Coronavirus Captive Impact

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18 March 2020 - Issue 194

CORONAVIRUS CAPTIVE IMPACT

Phillip Giles of MSL Captive Solutions discusses how the COVID-19 pandemic could potentially affect self-funded health plans and medical stop-loss captives

IRS Focus Emerging Talent Isle of Man

Industry experts discuss the latest Cheryl Baker, manager, risk How will new legislation, current settlement offer made by the IRS management services at Blue trends and challenges impact the and what its next move could be Cross Blue Shield of Michigan island’s captive market? VERMONT CAPTIVE INSURANCE Captive Insurance Times OVER 1,100 CAPTIVES LICENSED

Issue 194

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Editor Becky Bellamy isn’t about [email protected] Tel: +44 (0)208 075 0927

Reporter Maria Ward-Brennan [email protected] Tel: +44 (0)208 075 0923

choosing better Cover Image Contributor Maddie Saghir By Lightspring [email protected] Royalty-free stock illustration ID: 128767289

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Publisher When you choose to domicile your captive in Vermont, you can be confident Justin Lawson you chose correctly. With nearly 40 years of regulatory experience coupled with [email protected] CORONAVIRUS an unparalleled service provider network and legislative partnership, Vermont Office Manager Chelsea Bowles CAPTIVE IMPACT offers companies the sensible, secure and supported domicile they need. Tel: +44 (0)208 075 0930

Phillip Giles of MSL Captive Solutions Follow us on Twitter: @CITimes discusses how the COVID-19 pandemic could potentially affect self-funded health plansand Connect with us and see why Vermont sets THE GOLD STANDARD. Published by Black Knight Media Ltd medical stop-loss captives Company reg: 0719464

Industry experts discuss the latest Cheryl Baker, manager, risk How will new legislation, current stored in a retrieval system or transmitted, in any form or by settlement offer made by the IRS management services at Blue trends and challenges impact the and what its next move could be Cross Blue Shield of Michigan island’s captive market? any means, electronic, mechanical, photocopying, recording or

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captiveinsurancetimes.com 3

VTC001-20_Captive_Insurance_Times_Full_Page.indd 1 1/13/20 7:30 PM Contents In this issue

News Focus page 6

COVID-19 Outlook Phillip Giles of MSL Captive Solutions discusses how the COVID-19 pandemic could potentially affect self-funded health plans and medical stop-loss captives page 14

IRS Focus Industry experts discuss the latest settlement offer made by the IRS and what its next move could be page 22

Emerging Talent Isle of Man Insight Cheryl Baker, manager, risk management services at Blue Cross Blue Shield of With new insurance legislation on the cards for Michigan the Isle of Man, industry experts discuss how page 26 these as well as current trends and challenges are impacting its captive market Industry Appointments page 16 Comings and goings in the captive insurance industry page 30

Set up an EU based protected cell with the independent experts Capital, time & cost efficient alternative to a standalone insurer or captive Direct access to the UK and EU market

People you can trust

Atlas Insurance PCC Limited is a cell company authorised by the Malta Financial Services Authority to carry on general insurance business.

captiveinsurancetimes.com 5 News Focus News Focus

KeyState opens new Vermont office

KeyState Captive Management opened a new office in Burlington, Vermont on 1 March.

The new office builds on its existing presence in other states including Nevada, Delaware, Tennessee, District of Columbia, Alabama, Arkansas, Michigan, Missouri, Montana, and Oklahoma.

Over the last two years, KeyState has Aon to buy Willis Towers Watson hired three captive professionals, Jeff Vigne, director of insurance services; Risk Strategies acquires Alicia Huskes, captive client services Aon is set to buy Willis Towers Watson in that more efficiently match capital with will own approximately 37 percent manager and most recently David Atlas Insurance Management an all-stock transaction with an implied unmet client needs in high-growth of the combined company on a fully Guerino, SVP and managing director of combined equity value of approximately areas like cyber, delegated investments, diluted basis. captive insurance. $80 billion. intellectual property, climate risk and Risk Strategies has acquired Atlas rise, innovative alternatives such as health solutions.” Aon anticipates that the transaction will The firm also received approval from the Insurance Management as part of its captives are increasingly important in The deal will see the combination of two provide annual pre-tax synergies and Vermont Division of Insurance to operate purchase of Atlas Group Limited and its creating cost-effective ways to manage of the world’s largest insurance brokers. The combined company will be other cost reductions of $800 million as a captive manager in the state. affiliated entities. and mitigate client risk.” named Aon, maintaining its operating by the third full year of combination, Willis Towers Watson CEO John Haley, headquarters in London. thereby allowing the firm to continue KeyState CEO, Josh Miller stated: “We Atlas Insurance Management focuses Martin Eveleigh, Atlas’ founder described the combination of the two significant investment in innovation are excited to have David Guerino lead on the formation and management of and chairman, added: “Alternative firms as “a natural step in our journey As part of the deal, Haley will take on the and growth. the KeyState captive team, and we captive insurance companies. It also approaches to managing the cost of risk to better serve our clients in the areas of role of executive chairman with a focus are pleased to open our new office in forms and operates a number of its are increasingly necessary in today’s people, risk and capital”. on growth and innovation strategy. Willis Towers Watson and Aon Burlington.” own insurers, including protected cell evolving world of business.” anticipate savings of $267 million in companies (PCC), making cells available Haley said: “This transaction accelerates The combined firm will be led by Case the first full year of the combination, “Vermont is one of the ‘key states’ for the to captive clients and acting as fronting “We saw in Risk Strategies a firm with that journey by providing our combined and Aon chief financial officer Christa reaching $600 million in the second full US captive industry, and our new office insurers as well as pooling reinsurers. a truly consultative approach to risk teams with the opportunity to drive Davies, along with a leadership team year, with the full $800 million achieved in the heart of downtown Burlington management and the same dedication to innovation more quickly and deliver from both organisations. in the third full year. represents our commitment to the growth The acquisition brings both onshore using technical expertise and innovation more value.” of our captive management business into and offshore capabilities with a in pursuit of the best solutions for clients.” The board of directors will comprise Aon considered a bid for Willis Towers Vermont,” he added. presence in multiple domiciles as well Aon CEO Greg Case added that proportional members from Aon and Watson last year, but in March released as licenses in 10 US jurisdictions, Risk Strategies said that acquiring Atlas the merger would create “a more Willis Towers Watson’s current directors. a statement stating that the company Commenting on the new office, Guerino according to Risk Strategies. Insurance Management builds momentum innovative platform” that will create would not be pursuing an all-share said: “KeyState has a very robust captive behind the firm’s efforts to build out better outcomes for all stakeholders, Both companies expect the transaction business combination. practice and strong relationships with It will also provide Risk Strategies with captive management capabilities, including clients, colleagues, partners to close in H1 2021. its captive owners, business partners, its first operating presence outside of adding to its recent acquisitions of Risk and investors. The deal comes a year after Marsh & and regulators. I look forward to building the US. Management Advisors and Oxford Risk Upon completion of the combination, McLennan Companies (MMC) completed on this foundation, with a continued Management Group. Case stated: “Our world-class expertise existing Aon shareholders will own the acquisition of Jardine Lloyd focus on business development and John Mina, CEO of Risk Strategies, said: across risk, retirement and health will approximately 63 percent, while Thompson Group (JLT) for $5.6 billion in expanding our offerings to existing “As traditional insurers become more Terms of the deal were not made accelerate the creation of new solutions Willis Towers Watson shareholders fully diluted equity value. captive clients.” selective in their coverage and premiums public.

