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NRRA announces fundraising plans to combat Florida bill

Luke Harrison
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The National Risk Retention Association (NRRA) has announced three stages of fundraising to combat Florida Senate Bill 516, which if passed into law, would require an AM Best “A” rating and a minimum financial size of $100mn in capital surplus in order for an RRG to write commercial auto liability in the state.

Phase one of funding plans include the current campaign to communicate with and educate legislators as to the “inherent flaws in the bill”.

NRRA said it had already written four letters in opposition to the Bill to the involved committees, the Senate President and House Speaker.

The Association has also partnered with Paul Handerhan, president of the Federal Association for Insurance Reform (FAIR), who has joined forces with Lewie Pugh, executive vice president and legislative spokesman for the Owner-Operator Independent Drivers Association (OOIDA), and Linda Allen, a small independent Florida trucker.

“While our interest and those of the proponents are actually not inconsistent, their language will be self-defeating, while ours will not be,” Joe Deems, NRRA executive director said.

“The purpose will be to persuade an amendment to the Bill that will work.”

Deems has previously said that the Bill unlawfully seeks to regulate RRGs, and unlawfully discriminates against those that do not obtain such ratings.

He believes the Bill could impact 96% of the RRGs registered in Florida.

“If Florida can get away with violating the federal law by making any financial rating a requirement to do business in their state, it may set a precedent to make other states bolder to do the same thing,” Deems added.

“We need to stop this bill before it passes because, if it passes, suing the state will take years and will be too late to help these impacted RRGs.”

Phase two will be dependent on the amendments actually adopted and includes an ongoing campaign to develop favourable agreements with multiple state agencies who require liability insurance from RRGs, such as the Department of Highway Safety and Motor Vehicles.

Deems said the estimated cost of this will be in the range of $75,000 to $90,000.

On 10 April, the House Commerce and Senate Appropriations Committee voted unanimously to approve the Bill.

While the Bill did pass the Senate Appropriations Committee hearing on 12April, the vote was not unanimous, and it prompted greater discussion and a desire to know more about its potential wider impact.

If the Bill passes with the current language, NRRA said its third phase of the campaign would be to commence litigation to and challenge it at the federal level, with an estimated cost of $150,000.

Captive knowledge gives brokers “competitive edge”

Luke Harrison
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Captive knowledge gives brokers “competitive edge”

Educating brokers about the role and value of captives will provide more opportunities for business, according to Olga Collins, CEO of the Worldwide Broker Network (WBN), and John Harris, group business development director at Robus Group.

Collins and Harris featured on GCP #83, discussing the profile of WBN and its members and the increasing interaction they are having with captives in recent years.

With much of the captive management and consulting space dominated by the large, multinational brokers such as Aon, Marsh and WTW, there has long been a perception challenge among some smaller, independent brokers that promoting or proposing captives can lead them to ultimately lose out on the business.

WBN is the largest independent broker network in the world with more than 150 broker members in over 100 countries.

“[Our members] work with clients spanning from very large brands all the way to high-net-worth private individuals, and I agree that it’s a matter of education,” Collins said.

Collins added that a wider profile of client is becoming interested in the consulting services provided by brokers, in addition to transactional risk management.

Harris, group business development director at Robus Group which is a partner of WBN, said that generally some of the more traditional brokers can initially feel threatened by captives from an income perspective, as they feel they could lose out when a client enters a captive structure.

“But that typically is because they’re not necessarily as educated or have a full understanding of how a captive can play a part in a programme,” he said.

“When you start to help them realise that this is actually something that gives them a competitive edge, they start to look at things slightly differently.”

Harris noted that Robus spends time informing brokers on how a captive strategy can be used as a competitive advantage.

“One, to help them protect themselves against attacks on their existing book,” he added.

“Where they’ve got some significant clients and they’re not deploying captive strategies or even thinking or talking about it with their clients to enable them to stop the competition, the Marsh’s and the Aon and the big guys from attacking their business.

“But also to enable them to use captive strategies as a leverage when they’re attacking new prospective business as well.”

He noted that when brokers realise that this is actually something that gives them a competitive edge, “they start to look at things slightly differently”.

International programme pain points still top of the agenda – Jayesh Patel

Richard Cutcher
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International programme pain points still top of the agenda – Jayesh Patel

Ensuring the smooth running of an international programme remains a key priority for captive owners, despite new lines and bespoke policies becoming increasingly important, according to Jayesh Patel, global head of market practice management for multinational at Allianz Global Corporate & Specialty (AGCS).

Speaking in an extensive interview on GCP #83, Patel discussed the new role he took on last year, AGCS’ renewed focus on and organisation concerning captives and what he is hearing from the market.

