LIPTZ AND ASSOCIATES
David Liptz of Liptz and Associates discusses the dynamic environment in which captives find themselves and outlines how changing conditions are shaping the deployment and development of self-insurance.
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aptives are a good fit for the US—a “land of entrepreneurs”—argues David Liptz, partner at Liptz and Associates, enabling firms to be masters of their own “insured destiny”. And such an approach is increasingly
popular. No longer the preserve of vast multinationals, small and medium-sized businesses are getting in on the act as firms look to insure their own risks and retain some of the profits inherent in the transaction. As Liptz made clear, under the right circumstances, captive insurance can be a “great transaction for the parent organisation”. Significant risk management advantages can be accrued by opting to self insure some risks in a formal captive insurance structure, but Liptz was adamant that firms need to enter such transactions with their eyes open and aware of the host of challenges that face captive entities.
Accounting for change Recent changes to international accounting standards have created challenges for the captive sector. As Liptz outlined, the new International Financial Reporting Standards “are a moving issue for the captive industry” and one that is placing additional demands upon accounting practice. A key concern revolves around Financial Accounting Standards statement 157, which relates to the disclosure of fair exit value of assets held. “For captives—many with closely held investments—this will prove a challenge,” he said.
Another concern has been US accounting rule Fin 48, which requires businesses to analyse and disclose income tax risks. Issues that have arisen around captives have been their “uncertain tax position” in
the face of Fin 48, concerns over “risk distribution” and questions regarding whether captives are considered to be insurance entities rather than investment vehicles. All these issues will present challenges for the sector, making the need for a clear paper trail and appropriate accounting and corporate governance all the more pressing.
Another area which may pique the interest of those that regulate insurance companies are “loan-backs”. During the financial crisis many parents were tempted to raid the balance sheets of their captives in order to prop up their own ailing positions. Such an approach, however, called into question the parent’s relationship with its captive. “Did such loan- backs taint the entire structure? Did they have regulatory approval? Did they follow the terms of the loan, and was there a promissory note?” asked Liptz. All these issues need to be addressed by captives which have issued “loan-backs”, particularly at a time when the Internal Revenue Service (IRS) is actively seeking out new revenue streams.
A taxing challenge Prominent among the challenges are tax considerations. In the US, the IRS has, since the financial crisis, begun to pay increasingly close attention to its tax uptake, with captives finding themselves unhappily caught in the dragnet. Such cases have, predominantly, been due to audits of the parent, but because of their unique nature, captives have at times come under IRS scrutiny, said Liptz. IRS interest has run the full gamut of captive entities from large single-parent entities to smaller captives, and excise tax audits, he explained, with the financial crisis certainly helping to focus minds and sharpen pencils at the IRS.
CICA | Forty years of captive leadership 71
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