Captive management company RMC Group and its president and CEO, Raymond Ankner, have won an important case against the Internal Revenue Service in the United States, with the assistance of law firm, ZMF Law.
In the RMC case, the jury concluded that the IRS failed to show that the captive manager was liable for Internal Revenue Code Section 6700 penalties.
Section 6700 applies to any person who organises or assists in organising “any investment plan or arrangement”, or “any other plan or arrangement”.
Such a plan is satisfied simply by ‘selling an illegal method by which to avoid paying taxes’.
The IRS had argued that “Ankner and his companies designed, sold, and managed a plan to avoid federal income taxes through unlawful deductions for supposed ‘insurance premiums’ in connection with micro-captive insurance programs.”
During the case, various witnesses testified in depositions that Ankner’s captive management services were not a “plan or arrangement” within the meaning of Section 6700 because the offered services to help unrelated clients form and manage captives was not a unitary programme.
After more than a decade disputing the issue, ZMF Law said the taxpayer was determined to owe no penalties and will receive a refund of penalties previously paid.
ZMF Law said the victory in the US District Court for the Middle District of Florida is the first of its kind for captives and represents a significant victory for both the captive industry and taxpayers.
“This is a big win for the industry,” said Matthew Reddington, a partner at ZMF Law.
“The case supports the sentiment of much of the small captive insurance industry, where there is concern that the lack of adequate guidance has made it difficult to anticipate what the IRS has now decided are the rules.”
The IRS has a history of going after micro captives – ie. those making the 831(b) election – directly in the Tax Court, winning its most recent case at the end of last month against Dr. Patel, the co-founder of an eye surgery centre and the founder of two research centres in the West Texas area.
Data recently seen by Captive Intelligence indicates that of the approximately 80 831(b) cases concluded in the US Tax Courts since 2014, no deficiencies were found in 25 of those.
Of the over 1,100 cases lodged in the US Tax Courts since 2014 for alleged unlawful 831(b) transactions, over 990 cases are still pending hearing.
Marcin Antosik, Captive Operations Leader – Middle East, Marsh
The Middle East has experienced rapid economic growth and diversification across various sectors, including energy, construction, finance, and healthcare. As companies expand their operations and face more complex risks, captives start to play an increasingly important role in their risk management strategies.
Governments in the Middle East have recognised the importance of captives in supporting economic growth and attracting foreign investment. As a result, they have introduced favourable regulations and frameworks to encourage the establishment of captives.
These regulations provide companies with the necessary legal and regulatory framework to set up and operate captives in a transparent and efficient manner.
Opening the door to captives
There are currently three countries in the Middle East that have specific captive regulations: the United Arab Emirates (UAE), Qatar, and Bahrain.
In the UAE, there are two financial free zones with captive insurance regimes — the Dubai International Financial Centre (DIFC) established in 2004 and the Abu Dhabi Global Market (ADGM) established in 2015.
Regulators in both free zones have introduced captive regulations of the highest standard, in line with well-established captive insurance domiciles, including Bermuda, Guernsey, Cayman Islands, and the Isle of Man. Currently, the UAE is the largest domicile in the Middle East.
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These regulators are constantly seeking ways to improve the environment for captive insurers. For example, in the DIFC, the Dubai Financial Services Authority (DFSA) has approved a revised solvency regime for captives that is more proportionate to their business model and risk profile. This regime came into force in 2021.
Qatar, through the Qatar Financial Centre established in 2005, aims to establish the country as a thriving captive insurance hub, while Bahrain has been a destination for captives for years.
There has been positive dialogue between the captive owners and regulators in these locations. And for companies with captives in their home country, it has often been easier to operate according to the regulations of one country, rather than two.
Saudi Arabia has been contemplating captive legislation recently. The possibility that foreign captives could be redomiciled back home is an important consideration. For Marsh clients in the country, captives are becoming more important for the evolving risks they are facing.
Bassam Albader, CEO of Marsh Saudi Arabia, supports the use of captives as an innovative and necessary option for clients’ risk management needs.
“Captives are becoming an important part of successful risk financing, especially for evolving risks,” he said.
“It would be advantageous to Saudi Arabia to develop the legislation so that companies can efficiently and effectively run captives without needing to use domiciles a long way from home.
“As a global captive leader, bringing this capability to Saudi Arabia is a dream of mine, one that will help in developing the local insurance industry while further enhancing the available insurance solutions we can provide to our clients.”