6 Captive Insurance Times - Issue 194 captiveinsurancetimes.com 7 News Focus News Focus

Alabama’s captive legislation passes unanimously Positive ratings for Nuclear available The Alabama Captive Association’s bill to Electric Insurance update the state’s captive legislation was for passed by a vote of 99-0 by the house of free representatives on 25 February 2020. Survey: Majority of UK and German A.M. Best has affirmed the financial underwriting results given the nature download strength rating of A (Excellent) and the of the risks it insures and because of The bill is sponsored by state firms exploring captive solutions long-term issuer credit rating of “a+” claims activity, which relates to the fact representative David Faulkner, who also now! of Nuclear Electric Insurance Limited that it relies on one market and two presented the previous amendment to the (NEIL). The outlook of these credit principal product lines. Alabama Captive Insurers Act in 2016. The majority of businesses in the UK and market conditions are notably different to ratings remains stable. Germany are exploring captive insurance, previous hard markets which were cyclical However, these factors are “inherent” Under the new bill, branch captive according to surveys conducted by the and focused on price.” The ratings reflect NEIL’s balance sheet to captive mutual insurers focused on a requirements will be revamped to more UK risk and insurance management strength, which A.M. Best categorises particular niche market supported by its closely match those of pure captives. association, Airmic, and the German risk Graham added: “Today, by comparison, as strongest, as well as its marginal members, A.M. Best noted. and insurance management association, we are also seeing reduced capacity, an operating performance, favourable Multi-state and multi-national GVNW in January and February 2020. increase in exclusions and in some cases business profile and appropriate NEIL designed its risk management organisations will also be able to better the complete withdrawal of cover. There enterprise risk management. programme to manage risks within manage Alabama risks by making capital The survey concluded that 65 percent are also early signs of changing claims the company’s defined tolerance standards more reasonable expanding of UK and 53 percent of German firms behaviour which we are monitoring closely. ” The ratings also acknowledge NEIL’s levels. The company also maintains the use of branch captives to all lines are exploring alternative risk transfer management culture and its exclusive a comprehensive loss prevention of business. solutions, including new and expanded “This is a seismic shift. To stay relevant, leadership position in the US nuclear programme, with a specialised, use of captives, for their 2020 renewals. the market must become more customer- power-generating industry. effective loss prevention department Additionally, the bill will remove the centric, make better use of technology closely working with insured members requirement for coastal homeowners Meanwhile, it found that over a third of to improve service, and provide more NEIL underwrites the entire nuclear to control losses. captives to be fronted. businesses (33 percent UK, 46 percent innovative solutions.” utility property insurance coverage in Germany) plan to invest more in risk the US and continues with its mission A.M. Best suggested the ratings also The codification of a formal dormancy management solutions. According to the survey, there is a of maintaining the financial strength to recognise NEIL’s history of maintaining statute, that follows existing practice, to frustration at poor or late communication cover two full-limit nuclear losses, while sufficient capital to support its ongoing allow captives to cease writing business The survey stated that the impact of the from insurance partners (43 percent UK, promoting industry risk management obligations, which includes its financial for up to five years to remain in existence. hardening market goes beyond price, 62 percent, Germany) and over half of and safety practices. flexibility to suspend policyholder with reduced capacity, an increase in policyholders are only partially satisfied or A GUIDE TO distributions. Clarification on risks allowed in a foreign exclusions, and unavailability of cover not satisfied with service from brokers. TRAVERSING According to A.M. Best, partially jurisdiction may now be insured in for some, having a significant impact on THE CAPTIVE offsetting these positive rating factors A key rating driver, according to A.M. domestic captive. 2019 renewals. Joerg Henne, managing director of GVNW, are the company’s primary focus on Best, that could lead to positive rating said: “Communication and transparency TERRAIN property catastrophe risks and related action is profitability and reduced Executive director of the Alabama Captive Directors and officers (D&O) rates have need to improve and good risk management business interruption claims, with the volatility in underwriting results over the Association, Norman Chandler, said: “We been hardest hit, the survey revealed with should be rewarded.” subsequent financial stress this could long term. are excited that captive legislation in over 80 percent of respondents noting Read us on cause in the unlikely event of two full- Alabama continues to have unanimous price rises in the UK and over 60 percent in “Businesses understand their risks better limit losses. However, key factors that could see a support by the legislature. This shows the Germany. In the UK, 13 percent have seen than ever before and the fact that we rating downgrade include increased great commitment to captives. Alabama D&O rates more than double. are seeing risk professionals exploring Despite recent positive results, A.M. leverage, substantial increases in losses also continues its industry-first initiatives alternative risk transfer solutions for 2020 Best explained that the company and significant erosion of capital or loss in-branch captives and in coastal Julia Graham, deputy CEO and technical renewals should be a wakeup call to the remains exposed to volatility in of members. homeowners captives.” director at Airmic, commented: “Today’s market,” he explained.

