movement quite different from prior times, when the surge in growth accompanied hard markets. In fact, the distinction began shortly after the hard market of the mid-1980s. While the general property and casualty insurance market remained soft during the 1990s, captive growth continued. During this time, many insurance buyers came to the realization that captive insurance companies allowed them to control their own destinies. In fact, today over 4,500 captives worldwide are providing long-term risk financing solutions for their parents. Another change in the captive complexion is that, according to most industry followers, the middle market is driving the current interest in captive insurance companies. This interest in captives has been felt in all service sectors as third-party vendors and service providers develop strategic plans to attract captive participants. Pressure on RRGs continues Many of the current middle market participants are utilizing group captives that are being formed as risk retention groups (RRGs). This approach grew out of the passage of the Liability Risk Retention Act of 1981, and amended in 1986. The enabling legislation provides federal control of a traditional state insurance regulated area and allows groups of similar risks to band together to solve their mutual insurance problems. The federal regulation requires that the RRG be licensed in a single state and that that lead state had the regulatory obligation. As a result, the remaining 49 states had no jurisdiction in the RRG’s operations. However, subsequent to the passage of the Act, each state has had its own views on this matter. The individual states have chosen to offer a number of challenges to RRG operations. In general, these challenges come from several different areas such as: • Information Requests - Despite the fact that the RRG is responsible only for the notification of operations, many states have gone further in their information requests. Today, the requests from individual states run the gamut from requests for details of the operations to current financials. • Fees - The Risk Retention Act states that non-domiciliary states can only charge normal state premium taxes, just like any other insurance company that operates in the state. However, many states have now decided that they need additional fees and charges. Some state fees can now amount to over $2,000. • Quasi-licensing issues - Some states have taken the position that the RRG must file its notification information in a specific model that is established by the individual state. In addition to the individual state challenges, the federal government also singled RRGs out for a special review during 2005 when they had the Government Accounting Office (GAO) conduct an in-depth study to determine if the RRG legislation was continuing to meet its objectives. Results of the study will shape the RRG landscape for years to come. Help needed to stay current Annually, CICA provides a venue that attracts captive owners, industries’ leaders, third-party vendors and other interested parties. Last year’s conference touched on a wide variety of important items. Among the items that were reviewed at the 33rd International Conference were topics such as the continuation of the federal Terrorism Risk Insurance Act (TRIA), tax issues, investment strategies and selecting a captive manager. Several speakers provided insight into the emerging issues surrounding the addition of employee benefits to a captive. And one of the highlights of the conference was the presentation of the joint CICA/Vermont Captive Insurance Associations annual fronting study. Scheduled March 8-10 in Orlando, the program for the 34th CICA International Conference is just as impressive. The conference, which is titled “Facing the Challenge: Managing Captives in an Era of Changing and Increased Oversight,” was designed to provide captive owners with up-to-date information on many of the regulatory constraints that captives currently face. Among a few of the topics that will be addressed are current tax issues including the issues raised in IRS Notice 2005-49, as well as “Compliance Benchmarks” that may be required as a result of New York Attorney General Eliot Spitzer’s ongoing investigations. Since a large percentage of new captives formed over the past few years have been health care-related entities, the conference will highlight this via a session titled “Healthcare Captives: Is there Light at the End of the Tunnel?” Among the important issues addressed in this session will be challenges with insuring nonemployed physicians in hospital captives or RRGs, and solutions for managed care and long term care organizations. One of the highlights of the annual event has been the release of information regarding CICA’s Fronting/Risk Sharing survey. This year will be no different, as CICA delivers the results of its 6th annual survey and provides an overview of the state of the fronting marketplace. Conclusion The alternative risk transfer market in general—and captives specifically—continue to provide significant opportunities for middle market brokers. As a result, these brokers have quickly developed strategies and identified partners that can help them attract this important market. Those brokers that have yet to see the opportunity that captives can provide should re-examine their business models and begin to frequent information-packed gatherings such as the CICA conference. Recent and relevant information from industry leaders can provide critical background data with which to ascertain this movement’s direction as well as potential opportunities. The exchange of views by participants and attendees that are fostered in numerous events throughout the conference provides an excellent environment for novice and expert alike and shows the value of industry-specific events such as the CICA conference. Accordingly, it is suggested that middle market agents and brokers consider attending this year’s CICA conference. *
The articles in this special section were written by Michael J. Moody, MBA, ARM, the “Enterprise Risk Management” columnist for Rough Notes magazine. He also is the managing director of Strategic Risk Financing, Inc. (SuRF). SuRF is an independent consulting firm that has been established to advance the practice of enterprise risk management. For more information: |
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