Captive Insurance Companies Association (CICA) Special Section
CICA—MOVING FORWARD
By Michael J. Moody, MBA, ARM
By any measure, 2007 was an eventful year for the Captive Insurance Companies Association. First, the 2007 annual conference set records for attendance and offered the captive industry a significant number of new, quality educational sessions. Additionally, following the success of its 2006 Fall Seminar, CICA began retooling its fall program and designed the 2007 fall event around a series of case studies.
These case studies were well received and some will be incorporated in the 2008 CICA International Conference next month. Additionally, the CICA board, under the leadership of Karin Landry of Spring Consulting, undertook the task of developing a set of “Best Practice Guidelines.” Landry, along with Mike Lusk and Jay Waters, will present the guidelines at the 2008 conference.
Without question, these initiatives represent an ambitious effort on behalf of CICA and its board. However, 2007—and 2008, for that matter—may be remembered best for the proposed regulations that the IRS published in the September 28, 2007, Federal Register. As CICA President Dennis Harwick notes, everything was going along fine, and then “the unexpected comes along.” Since the publication of the Federal Register, the captive industry has mobilized to derail the proposed regulations.
The IRS attack
The September 28, 2007, Federal Register provided details regarding “IRS Proposed Regulation on Intercompany Insurance Obligations.” It outlined an approach that, according to Harwick, “would have a devastating effect on single parent captives.” For the most part, the current intercompany transaction regulations specifically state that if a member provides insurance to another member in an intercompany transaction, the transaction is taken into account by both members on a separate entity basis.
The proposed regulations call for “single entity treatment” of inter-company insurance transactions. But, as Harwick points out, “captives are insurance companies, and it has long been realized that they need a special accounting system to properly recognize their income.” Over the years, he notes, “reserve accounting has been established for this very purpose.”
In most industry segments, Harwick observes, “you incur the expenses first, then you build your product or provide your service.” As a result, “you can deduct those income-producing expenses first and then wait as the income comes later.” But for insurance operations, he notes, “It’s a complete ‘flip flop,’ since you get paid first and the claims and other expenses are paid years later.” This necessitates a different approach to accounting, Harwick says, “one that provides for reserves on both the expense and the premium side of the ledger to accurately reflect income.”
A little help for your friends
It was clear to CICA from the start that if the proposed legislation became law, it would have a chilling effect not only on single parent captives, but on the industry as a whole. Shortly after the proposed regulations appeared in the Federal Register, the CICA board agreed that CICA would take a leadership role in fighting the proposed regulations on technical grounds by responding to the IRS and on political grounds by collaborating and coordinating a unified response by various captive domiciles, interested industry groups and affected organizations.
Shortly thereafter, CICA and the Vermont Captive Insurance Association (VCIA) announced the formation of the Coalition for Fairness to Captive Insurers (CFCI). CFCI hired several law firms to develop a coordinated response to the proposed consolidated reporting legislation. Interest in CFCI has been widespread and, according to Harwick, “that has turned out amazingly well.” Over the last few months, CFCI has attracted the vast majority of captive domiciles, domicile associations and other affected groups. Harwick notes that the ability to mobilize this much support will be one of the most favorable things to come out of this effort. “It has solidified the captive movement,” Harwick declares.
Before formally responding to the proposed regulations, CFCI conducted a significant amount of research on this matter. A major finding was that the IRS had previously addressed this issue. “In fact,” Harwick points out, “this very same issue had been discussed at length during the mid-1990s.” He adds, however, “The idea was deemed inappropriate due to complexity and not clearly reflective of income.” Obviously, even the IRS’s own staff realized that this was not the appropriate method of income recognition for the captive and abandoned this approach.
Formal responses to the proposed regulations were required to be submitted prior to December 27, 2007. CFCI, working with all the parties, had drafted its response as well as request-ing a public hearing on this matter. CFCI noted that under the proposed regulations, if a significant insurance member insures the risk of another member in an intercompany transac-tion, that transaction would be taken on a single entity basis. As a result, CFCI contends that the proposed change is inappropriate and therefore should be withdrawn. The CFCI response notes six specific reasons for this conclusion and urges the withdrawal of the proposed regulations.
So what happens now? That’s a good question, says Harwick. One of the problems, he notes, is that “a lot of people are waiting for a definitive answer from the IRS.” He goes on to remark that, “it could just as easily go to the ‘proposed regulation graveyard in the sky,’ and nothing really happens.” Harwick is concerned that “if you were forming a single parent captive today, you are probably going to say, ‘Why don’t we wait and just see what happens?’” That is why he hopes to get some conclusive resolution from the IRS on this matter.
On a more positive note
A major accomplishment of last year’s CICA board was the publication of the Best Practice Guide. Harwick says, “It is a very important starting set of documents, but it should be remembered that the Guide will most likely remain a ‘work in progress’ for the foreseeable future.” The Guide is the product of two task forces, one made up of industry experts and the second consisting of domicile regulators. “The Guide is the starting point for creating a roadmap for the captive industry,” Harwick says, adding that he believes the Guide “will be very important to smaller captives as well as new captives.
“For the past several years,” Harwick points out, “there have been discussions about establishing an actual rating system.” He notes, however, “There was significant concern about putting CICA in a rating role.” Rather, CICA decided that the best place to start was with the Guide. “Where this evolves is still uncertain,” Harwick says. In the future, it may move to more of a rating approach, but, Harwick says, “The Guide is the first step.”
To confirm the importance of the Best Practice Guidelines, one only has to look at this title of this year’s annual conference: “Turning Best Practices Into Optimal Results.” Additionally, Harwick notes that the first session after the opening keynote address will review the Guide and provide information about how best to use it. Looking down the road, the Guide may have a longer lasting impact on the captive industry than even the proposed IRS regulations.
From an educational standpoint, Harwick says that CICA is planning several audio/video/Web-based seminars on evolving issues during 2008. He also notes that those who are unable to attend the Fall Seminar in person will be able to listen to an audio feed of each day-long session.
Summing up
All things considered, CICA had an eventful 2007, advancing a number of important initiatives, particularly the Best Practice Guide. And while the proposed federal regulations have caused significant concern within the captive industry, the industry’s ability to mobilize support has been quite impressive. Clearly, all of these current and emerging issues signal that the 2008 CICA annual conference is a can’t-miss event.