When does a captive make sense?
The total number of registered captives in the UAE, Qatar, and Bahrain is 13, with 11 of them managed by a captive manager. Marsh is involved with most of these.
In addition to these 13 captives, several Middle East companies use captives domiciled outside of the region — for example, in Bermuda or Guernsey.
At present, the captives under management in the Middle East are from a broad range of industries including oil and gas, transportation and logistics, energy, mining, power and water, and property. However, the use of captives as part of a risk management and insurance strategy is suited to many other sectors such as health, finance, and manufacturing.
The most popular line of business remains property, although captives under Marsh management also write political violence, liability, construction, and group accident programmes.
Outstanding results
The financial performance of the Marsh-managed captives has been exceptional. In 2023, gross written premium (GWP) across the captives reached nearly $250 million — a 10% increase over 2022.
Net income of the captives surpassed $100 million in 2023, a rise of more than 50% from $66 million in 2022. Additionally, total captive-related assets under Marsh management in the Middle East increased 40%, year on year, to $612 million in 2023.
Demand for captives continues to grow
Meanwhile, activity levels in the Middle East have reached unprecedented heights. Marsh Captive Solutions has experienced a surge in demand for feasibility studies for captives in 2023 and 2024 from clients in most industries and locations throughout the Middle East.
The majority of companies in the region are looking to use a captive for key company risks such as property, political violence, and liability. In addition to these lines of business, there is growing interest to use a captive for employee benefits, marine cargo, and other non-traditional risks.
Marsh-managed captives in the Middle East continuously explore new lines of business to enhance their risk coverage. Notable areas of expansion are group travel (including kidnap and ransom coverage), marine cargo, and trade credit insurance against non-payment risks.
An increasing number of captives in the Middle East are opting for private or public ratings. By obtaining ratings, captives enhance their credibility and demonstrate their financial strength and stability to stakeholders. These ratings have been positive for captives under Marsh management, ranging from B++ to A-.
Mining companies, particularly those mining thermal coal, are looking at alternative risk financing tools, such as captives, for liability cover as a means of countering stricter and dwindling capacity in the commercial market.
Consistent with the wider financial sector, mining liability insurers are focussing on ESG and specifically thermal coal exposures when it comes to writing risk.
The property market for mining operations is generally stable, with limited new participants or withdrawals, according to Lockton’s 2024 Insurance Market Update.
Despite this, the sector is facing rate increases of around 5%, which may prompt further mining companies to look towards captive utilisation.
This pricing trend is likely to continue during 2024 with expectations the market will become more of a buyer’s marketplace.
The mining sector, and related energy sector, were hit with significant claims during 2022 and 2023, with several large claims reported in 2023.
The report noted that insurance capacity has reduced in Brazil for mining companies looking for worker’s compensation cover, mainly due to changes in the guidelines of the primary local reinsurer, which is a key leader in insurance treaties.
Lockton said this has prompted major insureds to seek alternative capacity through international facultative reinsurance or consider establishing captive reinsurance structures.
In recent years the mining sector has been affected by an array of political violence events, which in many cases has compromised physical assets and revenues.
Directors and officers insurers’ risk appetite in the mining sector varies, depending on several internal and external factors, with one being a companies’ ESG disclosures.
The potential introduction of a UK captive regime would bring the risk financing tool further into the mainstream and may potentially mean more companies, rather than less, will look to utilise neighbouring domiciles such as Guernsey.
Captive Intelligence reported in November last year that the UK government will launch a consultation on the design of a new captive framework in spring 2024, with the aim of “encouraging the establishment and growth of captives” in the United Kingdom.
Rather than any potential competition between Guernsey and the UK, Mark Elliott, CEO at Guernsey-based Marco Re and a board member of the Guernsey International Insurance Association (GIIA), said it was more about “growing the size of the captive pie for everybody, I think, and we’re very supportive of the UK’s ambition in that regard”.
William Lewis, UK insurance representative for Guernsey Finance, said captives are becoming more commonplace and this should be beneficial to the whole sector.
“For companies that were reticent about a captive previously are suddenly finding themselves realising that other companies are setting up captives and protected cell companies (PCCs), so ‘why shouldn’t we?’” he said. “I think this is going to be good news.”
