Captive Insurance Companies Association (CICA) Special Section

CICA president looks ahead to 201

By Michael J. Moody, MBA, ARM

The captive industry has grown and matured over the past 15 to 20 years and has gained a significant following as well. And while each captive supporter has a different perspective on the industry and where it is headed, they are all watching industry developments closely. Few of the proponents have the vantage point of Dennis Harwick, president of the Captive Insurance Companies Association (CICA). In addition to the active involvement with CICA, the only domicile-neutral association of its kind, Harwick has interacted with most of the major captive domiciles primarily by attending their individual local educational conferences.

As a result, he has a unique opportunity to gauge the captive landscape from a large number of different sources. His perspective on what has been going on with captives is one that is developed from discussions with leaders of the captive movement. But, more important, his views on what will be happening to captives in the future is based on the experiences of individual regulators, captive managers and other service providers, and captive owners themselves.

A look back at 2010

"For the most part," Harwick says, "many people in the captive industry are still dealing with the ongoing, lingering effects of the soft property/casualty insurance market. And since we continue to maintain a recessionary-type economy, worldwide, rates will continue to reflect the overall business environment." More to the point with regard to captives, Harwick notes that "conventional wisdom would suggest this environment will have an adverse effect on the captive industry."

But so much for conventional wisdom. He points out that "all of the domiciles are reporting that formations are continuing." He also notes that most domiciles are also reporting that while some runoff (captives that have chosen to unwind) is occurring, overall, "things just keep percolating along." Further, Harwick notes that the captive industry, for the most part, still is waiting for the inevitable hard market because "when the market hardens, things will really explode" and there will be a rapid acceleration in the formations of captives.

Looking ahead at 2011

Most industry experts believe that 2011 will be a year of "catching up," and Harwick thinks this will be the year when the captive industry will begin to see the fallout from the numerous legislative efforts of the past few years. He thinks that the primary concern will be health care legislation as well as the effects of the Dodd-Frank bill which was directed at controlling the overall financial service sector. He points out that these laws are "still too new to fully appreciate their effect on captives."

A good case in point has to do with stop-loss coverage that is used in conjunction with self-insured health programs. He wonders, "Will stop-loss be treated as health insurance or liability insurance?" This one issue, Harwick notes, "is going to have a major effect on the entire captive industry."

In addition to the mega-issues such as the health care legislation, Harwick points out that a number of tax and accounting issues also will affect captives in 2011. He notes that in areas where the IRS has issued specifics, such as regarding cell captives, for the most part the agency has adopted CICA's suggestions. For that reason, CICA continues to try to maintain a positive working relationship with the IRS.

One of the major accounting issues that is certain to continue to attract attention in 2011 is Solvency II. Harwick points out that the effects will be primarily on the European captive community during 2011, but all captive domiciles will have an interest in this issue going forward.

The focus of Solvency II is directed at moving toward a more risk-based capital regime. How and when Solvency II ultimately will affect United States captives is still an open question. However, with traditional insurers and EU captives moving in that direction, "it's just a matter of time," Harwick indicates. He points out that many of the deadlines for implementation "have been sliding back somewhat."

The 2011 major project for CICA will be to determine what effect health care legislation will have on captives. Then the establishment of a strategic response to that legislation will top CICA's 2011 "to-do" list. Development of educational programs will follow.

Also on the Association's "to-do" list is a Web site upgrade. But as Harwick is quick to point out, technology-related issues such as the Web site are ongoing—"a work in progress."

On a broader scale, from all indications, Harwick says, "it appears that the economy may have turned a corner and is starting the long road back." But, he says, the service providers in the captive industry "continue to be very, very cautious with their expenditures." Based on this fact, it would appear that 2011, from a general economy standpoint, will be one of moderate growth. In general, employers, and specifically in the captive industry, will try to keep a lid on the expense side of the balance sheet this year.

Conclusion

The captive landscape is constantly changing. Harwick says that 2011 will be a year of preparation for things that will be coming in the future, "rather than a year of sweeping changes." But it is important to realize that 2011 "will be no time to sit idly by." The past has shown that "we need to be active participants in our own outcome." Further to the point, he says, "we certainly do not want to wait until the deal is done" when it comes to things like new legislation or tax-related issues. In this regard, Harwick says "we need to take this time to be prospective in our planning, not reactive."

That prospective planning has long been a standard for CICA. Since it represents the entire captive industry, CICA continues to work for its members' interests with regard to captives and how they are used. Captives have proven themselves to be effective risk-financing vehicles and CICA has been instrumental in maintaining the level playing field that they currently enjoy. According to Harwick, they will continue to lead the charge with regard to potential issues that challenge the availability of these important risk-financing alternatives.