CICA Special Section

CICA: Helping maximize captives' value

By Michael J. Moody, MBA, ARM

History will show that 2009 was a challenging year for most businesses. While some industry sectors fared better than others, all of them felt the pain of a severe, worldwide recession. From auto manufacturers and dealers to service industry employers, all had to scramble to find ways to continue despite the souring economic conditions. In addition, the managers of many industry associations were challenged to create innovative ways to retain membership while continuing to provide a high level of educational offerings.

The Captive Insurance Companies Association (CICA) was no exception. As CICA President Dennis Harwick points out, it was one of those years where “we just had to weather the storm.” In fact, “weathering the storm” was the theme of CICA’s 2009 annual conference. Like many organizations, Harwick says, at CICA, “We just tried to make the best of a bad situation with regard to the financial services industry meltdown.”

While CICA held its own with membership numbers and attendance at its educational events, Harwick says, “It was the service providers area that proved to be more challenging.” Despite these challenges, he comments, “CICA has been able to make all of its goals for service provider involvement.” What’s more, “We have been fortunate to have all of the sponsorship and exhibitor spots taken for the 2010 annual conference.”

2010 conference insights

The association’s annual conference is the flagship of CICA’s educational efforts. “The timing of the annual event is always interesting,” Harwick notes. For example, the 2009 conference was held just as people were beginning to realize how bad the overall mess really was in the financial services industry. In contrast, the 2010 conference may take place as the economy begins to improve.

“Caution is the watchword for 2010, as our economy continues to improve,” Hardwick asserts. “People in every industry want to make certain they have the most current information before moving forward. The CICA conference is the place to get the most recent and relevant information regarding the captive industry.”

The 2010 conference will offer a variety of sessions for members at all levels of experience. Harwick notes that the sessions will cover a wide range of topics that will be of interest to captive owners and service providers alike. As usual, the agenda will also allow ample opportunity for participants to network and discuss issues informally.

Of interest to all attendees, Harwick comments, is a session titled “Fine Tuning Your Operations: CICA Operational Best Practices.” This session is based on a new document called “Phase II Best Practice Guidelines.” Several years ago, CICA was approached about developing captive standards, but the board was reluctant to move in that direction. Instead it chose to publish the first in a set of guidelines.

That first set of guidelines dealt with corporate governance and regulatory compliance. Phase II, Harwick explains, is “more of an operational practices document that will deal specifically with certain types of service providers:” captive managers, accountants, actuaries/consultants, and attorneys.

Publication of this document is an important step in developing transparency within the captive industry. It provides an overview of the role of each type of service provider during specific stages of captive development. It addresses the scope of services that should be provided during the pro forma stage, the formation stage and ongoing operations, and the winding-down stage. Harwick believes that this set of guidelines will be helpful for the entire captive industry and says it will be particularly useful for firms that are just beginning the process of forming a captive. According to Harwick, the guide “will provide clarity as to how all these pieces fit together, as well as the role that each type of service provider fulfills during each phase of the captive maturity process.

Future directions

It has become clear over the past few years that captive growth continues no matter where the insurance market is in the pricing cycle, and 2009 was no exception. “All of the major domiciles showed growth in 2009, with some having significant additions to the captive rolls,” Harwick says. The numbers of both single parent and group captives have increased, he comments, and continuing growth appears to be on the horizon.

Even though captive growth has occurred during the most recent soft insurance market, it’s natural to wonder when the market will begin to harden. Harwick remarks that, in general, the insurance industry has come through the financial crisis reasonably well.

“The captive industry has also fared pretty well,” he says, adding that at this point he is unaware of any captive failures due to the financial crisis. Certainly captives have taken a hit on the investment side, Harwick comments—but “who hasn’t?” Most industry observers believe it is unlikely that at least the first half of 2010 will see any premium increases; but, Harwick says, “At some point a hard market is out there.” Although recessionary pressures have held rates in check, he comments, “There has to be a ‘tipping point’ in the not too distant future.”

For any organization that is involved with the financial services industry, one of the big questions going into 2010 is what new regulations will be enacted. CICA’s objective is to closely monitor the regulatory environment, both at local and national level. To better serve this area, CICA has engaged a Washington, D.C., firm to serve as its eyes and ears regarding pending legislative efforts. Harwick says, “While financial regulations are a hot topic, at this point, it doesn’t appear that any captive-specific regulations have been introduced.” Nothing specific has moved forward from either the legislative side or on the tax front.

International cooperation

In August 2008, 25 European companies came together to form the European Captive Insurance and Reinsurance Owners’ Association (ECIROA). Its mission is similar to CICA’s: to protect and support the captive industry, as well as represent its members in discussions with regulatory bodies. Like CICA, ECIROA was established to provide a forum for captive owners to discuss areas of common interest and, equally important, to speak with one voice in dialogue with regulators.

ECIROA, Harwick says, observed how well CICA was able to use its unified voice a couple of years ago when the group was faced with potential changes in IRS regulations for consolidated financial statements. ECIROA now faces a similar challenge regarding the European Union’s Solvency II requirements and is working to ensure that the law, which is scheduled to go into effect in October 2012, takes account of the unique features of captives.

CICA has been working to establish a formal relationship with ECIROA, Harwick says, and the groups have agreed to participate in several collaborative efforts during 2010. For example, CICA will join ECIROA to co-sponsor the European Captive Luxembourg Rendezvous, which meets biennially and whose next meeting will be in 2011.

Harwick believes that the affiliation will be beneficial for both organizations because it will allow them to expand their international presence. If the ECIROA model proves successful, he says, CICA likely will look to establish relationships with other international domicile-neutral organizations. “So many of our members are large international companies,” he remarks, “that it only makes sense to have worldwide representation with other like-minded groups.”