Elliott said a UK captive regime would help bring captives into the mainstream even more than they currently are.
“As we’ve seen Italy, France, and hopefully the UK in the near future, introduce captive regimes, then we’ll have more companies looking to utilise captive structures, either in the UK or in the existing established jurisdictions,” he added.
While London’s leading position as a global insurance hub and the expertise already in place will be the unique selling proposition of a UK captive domicile, regulatory understanding and responsiveness will be the ultimate factor as to whether it succeeds or not.
Elliott said a UK regime would offer more choice and more options for buyers, “which is a good thing for everybody”.
He also believes there will be pros and cons of the UK as a jurisdiction alongside all the other domiciles.
“That’d be up to clients to decide, but generally, I think we see it as a positive development,” he said.
Only a small number of cases brought against 831(b) owners have concluded
‘Listed transaction’ fears and IRS pressure leading to “panic closures”
No timeline for IRS to confirm status of latest proposals
Legislative proposals being prepared for IRS
The Internal Revenue Service (IRS) remains at a stand-off with captives making the 831(b) tax election, and there is no indication of an imminent conclusion, with some observers believing the IRS is purposely drawing out the process.
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Property programmes could be a future addition to group captives that are consulted on by Captive Resources, according to CEO Nick Hentges.
Speaking on the Global Captive Podcast while at the CICA International Conference in March, Hentges said the annual premium flowing through its group captive portfolio had now reached $4.3bn, having crossed $4bn in 2023.
“We added about 600 members last year,” he said. “We grew by a little over $500m in premium. Some of that’s exposures, a lot of that is new members. We think that we will get close to $5bn by the end of this year.”
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The premium volume is a combination of casualty and medical stop loss, with 70% of the casualty book made up of workers’ compensation premium.
Hentges has been vocal about the company’s plans to make further inroads into the medical stop loss space, where he sees huge opportunity for growth and utilisation of the group captive concept.
“On the casualty side, I would say we have a pretty good lead on folks,” he said. “On the medical stop loss side, we are chasing. We are not a new entrant, but we’re a smaller entrant. We have got very serious about it.
“On the casualty side, we think there are 65,000 companies in the US that would fit one of our captives. We write 6,000 of those.
“On medical stop loss, we think there’s 175,000 companies that would fit what we want to do. And we write 400 of those. If you totalled everybody up that’s in the space, it’s maybe 5,000 companies, so there is tremendous opportunity.”
A further indication of CRI’s growth in medical stop loss is the fact four years ago, its MSL department consisted of three people. By the end of 2024, Hentges expects it to have up to 70.
While casualty, particularly workers’ compensation, and more recently medical stop loss have been what Captive Resources is best known for, Hentges did not rule out entering other lines of business.
Hentges said on the podcast: “I’ve been at the CICA conference now for two days and I bet I’ve had 10 people come up and ask, ‘can you do a property programme’ or ‘are you going to do a property programme? What can you do to help us with property?’
“I make no promises, but we are definitely going to look at property and see if there are opportunities or a niche that we can fill.
“It is tough and pricing has gone up dramatically, but it’s now to a point where the pricing probably makes sense. And if we jump in and can find the right niche, we think it could be a valuable add to the marketplace.”
Arch has promoted Lisa Marecki to senior vice president, head of alternative market claims.
Homogeneous and heterogeneous group captives are the primary focus of Arch in the captive space, but the company also offers solutions for rent-a-captive and single parent captive.
“Since joining Arch in 2016, Lisa has been instrumental in building the alternative market’s claim team made up of both liability and worker’s compensation claim professionals,” said Bill Murphy, EVP of alternative market claims at Arch.
“She also has been assisting our underwriting group develop new business and expand growth opportunities with our existing captive business.”
Arch works with group accounts with a minimum premium of $5m, or individual accounts with a minimum premium of $3m.
AM Best has affirmed the financial strength rating of A (excellent) and the long-term issuer credit rating of “a” (excellent) of Utah-domiciled NiSource Insurance Corporation (NICI). The outlook for the ratings is stable.
NICI is a single parent captive owned by US utilities company, NiSource, providing all-risk property, workers’ compensation, excess general and automobile liability, medical stop-loss, long-term disability, group life insurance and punitive damage coverage for the parent and its affiliates.
AM Best said it has taken a balanced view of NICI’s overall business profile, which maintains advantages as a single parent captive with immediate access to resources along with the broader financial wherewithal of its ultimate parent.