8 Captive Insurance Times - Issue 194 captiveinsurancetimes.com 9 News Focus WE KNOW State Street’s captive ratings affirmed

A.M. Best has assigned a financial strategy in the wake of significant price However, the rating firms said these CAPTIVE strength rating of A- (Excellent) and a firming in the professional liability projections are subject to a high long-term issuer credit rating of “a-” insurance market. degree of variability due to external to Federated Underwriting Company, market factors. located in Vermont. The outlook assigned Federated’s business profile is to these credit ratings is stable. considered limited as it will operate as a The rating includes a level of credit INSURANCE. single parent captive insurer whose sole enhancement from State Street. A.M. Best categorises Federated’s balance purpose is to take on a specific layer of sheet strength as very strong, as well as its risk related to its parent’s professional According to A.M. Best, the rating adequate operating performance, limited liability and bankers blanket bond enhancement considers an implied business profile, appropriate enterprise insurance tower. level of financial support to be risk management and one notch of credit provided if and when necessary as enhancement that it receives from its A.M. Best said it views the company’s part of its legal obligation contained in ultimate parent, State Street Corporation. prospective operating performance its client agreements. considerations as “adequate” as This single parent captive was formed this includes elements of stochastic and capitalised in 2019 as part of modelling, average annual loss State Street’s alternative risk financing expectancies and tail risk probabilities.

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10 Captive Insurance Times - Issue 194

1349PCP_Captive Review_20200211.indd 1 2/12/20 12:09 PM News Focus

PwC sees 2019 non-life insurance CY

CMY run-off figure increase K

PwC’s annual review of non-life run-off deals found an increase in Continental Europe in terms of deal values (though not volumes). publicly announced deals in 2019 compared to 2018, with deals North America saw a decrease in the volume of publicly jumping from 32 to 48. announced deals from last year. According to the report, this is due to the lower number of deals being publicly reported rather Of the 48 deals, totalling $10.5 billion, nine were captives, 28 than a lower number of deals being created. The region had 17 were (re)insurers, two were corporates and the other nine were deals that totalled to $3.7 billion estimated gross liabilities. Lloyd’s. The report also showed that there were four deals in the rest of In the report, PwC said that the market had seen “another busy the world, which totalled $1.6 billion of estimated gross liabilities. year” with a number of new entrants completing deals and incumbent increasing activity levels to “new highs”. Looking ahead to 2020, the report noted there would be a continued focus on the Lloyd’s legacy market following syndicate The UK and Ireland dominated deal activity in 2019 both by run-off announcements and new entrants able to provide legacy volume and values, driven in part by the Lloyd’s run-off deals. solutions. In total the UK and Ireland saw 18 deals with an estimated gross liabilities totalling $4.6 billion with approximately $2.4 billion It also said to look out for the completion of the first US Insurance coming from Lloyd’s. Business Transfers under Oklahoma legislation.

Although Continental Europe did see an increase in activity, the Finally, it also suggested an expansion of deals outside of the region still remained low compared to the rest of the world at $0.6 traditional US and European markets following a number of billion. The review found that the Asia Pacific region outpaced completed deals in Asia Pacific.

12 Captive Insurance Times - Issue 194 COVID-19 Outlook COVID-19 Outlook

Phillip Giles of MSL Captive Solutions discusses how the COVID-19 pandemic could potentially affect self-funded health plans and medical stop-loss captives

