LIPTZ AND ASSOCIATES
“Health care costs will continue to rise, obliging employers to ‘seek ways to reduce their medical costs’. Insuring health care through a captive will make good sense for many firms.”
As Liptz explained “as soon as someone does something aggressive or wrong and that fact hits the newspapers, that is when Congress will act and instruct the IRS to pick up their audit pace when dealing with captives”. For the time being, little has provoked the ire of the press and the IRS has not singled out the captive industry for closer attention, but Liptz admitted that there is a lot of speculation regarding when it might choose to step up its activity. “For now they have bigger fish to fry,” he said, but there are strong suggestions that the IRS may yet push to repatriate funds sent offshore. Liptz said that proposed regulation aims to “prevent firms shielding premium income in an offshore entity”. Captives will be watching potential developments with interest.
In order to navigate what may become an increasingly prescriptive US tax environment, captives need to ensure that they are being run like any other insurance company, Liptz said. “They need to carry out sound actuarial studies that prove they can support their reserves and their premiums, and ensure they are economically sound, and that their captive is treated like a real company.” When defending your position to the IRS, “you want to have as many feathers in your cap as you can and a solid paper trail”. Proving that you are a solid, functioning company is key. In many cases the IRS is “looking to prove that you aren’t a real insurance company”. Captives must present the case that they are, or else be stripped of the benefits captives traditionally enjoy. Keeping impeccable records will certainly help to keep the IRS at bay. Education is also significant. As Liptz outlined, the value and significance of captive entities needs to be more robustly defended from approaches by the IRS.
Optimal settings Despite these not insignificant challenges, captives remain an attractive proposition, providing companies with the chance to be masters of their own insured destiny, in the words of Liptz. “Maintaining control over the claims process” remains a leading incentive for captive owners, with such an approach providing firms with the opportunity to “save a ton of money and really educate themselves about the re/insurance market”. Captives also offer the parent the opportunity to understand
72 CICA | Forty years of captive leadership
better the lines they write through their captive and the risks they could add to their existing book of business. A captive also helps focus the minds of the parent’s CEOs and CFOs, encouraging closer attention to be paid to risk management, both from the premium side and also from a safety issue which will lead to reduced claim expenses, Liptz said. And with captives providing firms with the opportunity to “save money and raise their stock price”, there are incentives for the parent’s senior management to take active interest in the captive’s deployment.
The advantages conferred by captives are not restricted to the liability side of the business. As Liptz outlined, captives can be used as investment vehicles able to “finance other business units” within the parent, although he cautioned against indiscriminate use of captive investment returns. At the same time, “captives need to keep a close eye on their solvency position—whatever assets they invest in, they need to be admissible for solvency purposes”. Despite the need for close attention, captive investment returns can nevertheless be a welcome boost to the parent.
The changing nature of captives Addressing the changing use of captives, Liptz said that captive owners were getting “more creative”, with captive management “focusing on the exclusions that are in their traditional insurance policies, raising the deductable , researching ways to deploy employee benefit programmes through their captive and utilising the reinsurance markets” in order to retain more business.
At the same time, there is increasing emphasis on health care in the light of the Patient Protection and Affordable Care Act (PPACA). As Liptz indicated “there is certainly going to be a lot more talk and investigations into ways to structure employee benefits and health risks and the potential for self-insurance”. Rising health care premiums are likely to act as a catalyst for discussions regarding “alternative risk mechanisms”, with recent changes likely to “encourage firms to consider self-insurance programmes, rather than those presented by the government” under PPACA. “The challenge will be in persuading hundreds of employees to sign up for employee benefits programmes, ensuring sufficient security
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