JOHNSON AND LAMBERT
“We are also starting to see more inclusion of employee benefits in captive programmes for larger captives, while smaller captives are increasingly looking at medical stop loss programmes.”
and medium sized entities (SMEs). The IASB published a paper that said that if you are an insurance company and are publicly accountable, you will not be able to follow the IFRS for SMEs approach. However, if you are a captive and you are owned by, and insure, your parent, you could follow IFRS for SMEs, which would significantly simplify the accounting process. Practice has not yet been developed, so questions arise over third party business and there is a suggestion that those captives that write third party business will not be able to use the simplified IFRS for SMEs system of accounting. How this all pans out remains to be seen.
programmes more cheaply on the commercial market. With all things being equal you have to be sharp when presenting the advantages of having a captive—whether it is managing losses or strengthening investment income. On the loss management side, captives have become much more sophisticated in what they do to drive down costs and strengthen the bottom line. It is in building upon the strengths of captives that service providers can really prove their worth.
Do you foresee IFRS being a significant hurdle for captives, or do you foresee a smooth transition? Welch: In the US we still don’t know whether the Securities and Exchange Commission will adopt the International Financial Reporting Standards (IFRS), however, recently they have hinted they will go with an endorsement approach, in which case the US would consider each of the tenets set out by the International Accounting Standards Board (IASB) and decide whether they are going to endorse it or not, or endorse it with modifications. That said, many US captives aren’t publicly-held companies and so it is unclear how the rules will be applied. Three of the four joint projects that are left between the Financial Accounting Standards Board (FASB) and the IASB will significantly affect captive insurance: the insurance project, the financial instrument project and the lease project will all have potentially significant ramifications for captives. These are issues that, even if the US does not go with IFRS, will need to be considered by the captive industry.
The other question, if the US does opt for IFRS or a captive domicile approves the use of IFRS, is whether a captive could use IFRS for small
80 CICA | Forty years of captive leadership
What added value would IFRS bring? Welch: In the US, we are generally happy with our current standards, so the idea of bringing the international insurance contract project and its building block approach is not readily accepted right now. A lot of work would need to be done by actuaries to get their numbers in order, there would need to be a lot more disclosure in their financial statements, and the way that analysts look at their financial statements would require different benchmarks and analytical tools to examine results and carry out comparisons with other companies. I think we would prefer to stick with what we have.
Right now, however, it is a joint project. It has nothing to do with deciding to go with international standards; rather, it is about building new standards together. The FASB and IASB have accomplished that on some joint projects, while on others they have gone down different avenues. We expect a reconsideration of the insurance project in the second half of 2012.
Prescott: It seems they have developed a model for the commercial insurance market and captives are unhappily caught in its remit. The question is: do captives have any chance of being scoped out?
Welch: The way I see it, there is no option for captives to be scoped out of the evolving accounting standards. If we would go with IFRS, and captives fall under IFRS for SMEs, then that would be beneficial, but it seems unlikely that the US will opt for pure IFRS. It seems that we are going to go with public entities applying IFRS, but under an endorsement approach. As for the National Association of Insurance Commissioners (NAIC), it is following the joint project fairly closely, but has not made a decision as to which system it would like to see applied. Developments will undoubtedly be watched with interest.l
John Prescott is a partner at Johnson and Lambert. He can be contacted at:
jprescott@jlco.com
Magali Welch is a partner at Johnson and Lambert. She can be contacted at:
mwelch@jlco.com
Michael Bemi is president of the National Catholic Risk Retention Group. He can be contacted at:
mbemi@tncrrg.org
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