CAPTIVE SERVICE PROVIDERS
“Underwriters have learned that captive fronting represents an excellent arbitrage of capital, generating an enhanced return on capital.”
of net premiums results in a more profi table portfolio of excess and quota share revenue. Furthermore, underwriters have learned that captive fronting represents an excellent arbitrage of capital, generating an enhanced return on capital.
Captives represent opportunities for new and expanded service offerings. Investment managers have been able to leverage expertise developed while duration-matching pension funds. Portfolios can be designed to provide both the necessary liquidity for claims payments and the enhanced returns that can be achieved through the lengthy loss payout patterns of long-tail liability and environmental lines.
Loss control specialists are often perceived as a necessary nuisance imposed by underwriters. Captive programmes create an environment where loss control specialists become trusted advisors, as successful loss prevention efforts generate increased capital surplus. Captive programmes with large retentions or high deductibles offer immediate and long-term fi nancial benefi ts through attentive loss control. However, captives receive increased emphasis due to the parents’ long-term commitment. Reserve accounting allows the captive to defer profi tability for larger and longer term loss control investments until the full impact can be determined.
Captive management has offered accounting professionals a broader career beyond auditing. They become managers of insurance companies coordinating the activities of professional service providers on behalf of a wide range of private and public companies. They deal with regulatory and business issues on behalf of their captives and have the opportunity to live in very attractive countries and states.
Regulators are integral members and participants of CICA, actively promoting their jurisdictions and the continued growth of captives. They have combined analytical tools with corporate instincts to ensure that captives are not involved with the fi nancial mismanagement exhibited in other regulated fi nancial sectors.
There is not an adversarial relationship between the regulators and the regulated. CICA continues to provide an umbrella beneath which regulators can promote their jurisdictions and global captive development, in a supportive neutral environment.
A united front While the steady integration of service providers was evolving, a signifi cant catalyst for full and accelerated integration materialised with the creation of the Coalition for Fairness to Captive Insurers (CFCI). CICA, in partnership with the Vermont Captive Insurance Association (VCIA), created the coalition in November 2007 in response to proposed legislation by the US Internal Revenue Service (IRS) that would have signifi cantly altered the landscape for the captive industry. If the proposed legislation had been successful, the fi nancial benefi ts provided by captives would have been materially reduced, if not eliminated. Due to the potential impact of this uninformed legislation, CICA and VCIA established the coalition and committed to fund the entire initiative.
Industry support was universal. The coordinated response was prepared by long term CICA supporters Jim McIntyre of the McIntyre Law Firm, Bruce Wright of Dewey & Laboeuf and Tom Jones of McDermott, Will and Emery.
The captive industry coalesced enthusiastically around the initiative— there were no gold, or platinum, contribution levels. Everyone— service providers, captive owners, and interested parties—all contributed in affordable amounts. The end result was that almost the entire required amount was industry-funded, with a nominal shortfall made up by CICA and VCIA.
The coalition did not distinguish between captive owners and service providers. It was an industry effort focused on educating elected representatives on the benefi ts provided by captive insurance. Captive regulators provided invaluable support by educating infl uential elected offi cials and facilitating the necessary meetings in Washington.
The successful result of this superbly coordinated industry effort was the withdrawal by the IRS of the proposed legislation. The campaign resulted from a coalition of captive owners, service providers and regulators jointly focused on increasing the value and expertise of CICA. ●
Les Boughner is executive vice president and managing director of Willis Management and former chair of CICA. He can be contacted at:
les.boughner@
willis.com
CICA | Forty years of captive leadership 45
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