It is still quite early to ascertain, with any The employer pays the claims incurred by to claim severity (i.e., specific), should also degree of accuracy, the effects that the the plan and then seeks reimbursement be considered, especially for smaller self- coronavirus pandemic will ultimately have for any larger claims, above a predefined insureds, group captives and employers on US health plans. (specific attachment) level from its medical having large concentrations of employees stop-loss carrier or captive. in single locations. I can, however, offer some initial observations, from my perspective, as to The industry-wide average specific The cascading effects of an infectious how the pandemic could potentially affect stop-loss deductible (across all self- outbreak within a single employee self-funded health plans and medical stop- funded plans) is approximately $95,000. population could have significant impact loss captives. Most self-funded plans, including the from an aggregate coverage perspective. smallest members participating in group There is a significant variance in the medical stop-loss captives, have specific Group captives that provide captive levels of severity among those that have deductibles above $25,000. aggregate coverage (as opposed to contracted the virus. individual plan aggregate) could also see From what we know at this stage, this some increased potential to erode the These range from symptoms of a cold or should be well above the total treatment aggregate attachment in the event of a influenza, (requiring nothing more than cost of most COVID-19 claims. Most widespread outbreak. home confinement), to intensive care large or complex claims (that would hospitalisation for the more severe cases exceed the typical specific medical stop- It may also be worth considering that the with advanced progression or individuals loss deductible level of a self-funded contraction of an infectious disease if it with compromised immune systems. The employer plan) are more likely to come can be attributed to a work assignment first scenario can be minimal in terms of from elderly (retired) individuals, covered (such as a healthcare worker infected by a cost while the latter can potentially be very under Medicare, rather than from active patient), may compensable under workers expensive. employees covered by employee benefit compensation rather than the employer’s healthcare plans. self-funded health plan. Self-funded “plans” themselves will experience a significant impact from Again, it is important to distinguish between Again, it is still early, and there are COVID-19 as the employer (or plan the Plan layer, assumed directly by the enough variables to prevent us from sponsor) is directly responsible for all employer, and the MSL layers, assumed by fostering a consistent degree of certainty claims incurred by the plan. The degree the captive and (re)insurers. in terms of how much impact coronavirus to which the medical stop-loss coverage, will have on medical stop-loss captives including medical stop-loss risk held in The plan will assume all claims so the and (re)insures. Employer exposure a captive, is potentially impacted will effects from COVID-19 at primary coverage at the primary plan level is likely to CORONAVIRUS be relative to the attachment level of the layer could be considerable while the experience a significant direct impact. specific deductible covering the employer’s impact to medical stop-loss layers (captive While some medical stop-loss captives primary plan risk. Traditional self-funded or (re)insurer) are likely to be much less may have some increased aggregate plans have two layers; the primary “plan” significant. exposure, my belief is that most specific CAPTIVE IMPACT layer and the medical stop-loss layer. attachments are probably set well above A FEW ALTERNATIVE SCENARIOS most coronavirus claim levels. In short, The plan layer assumes responsibility for all the primary plan will experience some claims incurred by the participants covered From an stop loss and captive perspective, financial duress while the typical captive under the plan. claim frequency (i.e., aggregate), in addition excess layers are probably set high

14 Captive Insurance Times - Issue 194 captiveinsurancetimes.com 15 Isle of Man Insight - By Maria Ward-Brennan Isle of Man Insight

With a population of 83,000 people, the Insurance Supervisors’ - Insurance Isle of Man is a self-governing British Core Principles (published November crown dependency in the Irish Sea 2019) to deliver a dual regulatory regime located between the north of England and tailored to the needs of both captive and Northern Ireland. commercial insurers.

With a strong economy, the Isle of Man The authority has now issued the February is backed by a Moody’s rating of Aa2. 2020 Roadmap which provides regulated Although it is located in the heart of the entities and other relevant stakeholders British Isles, it is not part of the EU or the with information on progress over the past European economic area and retains its six months and looks ahead to significant internal self-government. workstreams over the next year.

The Isle of Man is also home to 102 The Isle of Man Financial Services captive insurance companies, as of 31 Authority is due to launch a limited December 2019. The captive market consultation in Q2 this year, in respect was first established in 1986 and offers of capital requirements for protected a variety of structures including limited cell companies (PCCs) and incorporated liability companies, protected cell cell companies. companies, incorporated cell companies, insurance special purpose vehicles and The new framework is anticipated to be in limited liability partnerships. place for the captive insurance market on 31 December 2020. In 2019, the island licensed two new captives and saw three closures. Industry Nick Gale, head of office, Marsh participants discuss the new regulatory Management Services Isle of Man of framework, current trends and what’s Marsh Captive Solutions, reveals the Maintaining the to come in the future for the domicile’s key changes that will affect captive captive market. (re)insurers (Class 12 licence holders) include a new risk-based solvency Regulatory roadmap capital regime based on an insurer’s regulatory roadmap individual risk profile; and an updated The Isle of Man Financial Services Corporate Governance Code (CGC) of Authority Regulatory Roadmap was practice for insurers. first issued in June 2013 to provide Located in the Irish sea, the Isle of Man is an overview of a significant update to He notes that the CGC will include the Isle of Man’s insurance regulatory several possible exemptions for Class 12 home to a big captive insurance market, framework which is consistent with the (captive) insurers. with new insurance legislation on the cards, authority’s aims of ensuring that the island has a proportionate and robust Ross Dennett, managing director at industry experts discuss how these as well regime for the regulation and supervision Thomas Miller Captive Management, adds: as current trends and challenges are currently of insurance business, consistent “Importantly in the process, the authority with the International Association of has not only undertaken extensive impacting its captive market

