AVENTURA, Fla. — Among the benefits captive insurance programs provide is the value of the data generated during their business operations.
But communicating that value to internal decision-makers and dealing with an increasingly complex host of regulatory issues surrounding capital levels and tax treatment are the primary challenges captive insurers face, observers say.
Michael Kerner, Zurich-based CEO of general insurance at Zurich Insurance Group Ltd., said the process of analyzing the claims and expense data collected through a captive program increases an organization's understanding of the risks facing it and “provides rigor” to risk management programs.
“There's value that comes out of that process,” Mr. Kerner said in an interview following his keynote address at this year's 23rd World Captive Forum, held Jan. 29-31 in Aventura, Fla.
“Analytics in health care have been growing in terms of their importance,” said Janeanne Lubin-Szafranski, president and CEO of St. Raphael Healthcare System Inc. in New Haven, Conn., during a panel discussion looking at accountable care organizations under U.S. health care reform and the opportunities and challenges for health care liability captives. “Never will they be more important than they are now in accountable care organizations.”
Data will drive those organizations' decision-making as they look to invest in improving quality of care, she said.
“The captive is a source of data. We know that,” said another member of that panel, Michael Maglaras, principal at Michael Maglaras & Co. in Ashford, Conn. “The ultimate evolution of any health care captive ... is learning from the claims you've had to improve the quality of people's lives.”
The captive industry's evolving relationship with regulators was another recurring theme of the conference.
David Provost, Vermont deputy commissioner of captive insurance, said prospective captive parents interacting with his office would do well to stress the legitimate insurance issues the captive was expected to address as opposed to any potential tax and financial benefits.
“We want to hear less about your captive as a profit center and more about the insurance problems you need to solve,” Mr. Provost said. “We are not in the business of licensing tax strategies. We license insurance companies.”
Maria Sheffield, who is captive program manager for the Missouri Department of Insurance, Financial Institutions & Professional Registration, agreed that framing a captive's insurance value properly was imperative.
“We want to look and make sure that companies understand that they are taking on risk,” she said. “We are concerned when individuals looking to set up a captive see it solely as a wealth-transfer mechanism.”
While captive insurers have long dealt with oversight from state insurance regulators, Thomas Jones, partner at McDermott Will & Emery L.L.P. in Chicago, expressed concern that the industry is beginning to attract attention from regulators less familiar with the intricacies of the business, noting recent actions by the U.S. Securities and Exchange Commission, the Federal Insurance Office and the National Association of Insurance Commissioners to elicit more information about captives.
“There's a lot of smoke and noise right now,” Mr. Jones said. “In the captive world, we pride ourselves on lighter regulation, so it puts a burden on us to demonstrate that lighter regulation is appropriate.”
Indeed, Mr. Jones said it was incumbent upon the industry to help educate regulators and the public about the benefits captive insurers provide. “How do we educate people at the NAIC and FIO about what captives do and why they are not harmful?” he asked.
Some 831(b) microcaptives formed primarily for estate planning purposes with little real risk transfer are making it more difficult for conventional captives in Internal Revenue Service audits, said P. Bruce Wright, a partner at Sutherland Asbill & Brennan L.L.P. in New York.
“The mood is a little bit chillier with the IRS now,” Mr. Jones said in agreeing. “We're essentially now uncomfortable with IRS agents in the audience at captive conferences.”
Elsewhere, the discussion centered on how best to convey a captive's value to internal stakeholders.
Steven Resnick, Nashville, Tenn.-based chief operating officer and chief financial officer at Caterpillar Insurance Co., said that when pitching his captive to Caterpillar Inc.'s C-level executives, he stressed ways in which the captive would enable the equipment manufacturer's business model. For example, the extended warranty policies the captive would insure would give them an advantage in a competitive marketplace. Elsewhere the claims data the company collected could be fed back to the company's engineers to help improve product design and quality, Mr. Resnick said.
“The market demanded extended warranties on this type of equipment,” he said. “So it was easy as a risk manager to go to the C-suite and say that a captive will help increase sales and market penetration. It wasn't only about the financial benefits a captive can bring.”
This year's World Captive Forum drew approximately 325 attendees to the Turnberry Isle Miami resort. The next World Captive Forum is scheduled for Feb. 1-4, 2015, at the Boca Raton Resort & Club in Boca Raton, Fla. For more information go to www.worldcaptiveforum.com.