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Steady growth
Dennis P. Harwick looks ahead to see
steady growth in the US captive sector
April 2008
Over the recent weeks, I’ve listened to a number of industry
experts offer thoughts about what 2008 holds for US-domiciled
captives. Although everyone acknowledges that there is a
weakening US economy, no one has predicted a downturn in
the number of US-domiciled captives. Rather, the consensus is
that there will be slow steady growth in 2008.
However, the picture for US captives just got better in February when
the IRS suddenly withdrew a regulation it proposed in the fall of 2007 that
would have had a significant adverse impact on many US-domiciled singleparent
captives. After a vigorous campaign that brought all segments of
the captive industry together, the IRS took the unusual step of cancelling
the formal hearing that had been scheduled and withdrawing the portion
of the proposed regulation that would have affected captive insurance
companies. There’s nothing better for building coalitions than a common
enemy!
While the IRS regulation was pending, there was a palpable chilling
effect on the creation of on-shore captives, but with the IRS uncertainly
eliminated, it looks like both existing and potential captives can move
forward without worrying about the IRS tossing a monkey wrench into
the process.
CICA’s recent industry survey on fronting, reinsurance and employee
benefits confirmed that the availability and pricing of fronting and
reinsurance remain stable and that concerns about fronting and
reinsurance have dropped significantly. Rather, the quality of support
services to the captive industry emerged as the challenge identified most
often by captive owners. Frankly, I see this as good news for the industry!
If threshold issues such as fronting, reinsurance and the tax environment
have receded in importance, then the industry is sound.
Another long-awaited trend in the captive industry—the use of captives
for employee benefits—seems to be maturing. In 2007, only five percent
of CICA survey respondents reported that they had placed employee
benefits in a captive. That grew to seven percent in the 2008 survey
results, but another nine percent of respondents reported that they
intended to place employee benefits in their captive during the next five
years and an astonishing 47 percent reported that they will be considering
placing employee benefits in their captive during the next five years.
Traditionally, a period of soft insurance markets such as we are
experiencing now would probably have reduced either the number of
captive formations or even resulted in some run-off in the number of
captives, but that doesn’t seem to be happening in a more mature captive
industry. Captive owners now see that having a long-term risk-financing
strategy is more important than just this year’s pricing. There is also a
growing understanding that utilisation of a captive allows a captive’s parent
to smooth out the effects of swings between hard and soft markets and
swings in capacity. There are even those who argue that industries with
problems—for instance, real estate, construction, transportation and so
forth—are ripe with opportunities for new captives as their management
looks for creative solutions!
The expansion of US domiciles welcoming captives continues to grow.
Missouri adopted captive-enabling legislation last year and Michigan is
close to final approval. The list of ‘mature’ on-shore domiciles such as
Vermont, Hawaii, South Carolina and Arizona gets longer as Nevada and
the District of Columbia continue to prosper, and emerging domiciles
such as Montana and Utah have added some spice to the list. We are
even starting to see second and third generations of captive regulators in
some domiciles!
As I travel the captive conference circuit in 2008, I look forward to seeing
old friends and meeting new ones.
Welcome to the world of captives.
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