16 Captive Insurance Times - Issue 194 captiveinsurancetimes.com 17 Isle of Man Insight

consultation but it has also worked closely “Naturally, this scenario has focused the government to expand the law. The with Isle of Man Captive Association to minds on increased risk retention by act was amended in 2006 permitting ensure that the enhanced legislation is purchasers and the logical home for a PCC to be used for any type of both relevant and appropriate.” such risk retention being a captive business. Additionally, the Protected Cell insurer,” he continues. Companies (Eligibility) Regulations were Gale clarifies that Marsh has been working created in 2010. closely with the island’s financial services Dennett points out that the general view authority over the last few years in order is that this trend is long overdue as Dennett outlines that the Isle of Man to address the needs of the captive the pricing within the insurance market “has always had a reputation as a sector and plan for the implementation of had reduced to sub-economic levels, ‘can-do’ captive domicile with a high the new regulations. meaning the island – along with the rest sovereign rating and its standing as of the market – should expect a lot of an internationally responsible country As a result, Marsh doesn’t expect any of interest and enquiries in the pipeline. as acknowledged by the International its client companies that they manage to Monetary Fund (IMF) and other require additional capital or find the new According to Gale, the captive insurance regulatory bodies”. governance requirements unduly difficult sector continues to be the bedrock of the to comply with. island’s non-life insurance sector. He explains that this is because a protected cell vehicle can allow a smaller On regulation, Gale also noted that Gale adds that Marsh is seeing an company to isolate risk without incurring the Isle of Man income tax division increase in enquiries and new insurance the expense of actually owning a captive. has implemented new substance licence applications. requirements for resident companies, A PCC can be designed to accommodate including captive insurance companies. He says: “In addition, a number of a quick entrance or exit. In addition existing captives are considering self- to cost savings, a PCC can free up Gale says: “While these requirements are insuring more of their own risk, which management time and offer both capital new, they have been largely practised is largely due to the challenges some flexibility and acceptance. It can be by the Isle of Man captive industry for insurance buyers are experiencing in thought of as being a standard limited decades and therefore are not expected the commercial market. Where cover company that has been separated into to have much impact,” he adds. is not available or is not cost-effective, legally distinct portions or cells. companies are looking to utilise an Hardening market existing captive or set-up a new captive “The revenue streams, assets and vehicle to self-insure the risk.” liabilities of each cell are kept separate On the current trends, Dennett addresses from all other cells. Each cell has its own the significance of the hardening of the Looking at it from a Marsh perspective, separate portion of the PCC’s overall conventional insurance and reinsurance Gale adds they have seen increased share capital, allowing shareholders to market over the last year. interest in protected cell companies maintain sole ownership of an entire cell (PCC) over the last 12 months. Recently, while owning only a small proportion of Dennett suggests that the hardening Marsh’s Mangrove Insurance Solutions the PCC as a whole”, he continues. market has been a catalyst for a marked PCC facility in the Isle of Man established increase in business enquiries. two new cells and they expect to form He notes that a PCC can provide a another two shortly. means of entry into the captive insurance He explains that insurance purchasers market to entities as it was previously are either faced with significant premium PCC legislation uneconomic. The overheads of a PCC can increases, reduced cover or in some be shared between the owners of each of cases are not able to source any cover at A law governing PCC’s was first enacted the cells, making the captive cheaper to all from the insurance market. in 2004 on the island, which was known as run from the point of view of the insured. the Isle of Man Protected Cell Companies The professional infrastructure on the “Capacity has reduced and insurers are Act (IOMPCCA), which was solely for island is well established, but according clearly in a position where they can be a lot their insurance industry. However, due to to Dennett, one of the attractions of the more selective over which risks and lines its potential to protect other industries, Isle of Man is that the finance sector is of business they choose to underwrite.” numerous business groups lobbied really quite broad.

B++ Good 18 Captive Insurance Times - Issue 194 Isle of Man Insight

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“Sticking the right balance of timely and safe innovation and maintaining the island’s strong reputation for reliability will be important to the island’s ongoing success”, he adds.

Looking at the competition, Gale points SRS Europe is changing the Face of out that the number of potential captive domiciles grows almost every year so the European Captive Management Isle of Man “must continue to differentiate itself” to stay relevant”.

Gale comments: “The Isle of Man Captive Specialist focus on captive insurance management and Association plans to actively promote the island’s non-life sector in 2020 through consultancy... It’s all we do various media channels to make sure its benefits and reputation don’t just rely on word of mouth and the knowledge of key Offering impartial advice and bespoke solutions without conflicting industry experts.” internal vested interests... It’s how we do it

Planning ahead Driven by client service excellence underpinned by flexible, He comments: “Both the Isle of Man He highlights that businesses and For the rest of 2020, Gale believes that innovative and solid delivery... It’s focused on you government and the Isle of Man Financial people have been provided with the outlook is “positive”, due to the Services Authority recognise the relevant information to ensure that they transitioning insurance market, which importance of the captive sector and can also take the steps necessary to should lead to increased captive utilisation. PCC’s are an important tool.” prepare for Brexit. He adds that with the association Our Services European Operations Brexit impact Island challenges actively promoting the island as a captive domicile and an alternative Captive management Ireland Although the Isle of Man is not part of With ever-changing technological advances, solution to commercial insurance, “the Feasibility studies Liechtenstein the UK or the EU, it does have a close comes the pressure to stay up-to-date with island will see its fair share of new relationship with the UK. the latest innovations and trends. formations and growth”. Program management Luxembourg and underwriting services Malta Dennett states that with Brexit things will Gale explains that the new insurance Although we are currently three months Governance, risk & Netherlands change and the scope of that change will regulations and recent Moneyval into 2020, Dennett reveals that this year compliance consulting Sweden take shape this year as the future relationship plenary results are important steps in has already been “very exciting” for the between the UK and EU is negotiated. the right direction. islands captive sector. Strategic reviews Switzerland

He explains: “For people and businesses However, Gale adds that continued focus He notes that there have been “a lot in the Isle of Man the effects of these is required for the captive sector to adopt of new captive enquiries coupled with changes may be significant, or they may new and disruptive technologies that existing captive owners looking to ‘work’ be minimal. The Isle of Man Government change the way the businesses operate their existing captive more”. has, therefore, been preparing for the UK’s and their client’s needs for insurance. withdrawal from the EU for some time. Dennett adds that he is also positive that This has meant making sure that our laws He suggests that shifting social the new regulatory framework will be have been changed to reflect the ending attitudes and political priorities are also finalised and formalised and the strong of our limited relationship with the EU, likely to present new challenges and indications of the long-overdue hard Find out why over 500 and also that government services can opportunities that must be understood market will all help grow the island’s captive clients trust SRS continue to be delivered.” and regulated appropriately. captive sector.

