In episode 52 of the Global Captive Podcast, supported by legacy specialists R&Q, Richard explores the growing world of captive insurance for businesses involved in the legalised cannabis industry.
A complex legal environment for the sector, especially in the United States, has made insurance hard to come by and captives are now being formed by businesses desperate for coverage.
Richard is joined by Mike Parrish, Senior Vice President and Client Services Leader at Marsh Management Services Bermuda, who has been involved with two cannabis captives formed in the jurisdiction.
We have a captive owner interview with Josh Hamlin, Chief Legal Officer at DNA Genetics, which formed a captive in Bermuda earlier this year.
And Rocco Petrilli, Chairman of the National Cannabis Risk Management Association (NCRMA), also joined to discuss why the association formed a captive for its members in 2020.
In this GCP Short, produced in collaboration with AXA XL, Richard is joined by Shiwei Jin, Global Program & Captive Regional Director for APAC at AXA XL, and Diana Accordi, Global Advisory Practice Leader in Asia for Marsh, to discuss the growing utilisation of multinational insurance programmes in Asia Pacific.
Over 15 minutes, Shiwei and Diana discuss what support captives and their corporate sponsors require from multinational programme partners, the importance of a defined strategy and objectives from the start, and the necessity to regularly review how a programme is operating.
In episode 51 of the Global Captive Podcast, supported by legacy specialists R&Q, Richard is joined by guest co-host Dave Stebbing, consulting actuary and Director of Strategic Risk Consulting at WTW. Dave discusses data and analytics, capital optimisation and how captives can do a lot better in these areas.
We have a fascinating captive owner interview with Janaize Markland, Director of Business Risk and Insurance at Facebook, who tells us about the social network’s risk financing philosophy and why they established their first captive in Hawaii in December 2020.
In the second half we are also joined by James Rayner, Global Relationship Leader at Crawford & Company, who gives us a really good 101 on captive claims, how they work and the keys to a successful claims strategy.
Janaize Markland, director of business risk and insurance at Facebook
Improving employee benefits was the “primary driver” behind Facebook’s decision to form a captive, according to Janaize Markland, director of business risk and insurance.
“Because Facebook is obviously a global company with employees in a lot of different regions, there are a variety of different employee benefits that are available, and they’re not consistent from region to region,” Markland said in an exclusive interview on GCP #51.
“The idea was to be able to enhance benefits in some areas, to offer coverages that we wanted to, that maybe weren’t necessarily available in the commercial market.”
Markland added that Facebook has three goals for the captive. “One is to be solvent, the second one is to be efficient, and the third one is to be helpful.”
At the time of the interview she they had selected its fronting partner and started to negotiate individual contracts for the captive. “We’re about to place the first one”, she added.
However, Markland said that the company was having a second look at some of the contracts for life and accident & disability insurance. Prior to Covid-19 these had been viewed as a “safe bet”, but there was now an “extra layer of uncertainty”.
“We’re a little concerned that we don’t want to end up having to ask our CFO for additional cash in the first year of operations after convincing him that it was a good idea to do it the first place,” she said.
Facebook wrote its first policy through its captive in December 2020, which was a small excess property policy for existing coverage.
Markland revealed that when she first joined Facebook, she said that theoretically, her first question was: “Why do we have insurance at all?”
However, she noted that although the company has a very strong balance sheet, and a very good risk profile, when it comes to assessing the company’s different exposures, there’s “not much experience in terms of claims”.
She noted that Facebook could take more risk going forward, but it needed to be careful and thoughtful about the most efficient ways to handle its risk transfer needs.
Markland said the company was still interested in transferring risk into the commercial market if and when it’s efficient. “And if it’s not, that’s where our captive can play a role,” she said.
Roy Sharma, Labuan International Insurance Association
In this GCP Short, produced in collaboration with Friends of the Podcast Labuan International Business and Financial Centre, Richard is joined by Farah Jaafar-Crossby, CEO of Labuan IBFC, Roy Sharma, Chairman of the Labuan International Insurance Association and Oliver Schofield, Head of Captive & ART Consulting at Principal Re Limited.
Labuan is Malaysia’s midshore financial centre and the fastest growing captive domicile in the Asia Pacific region, and in this episode we hear about the latest captive formation and premium statistics, the utilisation of protected cells, how the growing commercial reinsurance sector in the jurisdiction is complimenting the captive environment and areas to watch out for with regards future growth.