While AGCS has been involved in some new, innovative captive structures over the past 18 months, including supporting Meta’s captive being deployed alongside a Side A ‘Laser DIC’ D&O policy, Patel said compliance and operational efficiency remains a big focus.

“What I’ve heard from captive owners with multinational programmes, their big bug bear is just making it run smoothly,” he said.

“And it links to what we said before about bringing local policies together, making sure premium payment is paid on time, ensuring that all of the pieces in the chain work well.

“A lot of people are saying, you know, apart from the cool complex topics, please just make my programme run smoothly.”

As captive owners continue to grapple with the hard market, there has been an increasing demand for 100% fronting programmes and more bespoke wordings in policies written by captives.

While previously some commercial carriers were reluctant to engage in pure fronting, the landscape has changed with customer demand forcing a different approach.

This can lead to the (re)insurer playing multiple roles with the captive.

“It’s important first of all to understand what the needs are of the customer at different elements of that captive chain,” Patel explained.

“We’ve got fronting, which is all about making sure you’ve got the right partner in place locally, your right partner in place centrally to cede premium through as quickly as possible.

“What else can we do for that customer within the tower structure? Is the captive retention set correctly? Can we manage those retentions is a better way?

“And then on the aggregate side and on the layers above, is that structure the most effective way as well when we’re talking about cross cost solutions?”

Listen to the full interview with Jayesh Patel in GCP #83 here, or on any podcast app. Just search for the ‘Global Captive Podcast’.

Over reliance on commercial market prompts GEODIS US captive formation

Luke Harrison
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Over reliance on commercial market prompts GEODIS US captive formation

An over reliance on the commercial insurance market led to the Americas region of GEODIS to establish its own single parent captive, according to Justin Bahorik, director of insurance & risk management.

GEODIS is a world leader in transport and logistics with expertise in all aspects of the supply chain. Globally, GEODIS is headquartered in Paris, France with the Americas Region based out of Brentwood, Tennessee.

In April 2022, GEODIS launched its first single parent captive domiciled in Tennessee and is being managed by Aon.

Bahorik explained the motivation and plans for the captive in GCP #83.

 “When you’re fully reliant on commercial markets, you have to pay what they tell you you’re going to pay with no other options,” he said.

He gave the example that their workers’ compensation premiums had continued to rise despite always outperforming the industry and losses never breaching the retention.

Bahorik explained: “We weren’t being fully rewarded for our hard work in safety and innovation and with a captive, our rates are determined using our own experience and not the industry as a whole.”

Bahorik said it’s been a very positive first year of operation and the company is looking to expand the captive in the near future.

“We definitely want to expand,” he added. “So far we’ve taken a crawl, walk, run approach to ensure we are building a strong base and all stakeholders are comfortable with the process.”

He highlighted that the captive first began by writing a deductible reimbursement policy for workers’ compensation and auto, but has recently added a truck broker liability policy that is written specifically to address the unique needs that GEODIS has in this area.

“Not only can you reduce dependence on the commercial markets, but you can also write policies that benefit the policyholder which in this case is GEODIS,” Bahorik said.

“We were able to include language that filled a gap that we were not able to find commercially.

“The benefit of a captive is not realized in the short term. This is a long term investment. 

“We want to position our captive for success by carefully adding coverages that provide value to the business while also protecting and building the captive’s balance sheet.

“Our hope is that in 5 or 10 years we will have a sizeable surplus that we can utilize to provide even greater stability to the business.”

Listen to the full interview with Justin Bahorik in GCP #83, which also features interviews with Jayesh Patel, Global Head of Market Practice Management for Multinational at Allianz Global Corporate & Specialty (AGCS), and Olga Collins, CEO of the Worldwide Broker Network, and John Harris, Group Business Development Director at Robus Group.

GCP #83: Jayesh Patel, the GEODIS captive and WBN’s Olga Collins

Richard Cutcher
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Olga Collins, Worldwide Broker Network
John Harris, Robus Group
Jayesh Patel, AGCS
Justin Bahorik, GEODIS

In episode 83 of the Global Captive Podcast, supported by the EY Global Captive Network, Richard is joined by a four guests. Time stamps below:

Start – 13.50: Jayesh Patel, Global Head of Market Practice Management for Multinational at Allianz Global Corporate & Specialty (AGCS), and Richard discuss the commercial insurer’s restructuring and focus of captive business globally.

13.50 – 26.22: Recorded at the CICA International Conference in March, Senior Reporter Luke Harrison interviews Justin Bahorik, Director of Insurance and Risk Management at Geodis in the US, about the Tennessee captive formed by the transport and logistics company last year.

26.24 – End: Richard is joined by Olga Collins, CEO of the Worldwide Broker Network, and John Harris, Group Business Development Director at Robus Group, to discuss the growing importance and value of captives to WBN members.