20 Captive Insurance Times - Issue 194 strategicrisks.com IRS Focus - By Maria Ward-Brennan IRS Focus

strategy, rather than entering into it for He adds that in Notice 2016-66, the IRS Phil Karter, attorney at Chamberlain risk management purposes,” he adds. stated that it “lacks sufficient information Hrdlicka states he would not characterise to identify which 831(b) arrangements the IRS’ latest move as one “against” Many major cases have made headlines should be identified specifically as a micro captives, but rather a recognition as they went to US tax court against the tax avoidance transaction and may of the limitations on its own resources IRS, the first case that involved a captive lack sufficient information to define the to effectively manage a large number of that made the election to be taxed solely characteristics that distinguish the tax captive audits in the pipeline. on investment income under Section avoidance transactions from other 831(b) 831(b) was Avrahami v Commissioner of related-party transactions”. He explains: “In attempting to reduce Internal Revenue (Avrahami). the workload, the IRS has proposed a King says: “So, clearly, the IRS thinks settlement that is arguably reasonable In August 2017, the US Tax Court released that there are some, perhaps a lot, of for bad captives or ones where the its decision in the Avrahami case, backing non-abusive captive transactions.” dollar amount at issue may not justify the IRS. the expense of defending an audit, but Settle for less much less so for well-organised, well- Judge Mark Holmes ruled that payments run captives that have been caught in made to the Avrahamis by their micro In September last year, the IRS mailed a the audited net simply because of the captive, Feedback, amounted to taxable “time-limited settlement offer” for certain reporting requirement and consequent dividends outside of the scope of certain taxpayers under audit who participated close scrutiny given to micro-captives tax elections. in ‘abusive’ micro captive insurance generally.” transactions. Feedback insured the Avrahamis’ Since the first announcement, in February, The battle goes on Arizona jewellery stores and shopping The settlement requires substantial the IRS revealed that 80 percent of centres against chemical and biological concession of the income tax benefits taxpayers who received offer letters terrorist attacks. claimed by the taxpayer together with elected to accept the settlement terms. As the IRS’ battle against micro-captives continues, industry experts appropriate penalties—unless the discuss the latest settlement offer made by the IRS and what its next But the IRS believed that the micro taxpayer can demonstrate good faith, However, the Self-Insurance Institute of captive was organised to provide tax reasonable reliance. The initiative is America (SIIA) has suggested that the move could be deductions under Section 831(b) of currently limited to taxpayers with at least settlement figures released by the IRS the Internal Revenue Code and lacked one open year under exam. are “misleading”. insurance risk, and that risk was not The Internal Revenue Service (IRS) elect to exclude limited amounts of 1970s and early 1980s when they shifted to the captive. Commenting on the IRS’s latest move SIIA stressed that the figure is has targeted micro captives for years, annual net premiums from income, so attacked a large number of captive against micro-captives, Fine suggests misleading in that the 80 percent of the but in more recent times they have that the captive pays tax only on its insurance companies. Another example is Reserve Mechanical that if the IRS were focused on pursuing taxpayers have agreed to participate ramped up their efforts to do so, investment income. Corp v Commissioner of Internal Revenue taxpayers who entered into the captive and consider a settlement, but did not including them on its ‘Dirty Dozen’ list Fine says: “Those early cases, like the and CIC Services LLC v. IRS, which is transactions strictly to generate tax actually settle. of tax scams since 2014, along with Named as a type of “abusive tax cases of recent years, generally resulted still ongoing in the court. CIC Services deductions, “I would not take exception other actions. shelter”, the IRS has previously in victories for the government.” has petitioned the Supreme Court of the to this move”. According to SIIA, those taxpayers can suggested that some micro captives US to hear its lawsuit against the Internal indeed settle, but also have the option to In 2016, the Department of Treasury may be used by promoters, accountants He explains that the IRS currently Revenue Service (IRS) regarding IRS Fine explains that unfortunately, the IRS go to court. and IRS issued Notice 2016-66, which or wealth planners to persuade owners operates under the assumption that Notice 2016-66, while Reserve Mechanical “is unlikely to be that focused on their formally labelled micro captives as of closely-held entities to participate most micro-captive transactions have Corp has filed the opening brief with the new examination efforts” SIIA said it understands that, as of 19 ‘transactions of interest’. The IRS in schemes that lack many of the been entered into and conducted tenth circuit court of appeals. February, not a single captive had engaged advised that these transactions have the attributes of genuine insurance. improperly, without sufficient non-tax He adds: “The additional issue is that in a final settlement agreement, and making potential for tax avoidance or evasion. business purposes for doing so. Sean King, principal at CIC Services, there will still be a shortage of subject such an announcement is “premature”. Alan Fine, tax partner and insurance explains that the IRS does not and has not matter experts that understand the Under section 831(b) of the US tax industry group leader, Brown Smith “There are some situations in which identified all micro-captive transactions insurance-specific nuances of these In addition, SIIA suggested the audit code, captive insurers that qualify Wallace, notes that the IRS’ aversion taxpayers try to reduce their overall tax as ‘abusive’. He says: “In fact, the IRS transactions, resulting in longer, teams will most likely be looking at as small insurance companies can to captives dates back to the late liability by utilising the micro-captive conceded in its original ‘Dirty Dozen’ inefficient exams and increased other issues unrelated to the captive publication that micro-captives, in professional fees for taxpayers industry, not simply focusing on general, are a “legitimate tax structure.” defending the exams,” he adds. captives themselves.