In this GCP Short, produced in collaboration with Friends of the Podcast Marsh Captive Solutions, Richard is joined by Michael Serricchio, Americas Sales & Advisory Leader at Marsh Captive Solutions, Rich Serina, Senior Manager for Risk Management at Canon USA, and Donna Weber, SVP with responsibility for Marsh’s global protected cell companies.
The trio discuss the growing trend of insureds using captives, and in particular cell captives, to write third party risk. Rich Serina explains how Canon USA has used a DC cell since 2018 to take part in a profitable line of third party insurance.
In episode 50 of the Global Captive Podcast, supported by legacy specialists R&Q, Richard is joined by guest co-host Mike Foley, President of Captive Resources.
Mike joined the group captive specialists in 2018 and discusses his perspective on the risk transfer strategy, his background in the commercial market and the impact of the hard market on group captives.
The captive owner interview is with Dan Scheid, CFO at Zeigler Auto Group and President of Navigator Casualty, Ltd, a Cayman-domiciled group captive. Dan discusses Zeigler’s journey as founder members of Navigator and the benefits it has brought to the company.
For more episodes and to subscribe to the Global Captive Podcast see:
In this GCP Short, produced in collaboration with Friends of the Podcast AM Best, Richard is joined by Daniele Zucchi, Managing Director of Sigurd Ruck, the Swiss-domiciled captive owned by Saipem, Ghislain Le Cam, a Director of Analytics at AM Best, and Roisin Gallagher, Associate Director within Market Development for AM Best Ratings Services.
Daniele, Ghislain and Roisin discuss how and why captives are rated, the impact of the volatile insurance environment and the effect of the parent and other factors on a captive’s rating.
In this GCP Short, produced in collaboration with Friends of the Podcast Swiss Re Corporate Solutions, Richard and guests debate the similarities and differences between virtual captives and protected cell companies (PCCs).
Thomas Keist, Global Captive Solutions Leader at Swiss Re Corporate Solutions, and Fabrice Frere, Managing Director within Aon Global Risk Consulting in Luxembourg, discuss the two structures, addressing areas such as fronting and reinsurance partners, domicile considerations and consolidated and unconsolidated balance sheets.
Jenny Coletta is a Partner and Global Captive Network Co-Leader at EY. Over the last 18 years Jenny has worked exclusively with insurers, providing international insurance tax and transfer pricing services. Jenny leads EY’s Global Insurance Transfer Pricing practice, EY’s Global Captive Insurance network and EY’s UK Insurance International Tax team.
Captives owned by multinational organisations have had to keep a close eye on the OECD’s BEPS project, and further developments are expected this summer that will require close inspection once more.
In July 2021 the OECD/G20 Inclusive Framework[1] of 137[2] countries and the G20 finance ministers are due to reach the next milestone in seeking to achieve consensus with respect to the latest OECD Base Erosion & Profit Shifting (BEPS) project. Widely known as “BEPS 2.0” this project has been underway for the last few years and now appears likely to supersede many aspects of the original BEPS project.
Eight years on from the original BEPS project, which itself had some significant impacts for captives, many jurisdictions are still implementing the initial proposals. Like all good sequels BEPS 2.0 promises to be even more action-packed and ultimately could completely overhaul the international tax system. Most notably for captive owners, the proposals introduce the concept of a minimum tax rate such that multinationals owning entities in low and zero tax jurisdictions may be subject to a top-up tax up to an as-yet undecided minimum tax rate. This will result in a fundamental shift in tax policy for many of the countries expected to adopt the rules.
So, what does this mean for captive owners? Will this result in a significant rise in tax cost? Will captive owners undo what they have put in place as a result of BEPS 1.0?
We explore some recent trends in the captive market and where the future path might lead considering these new developments.
Timing is everything….
Of course, we should not lose sight of the fact that at the same time, and probably of far greater concern for multinationals is that the commercial insurance market has been and is continuing to harden at levels not seen for decades. Many risk directors are facing astronomical pricing hikes for coverage. In certain industries some are facing portfolios of uninsurable risks. Many groups that have not previously owned a captive are now considering doing so. Groups with existing captives are considering increasing retentions. Brexit may bring regulatory challenges to the commercial insurance market which could also further exacerbate operational costs reflected in programme pricing.