For the latest global captive news, analysis and though leadership, visit Captive Intelligence.

Ascot US appoints Mark Totolos to lead new captive solutions unit

Luke Harrison
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Ascot US appoints Mark Totolos to lead new captive solutions unit

Ascot has appointed Mark Totolos to a newly created role of senior vice president for captive solutions at Ascot US.

The appointment marks the (re)insurance underwriting group’s entrance into America’s booming captive market.

Totolos, who joins from Skyward Specialty Insurance where he was head of captives and programmes, will be a part of the portfolio solutions group, reporting into Tony Lyons, head of portfolio solutions.

Matt Kramer, CEO at Ascot US, said: “With Mark’s deep experience and extensive knowledge in the captive marketplace, I am confident that we will be well-positioned to capitalise on strategic captive opportunities, expanding our portfolio to best serve our clients both now and in the future.”

Totolos will be responsible for setting and communicating the vision, value proposition, and long-term business strategy for Ascot’s new captive solutions portfolio.

“As companies continue to seek alternative risk transfer with increasing frequency, Ascot is committed to responding to the dynamic market by offering clients new capabilities that meet their evolving needs,” Totolos said.

“In this role, I look forward to developing Ascot’s captive business to both drive growth and profitability, and to provide creative solutions to address our clients’ risk management challenges.”

Totolos has previously worked for AIX Group, a subsidiary of Hanover Insurance Group, and Harleysville Insurance Company in underwriting and captive roles.

IRS obsoletes Notice 2016-66, proposes new “micro-captive” regulations

Luke Harrison
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The United States Treasury and Internal Revenue Service (IRS) have obsoleted Notice 2016-66 and confirmed they will not enforce the disclosure requirements or penalties that are dependent upon the procedural validity of the Notice.

In March 2022, the District Court of Eastern Tennessee struck down the IRS’ controversial Notice 2016-66. The Court also held that the IRS acted arbitrarily and capriciously based on the administrative record.

The Service has now issued proposed regulations identifying certain micro-captive transactions as “listed transactions” and certain other micro-captive transactions as “transactions of interest”.

The full proposed rules have been published on the Federal Register here.

“The IRS previously identified certain micro-captive transactions as transactions of interest in Notice 2016-66,” the Service stated on 10 April.

“Recent court decisions in the Sixth Circuit and the U.S. Tax Court ruled that the IRS lacks authority to identify listed transactions and transactions of interest by notices, such as Notice 2016-66, and must instead identify such transactions by following the notice and public comment procedures that apply to regulations.

“Treasury and the IRS disagree with these decisions that the IRS lacks authority to identify listed transactions by notice and continue to defend listing notices in litigation except in the Sixth Circuit.

“Treasury and the IRS will, however, no longer take the position that transactions of interest can be identified without complying with notice and public comment procedures. Treasury and the IRS issued the proposed regulations to ensure that these decisions do not disrupt the IRS’ ongoing efforts to combat abusive tax shelters throughout the nation.”

Micro-captives, as labelled by the IRS, are captive insurance companies that take the 831(b) tax election and have long been under scrutiny from the Service.

To qualify for the election, annual premium must now be below $2.65m. By taking the election the insurer is only taxed on investment income and not underwriting profit.

The Treasury Department and IRS intend to finalise the regulations, after reviewing public comments, this year and issue proposed regulations “identifying additional listed transactions in the near future”.

“The obsoletion of the notice, however, has no effect on the merits of the tax benefits claimed from the transactions themselves and related litigation, or income tax examinations and promoter investigations relating to micro-captive transactions,” the IRS states in its notice of proposed rulemaking.

Trisura impairment a cautionary tale for captive fronting business

Richard Cutcher
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Trisura impairment a cautionary tale for captive fronting business
  • Trisura sees 30% share price fall after fronting failure
  • Growth in MGA fronting prompts fears of race to the bottom
  • Pure and group captive fronting viewed as less risky
  • Competitive marketplace requires additional due diligence from captive owners
  • Gross cession and 100% fronting becoming increasingly popular for captives

News of Trisura Group’s multi-million dollar write-down and subsequent stock drop has caught the fronting, and wider commercial market’s attention, but fears of a “race to the bottom” are not expected to impact traditional pure and group captive programmes.

In March, AM Best revised its outlook for Trisura Group to negative from stable, after the Canadian insurer had revealed a CAD 81.5m one-time write-down of reinsurance recoverables in Q4 resulting from its fronting of a US property and casualty captive programme.

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Reviewing credit risk on gross cessions and pure fronting

Emma Sansom
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Reviewing credit risk on gross cessions and pure fronting
Emma Sansom is group head of captives at Zurich Insurance Company, based in Zurich, Switzerland.