22 Captive Insurance Times - Issue 194 captiveinsurancetimes.com 23 IRS Focus Local Protection

SIIA revealed that while approximately However, King states: “Knowing that they He states: “Ultimately the captive 160 captive structures have agreed will eventually lose some important cases insurance industry will deal with the IRS to consider settlements with the IRS, again and that such losses will embolden just like they have for so long – by beating Global Connection thousands of captives remain in place honest taxpayers to resist its attempts at it in court. Court precedent will ultimately that are assisting America’s small and extortion, the IRS is seeking to strike at give the industry the guidance that the medium-sized businesses to mitigate its point of maximum leverage.” IRS refuses to. And in the meantime, important and real risk factors. the industry will continue to grow and He adds: “The service hopes to prosper, just as it has.” Commenting on the benefits of intimidate as many taxpayers as accepting such offer, Fine says: “The possible in the coming months into Will the uncertainty remain? benefit of accepting the settlement settlements before adverse precedent offer is it will allow affected taxpayers undermines that leverage.” As the IRS continues to focus on micro- to move past the time and effort captives, is there a possibility it will move associated with the examinations. “My guess is that the Service will act the attention onto another form of a It provides certainty, particularly quickly, or as quickly as governments captive in the future? regarding the potential income inclusion do, to threaten more audits in hopes of at the captive level, and it reduces or scaring taxpayers into quick settlements.” Fine suggests that could be the case, potentially eliminates penalties.” “particularly if the Reserve Mechanical A resolution appeal is unsuccessful”. At the time of announcing the settlement offer, the IRS also revealed it was As the battle continues between the IRS He notes that the issues the IRS is focusing establishing 12 new examination teams and micro-captives, will there ever be a on “aren’t limited to micro captives”. comprised of employees from the IRS resolution or agreement between the IRS large business/self-employed divisions and its view on micro captives? “Concerns over the logic utilised by that will be working to address abusive the tax court, such as the requirement transactions and open additional exams. Karter discloses that many professionals to have a prior loss before there is a who work on captive matters view the valid business purpose for purchasing Fine said he expects to see a significant IRS’ current aggressive captive audit insurance, ‘cookie-cutter’ insurance number of these new examinations initiatives as a “short-term pain” that policies and what the court incorrectly starting in the next 12 to 18 months. will hopefully lead to a better long-term referred to as “circular flow of funds” outcome in differentiating the many (the mechanism by which all risk-sharing He reveals: “Given the vast breadth of captives that are appropriately run to pools operate) could potentially be the information requests, the lack of effectuate better risk management for issued for group captives, as well as the captive insurance experts within the their businesses from those that have largest captives owned by fortune 500 IRS (even within the new exam teams), no real business purpose but are set up companies.” and the IRS’s steadfast refusal to look principally to capitalise on tax benefits”. at these captives reasonably, the vast King stresses that the IRS “loves majority of the cases will then move to He adds: “When the dust finally settles, uncertainty”. He says: “Uncertainly the appeals phase, followed by a large it is reasonable to expect that more allows it to raise revenue by arbitrarily number of taxpayers moving to litigate clearly defined standards of what works coercing settlements from taxpayers who in tax court.” and what doesn’t will allow the many don’t want to ‘make a federal case of it.’ bonafide micro captive arrangements And what qualifies as ‘insurance’ and Generali Employee Benefits The next move to successfully capitalise on the tax what does not will probably always be inducements congress intended in somewhat uncertain.” The world’s leading Network, serving multinational companies in over 100 countries. Commenting on the IRS next move, enacting section 831(b).” A comprehensive range of employee benefits solutions, including Life, King says that after decades of losing “For that reason, I’m sure that the IRS Disability, Accident, Health & Wellbeing, Retirement & Savings, for both local tax court case after-tax court case, the However, King suggests that the IRS’s will continue to scrutinise insurance and expatriate employees. IRS has “finally managed” to win the last hostility towards captives transcends arrangements in general, not just three in a row involving micro-captives of decades, administrations and parties, and captives. That’s just how the game is geb.com questionable status. he doesn’t believe this will change. played”, he adds.

24 Captive Insurance Times - Issue 194 Emerging Talent Emerging Talent

Cheryl Baker Manager, risk management services Blue Cross Blue Shield of Michigan

Personal Bio: I grew up in southeast Michigan, where I remain today – give or take 30 to 40 miles. In my spare time, I enjoy travelling, cooking and trying out new restaurants. I’m also passionate about practising yoga and spending time with my friends and family.

Professional Profile: I graduated from the University of Michigan with a Bachelor of Arts in history, minoring in anthropology. From there, as a result of networking, I took a non-traditional path to captives. My first employer after college was a long-term customer at the establishment where I waited tables and tended bar throughout college. He overheard me speaking about graduating and offered me a position as an office manager at his management training company. After a couple of years, I was able to buy my first home, which led me to my next employer. My neighbour was looking for an employee within his risk management department. I was ultimately hired by Marsh to fill that position. There, I learned a lot about risk management and insurance, including captives. Over time, I engaged in significant formal education related to risk management and insurance, something that I continue to this day. After approximately 15 years, I moved to Blue Cross Blue Shield of Michigan; I have been with Blue Cross Blue Shield of Michigan for eight years.