So, the need for a captive is probably greater than ever. New and existing captive owners may therefore need to keep a close eye on these potential tax changes which could bring additional tax cost.
Déjà vu??
In the context of the OECD proposals, this is not the first rodeo for many captive owners. We saw under the original BEPS project that the drive for more substance in captive locations led to captive owners reconsidering their strategy – faced with increased operational cost it often made sense to increase the scale of the captive through writing more business. We also saw other BEPS actions lead to more scrutiny on the transfer pricing of captive arrangements and the need to support the commercial rationale; this resulted in behavioural change as smaller, less commercial captives became unsustainable.
Particular tax challenges included changes to Controlled Foreign Company (“CFC”) rules, the UK Diverted Profits Tax (the UK legislative enactment of some of the original BEPS actions), targeted transfer pricing rules and increased controversy around transfer pricing of captive arrangements, and of course the US Tax Reform (The Tax Cuts and Jobs Act of 2017) introducing the Base Erosion and Anti-Abuse Tax, or BEAT.
All of these pressures may have played some part in the overall movement in the total numbers of captives in 2016-2018 as smaller, less commercial captives became unsustainable. However, the volumes of premium written and assets under management became larger as captive owners used their increased substance to write more risk.
For some captive owners these tax challenges presented too much uncertainty and, potentially, reputational risk. Some captive owners instead opted to pay more tax by taxing their captives in the parent location thus mitigating many of these areas of challenge. In many OECD countries this can be undertaken by moving the “central management and control” or “place of effective management” of the captive to the parent location. This generally entails having some substance through holding board meetings in the parent jurisdiction, instead of in the captive location.
This concept originally derives from case law but was latterly enshrined in OECD Model Tax Convention guidance around 20 years ago. It is followed in many countries, however, the most notable exception to this is the US which does not currently observe this concept. However, as an aside, it should be noted that some members of the US Congress have again introduced a proposal for legislation that would refer to this concept of management and control being an indicator of residence, though it remains far from clear whether this proposal will be seriously considered later this year as the US Congress considers numerous international tax law changes aimed at raising revenue to help fund new spending on infrastructure and other programs.
In any case, the US already has a mechanism in place which allows certain insurance companies to be elected as US taxpayers, which has the same effect.
What next?
Broadly speaking, if the BEPS 2.0 proposals are implemented into local law, captive owners holding captives with an effective tax rate below the proposed minimum tax rate will be subject to tax in the parent jurisdiction on the profits of the captive at a ‘top up’ to the minimum rate. For those multinational corporations whose parent jurisdictions do not adopt this top up tax, a back-stop proposal somewhat like the US BEAT could be used by other countries to deny deductions for payments to low-tax jurisdictions.
These rules are intended to operate after the various other international rules mentioned above. However, this does bring into question whether some of the existing substance-based rules will become obsolete if captive owners will be subject to tax in the parent location anyway. Since the substance rules were initially introduced to change behaviour and substantiate commercially rational conduct it would be unfortunate if the new BEPS rules simply disregard that.
How, when and whether the rules will actually be implemented in various countries remains to be seen. Many commentators would observe that there are some significant political barriers to be overcome in doing so, not least ensuring relief for double-taxation and dispute resolution. For the previous BEPS Actions this was achieved (after a lengthy process) through a Multilateral Instrument essentially designed to overlay approximately 3,000 double-tax treaties globally in place and signed up to by many jurisdictions. However not all countries signed up to this and implementation has been inconsistent.
We would also expect the EU to publish its version of the proposals and could expect to see local countries issuing their own consultations later this year or next year. Captive owners should continue to monitor the situation.
This Publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Member firms of the global EY organization cannot accept responsibility for loss to any person relying on this article.
[1] In 2016 the OECD/G20 Inclusive Framework on BEPS (IF) was established to ensure interested countries and jurisdictions, including developing economies, can participate on an equal footing in the development of standards on BEPS related issues, while reviewing and monitoring the implementation of the OECD/G20 BEPS Project [https://www.oecd.org/tax/beps/flyer-inclusive-framework-on-beps.pdf]
[2] As at 21 January 2021 – https://www.oecd.org/tax/beps/oecd-g20-inclusive-framework-on-beps-to-meet-at-plenary-level-on-27-28-january-2021.htm