Following Captive Intelligence’s report on what lessons, if any, there are to learn from Trisura Group’s multi-million dollar write-down, Zurich’s Emma Sansom shares her thoughts on recent changes in fronting trends and the considerations for captive owners.

As we’ve seen a rise in gross cession structures and requests for pure fronting, the issue of credit risk is becoming more of a critical one, and there are some additional considerations for captives looking to benefit from using gross structures to access reinsurance markets.

Reinsurance overriders from these transactions can be seen as ‘risk-free’ income, but it’s not: aside from reputational risk at the front end if there are disputes with the claims handling process, then there’s operational risk, and of course credit risk.

Typically we tend to think of insolvency when we think of credit risk, but it can come from a variety of sources: insolvency of the counter-party, coverage disputes, or potentially even legal reasons (see Side A D&O).

Managing counter-party credit risk

Whilst diversification across a portfolio of risk is generally a good thing, with counter-party credit risk, having a large panel of reinsurers brings with it a host of additional considerations.

Concurrency of reinsurance agreements is key to ensuring there is back-to-back coverage for a captive, but negotiations with a large panel of reinsurers can be time consuming.

Contracts will need to be negotiated with the individual carriers, and potentially, subsequent changes to the underlying policies will also need to be negotiated with the panel, or at least the leading reinsurers. Small changes to claims cooperation clauses for example can have potentially far-reaching impacts. 

Ensuring you understand the financial position of each carrier is important, as is ensuring you are making a provision in your pricing structure to cover counter-party credit risk.

Having highly rated capacity of say A- as a minimum is a good place to start. However, as we have seen, these ratings can change so it is important to be able to monitor the whole panel, and have provisions within the reinsurance contract enabling replacement of carriers where there is significant downgrade.

Other credit risk mitigants such as Letters of Credit (LoCs) are an option, but these also involve operational considerations and risks.

For example, an LoC is often a physical document that needs to be stored in a safe. If it needs to be drawn down on, then this means presenting it at the specified branch, which may mean physically going to the branch with the LoC.

So you need to make sure that firstly, the LoC is on demand and evergreen so that it can’t just be cancelled at renewal by the provider, and you have systems in place to respond at pace when you do receive a notification of cancellation or when you need to drawn down.

And then there’s the credit risk of the LoC provider itself. If you happen to be having an issue with a counter-party and the LoC provider is no longer there to provide the cash, then you may be left with outstanding reinsurance recoveries.

Tail risk

Finally a comment of the tail of risk. Predicting long tail risk is difficult to get right – and claims costs are only rising. Where reinsurance is aggregated, such as with mutli-year-multi line structured reinsurance solutions, this potentially leaves gaps in cover for captives where long-tail claims start making themselves known.

Ensuring reinsurance coverage in your excess layers is dovetailed with these types of insurance is critical – for example, if the SS capacity is completely eroded, do the excess layers drop down or stretch down? A drop down of the excess layers will likely be cheaper, but can potentially leave you exposed in the event this capacity is also eroded.

It can be time consuming so if you are considering switching to a gross cession form a net cession, then counter-party credit risk, concurrency, and a robust, gap-free structure should be the focus of the exercise, but this might not be the cheapest capacity.

There is a balance to be struck and if the risks are minimised, a gross cession can reap many benefits.

SRS appoints Ron Sulisz as president of global company

Luke Harrison
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SRS appoints Ron Sulisz as president of global company

Strategic Risk Solutions (SRS) has appointed Ron Sulisz president of the global firm, a position he will assume from 15 May 2023.

Sulisz has been with SRS for 18 years and is currently CEO of SRS Cayman, having helped establish SRS as one of the leading captive managers in the domicile.

Jenny Pooley will be assuming the role of CEO in Cayman.

“I’m excited for this new chapter at SRS, and although I will be shifting responsibilities to Jenny, I’m remaining in the Cayman office, and available to my clients and the relationships that I’ve built over my years at SRS,” Sulisz said.

In his new role he will report to Brady Young, who will remain as CEO of the company. Sulisz will also serve on the board of SRS.

“As we continue to grow and expand, I recognised we needed more focus and resources to support operations and Ron will be perfect to lead this effort and focus on the corporate side of SRS, heading up the internal financial, operations, human resources, and information technology teams,” Young said.

“It will allow me to focus more on strategy and supporting our operating units and ensuring we maintain our customer focus.”

Captive Intelligence reported in February that New York-based private equity firm Integrum Holdings LLP had bought a significant stake in SRS.

Post investment, we understand SRS is looking to expand into new markets, both within and related to the captive management business, and is evaluating further acquisition targets.

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