“The insurance industry as a whole How did you end up in the captive What has been your highlight in What/who have been your influences industry? the captive industry so far? in the captive industry?

has always been fascinating to me – so Although I was exposed to captives at I have to say that meeting so many My influences include my current Marsh, it wasn’t until I moved to Blue knowledgeable and creative individuals leader, Fred Driscoll as well as several Cross Blue Shield of Michigan that I was have been the highlight of my captive broker partners I’ve worked with over what better way to start than providing able to dive into the captive space. My career, thus far. the years. Those individuals include manager and mentor, Frederick Driscoll, Sean Rider (Willis Towers Watson), added me to the team that was standing- Anne Marie Towle (Hylant), Bruce up Blue Cross Blue Shield of Michigan’s Whitmore (Willis Towers Watson) and banking solutions to the captive single-parent captive. This enabled me other captive owners such as Courtney to see how a captive is built, managed Claflin and Karen Hsi (University of and run from the ground-up. Since the California), two of the most fearless insurance industry” formation of the captive, I have been a captive owners I’ve met to date. member of the team responsible for its use and management.

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“Cheryl Baker has been instrumental in working with me and the BCBSM management team to fully develop our captive subsidiary, Woodward Straits, into a highly successful entity that contributes both financially and strategically to the company’s mission and vision allowing the company to focus more on member care and satisfaction.”

What is your impression of the industry?

In my view, the captive industry is so creative and nimble. People within the industry are truly interested in looking at emerging as well as traditional risks, risk mitigation and innovative risk financing via captive 2 0 2 0 V I S I O N : utilisation. Focusing on Your Captive What are your aspirations for your career in the captive industry?

I really enjoy taking advantage of what the captive industry has to offer, enabling our team to mitigate and finance the enterprise’s risks. I’d like to see May 18 - 20, 2020 continued innovation and look for additional strategic uses of our captive in order to help Blue Cross achieve its goals and mission. Salt Lake City, UT What advice do you have for someone considering a role in the industry?

This is the industry for creative and new risk financing opportunities. I would advise anyone interested in the captive industry to reach out and meet as many people as possible (captive managers, owners, regulators, etc.). Look for mentors, advocates and Learn more at Frederick D Driscoll, inspirational colleagues in the captive space. You Director of risk financing and won’t necessarily take all of the same steps but continue to have conversations with people involved captive operations, at every stage of captive development, use and w e s t e r n c a p t i v e c o n f e r e n c e . o r g Blue Cross Blue Shield of Michigan management. Look not only at risk financing options, but other strategic uses for your captive to expand the benefits to your enterprise.

28 Captive Insurance Times - Issue 194 Industry Appointments

The latest moves in the captive industry

Robus, the independent insurance management, fiduciary and financial advisory group, has appointed Laura Boyd and Martin Bourgaize as it expands its Guernsey-based team.

Boyd joins from Rossborough as an insurance manager and will have responsibility for the underwriting and claims management across a portfolio of clients and will also be assisting with business development.

Bourgaize joins Robus as corporate services and insurance manager and will apply his experience in the corporate services arena to his new role.

According to Robus, both hires are the result of growth among the firm’s client base over the past year and reflect its future ambition to win more business across the group.

Robus’ Guernsey general manager, Jamie Read us on Polson, said: “We’d like to welcome [Laura] Boyd and [Martin] Bourgaize to the Guernsey team. These are two excellent hires who strengthen our resources and will enable us to grow even further in Guernsey and beyond.”

“Boyd is an extremely enthusiastic professional with a relevant background in broking services which will certainly benefit our clients.”

“Bourgaize’s expertise in both insurance and company secretarial services will enable us to enhance the specialist, valuable elements of our comprehensive service proposition,” A GUIDE TO TRAVERSING THE CAPTIVE TERRAIN he adds.

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Arkansas insurance commissioner, Allen Kerr will step down from his role to pursue opportunities in the private sector, effective 27 March.

Kerr has been serving as the state’s insurance commissioner since his appointment by Governor Asa Hutchinson in 2015.

As commissioner, Kerr recruited and welcomed 110 new insurance companies to do business in the state, increased annual revenue to the state by $84.25 Guernsey Finance has named my management style as well as my million, increased licensures 67.6 percent Rupert Pleasant as its new chief insight into insurance policy.” and tripled the number of captive insurers executive, replacing Dominic in the state, according to the Arkansas Wheatley, who in December “I am grateful for the opportunity to be Insurance Department. announced he would be stepping appointed to this position, and I am down from his role on 30 June. looking forward to continuing to earn Commenting on his departure, Kerr said: the trust of Tennesseans”, he added. “It has been the greatest honour of my life Huddleston has served in the to serve as state insurance commissioner department since 2014 and has TDCI assistant commissioner Rachel under governor Hutchinson these previous experience in banking, Jrade-Rice noted: “As the division’s last five years. Today, Arkansas is the public accounting, and most recently director, Bill Huddleston will help plan destination for the insurance industry served as the division’s director of for the insurance division’s future known as a place where a company can receiverships. while helping further our mission of come and do honest business without protecting Tennessee consumers.” being overregulated.” Commenting on his promotion, Huddleston said: “My experience with She added: “His experience, As of 31 December 2019, Arkansas the department and our stakeholders leadership and knowledge will be had nine licensed captive insurance combined with my other professional beneficial in this role as he helps companies. experiences has helped me shape oversee day-to-day operations.”

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