The ratings agency said NICI plays a “critical role” in NiSource’s overall enterprise risk management (ERM) framework, supporting its objectives through insuring key risks of the parent.
The ratings reflect NICI’s balance sheet strength, which AM Best assesses as very strong, as well as its strong operating performance, neutral business profile and appropriate ERM.
NICI maintains the strongest level of risk-adjusted capitalisation, as measured by Best’s capital adequacy ratio (BCAR).
A conservative reserving philosophy is evident through the company’s reported favourable reserves development in each of the past 10 years.
The balance sheet assessment also considers the company’s ample liquidity measures, and maintaining low underwriting leverage, in addition to having no debt.
The stable outlooks for NICI reflect the company’s sustained profitability, adherence to maintaining capital at the appropriate risk-adjusted levels and its measured and prudent approach in insuring its parent’s exposure.
Positive rating action may occur due to a sustained trend of improvement in the company’s overall balance sheet strength that supports a higher assessment level.
“Conversely, negative rating actions could occur from a decline in the company’s operating performance, an increase in underwriting leverage or an outsized loss event that triggers a sudden decline in risk-adjust capitalisation,” AM Best said.
“In addition, negative rating action could occur due to financial issues resulting in rating pressure on the ultimate parent that could impact NiSource’s ratings.”
Adamo will lead SRS Altitude’s property portfolio and Baumann will be responsible for casualty and financial & professional liability (Finpro).
Baumann has held various positions with Converium, Aon and Swiss Re Corporate Solutions, covering topics such as finance, investments, risk analytics, structured solutions and consulting.
Adamo is formerly of Swiss Re Corporate Solutions and brings more than 11 years ART structuring to his new role.
He has held various technical and leadership positions across direct and facultative underwriting and alternative risk transfer.
“I am thrilled to welcome Marco and Roy to our team,” said Loredana Mazzoleni-Neglen, CEO at SRS Altitude.
“Their extensive experience and proven track records will undoubtedly contribute to serving customers, captives, and broker partners with alternative risk transfer solutions and further enhancing SRS synergies in risk consulting and captive management.”
Strategic Risk Solutions acquired captive and insurance manager Robus from the Ardonagh Group in January, further strengthening its presence in Guernsey and adding Gibraltar to its list of domicile options.
Davies has received regulatory approval for its European broking operations which will bring its services to companies across the European Union.
Davies Broking Europe SRL (DBE) has received approval from Belgium’s Financial Services and Markets Authority (FSMA) and is set to become an authorised Lloyd’s broker shortly.
The operation will be based in Brussels and has been designed to partner with brokers in the European Economic Area (EEA).
Its UK branch will also allow existing and future UK broker clients the ability to expand their business into Europe via a warehousing solution.
“DBE extends our UK broker incubation platform for clients aiming to grow and establish infrastructure in Europe through Brussels,” said Matt Lane, CEO of Intermediary & Market Services and a director of DBE.
“Longer term, our aim is to work with clients who are keen to achieve their own authorisation in Europe through the fast-growing Brussels insurance and reinsurance centre.”
Davies has made several captive management acquisitions over the past five years, including US assets of USA Risk Group in 2018 and Bermuda’s Citadel Risk in 2022.
DBE will provide an alternative for handling Lloyd’s Managing Agents’ internal broker and service company Bureau processing related to (LIC).
Davies acquired Lloyd’s managing agent Asta last year, one of the agents leading development of the Lloyd’s Captive Syndicate project.
The company will act as a partner to facilitate EEA presence for both Lloyd’s and non-Lloyd’s business, by serving as the EU placing broker.
DBE will also operate as an outsourced service provider either under DBE’s EEA authorisation or via clients’ own permissions, which will allow DBE to offer support for back-office operations.
It will also provide Non-Lloyd’s Bureau processing for London market carriers underwriting EEA business.
“This is a significant step in Davies’ ambitions,” Steven Goate, director of DBE at Davies.
“We have made no secret of our aim to open new markets for our established and future clients to enable entrepreneurial businesses to deliver innovative solutions in an ever-changing landscape.
“At Davies we are committed to be where our clients operate, and the opening of DBE will further our ambitions.
“Wherever our clients are in the world we will be alongside them to partner them in delivering their development and business growth.”
