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California Franchise Tax Board issues Notice allowing abusive micro-captives reduced penalties

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The California Franchise Tax Board (FTB) has offered taxpayers the opportunity to resolve potentially abusive micro-captives (831(b)) transactions and receive reduced penalties by entering into a closing agreement to reverse their deductions and related transaction costs.

Eligible taxpayers must submit a complete and signed FTB Notice 2023-02 closing agreement to the FTB between 10 July 2023, and 17 November 2023, which concedes all claimed tax benefits relating to eligible transactions.

The Notice offers the same mechanism to users of syndicated conservation easement transactions (SCE), which have no relevance to captive insurance but have similarly found themselves targeted by the Internal Revenue Service.

California taxpayers who directly or indirectly entered into an eligible transaction prior to the date of the Notice but have not yet realised the tax benefits from any of these transactions are not eligible to participate in the resolution.

“These taxpayers should be aware that they will be subject to all applicable penalties if at a later date they file a return claiming the tax benefits of an Eligible Transaction,” the notice stated.

Eligible taxpayers who do not participate in the resolution described in the Notice, or taxpayers who fail to comply with all the requirements of this Notice, will be subject to all penalties and interest applicable to that transaction.

The FTB Notice follows the IRS publishing proposals in April which, if implemented, would identify certain micro-captives as “listed transactions” and others “transactions of interest”.

Captive Intelligence published a long-read detailing whether the proposals would destroy the industry or be a refreshing change.

Domicile Wars: Third party risk expected to boost Labuan’s captive proposition

Labuan is set to allow certain captives to write third-party risk, in addition to the risks of its owner or members, in the case of association captives, which will likely make the domicile a more attractive proposition for new formations or re-domestications.

Captive interest in Labuan is growing, and Captive Intelligence understands that there are five additional PCCs currently in development, which are expected to be established in the near future.

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Iowa captive legislation advances

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Iowa is likely to become the next US state to embrace captives, which would make it the 36th US jurisdiction to adopt captive insurance legislation (including the District of Columbia).

On April 24, the Iowa Senate unanimously passed Senate File 549 (SF 549), as amended, “a bill for an act relating to captive insurance companies,” which the House passed earlier in April.

Governor Kim Reynolds is expected to sign the Bill into law, with Bills signed into law normally going into effect 1 July following passage.

SF 549 authorises the formation of pure, association, protected cell, special purpose and industrial insured captives.

The Bill also charges the Iowa Insurance Division with the responsibility of administering the law and promulgating rules under it.

“With a modern, competitive bill that is comparable in many ways to the captive statutes of other jurisdictions, including with respect to premium taxes and fees, dedicated captive regulators and a robust underlying insurance industry, Iowa will be a captive domicile to watch in the future,” said Brian Thomas, associate attorney at Womble Bond Dickinson.

Each captive, including series and protected cell captives, must pay an initial registration fee and an annual renewal fee of $300.

The one-time non-refundable application fee is $200 and every captive must submit an annual report to the Insurance Division by 1 April each year and undergo regulatory exams at the discretion of the insurance commissioner, but no less frequently than every three years.

Annual premium taxes on direct premiums will be 0.35% on the first $20mn of direct premiums, and 0.25% on each dollar of direct premium over $20m.

Annual premium taxes on assumed reinsurance premiums will be 0.20% of assumed reinsurance premiums up to $20m, and 0.125% of assumed reinsurance premiums from $20m to $40m.

Assumed reinsurance premiums that exceed $40m will be taxed at 5%.

The General Assembly has set the minimum annual premium tax for all captives at $5,000, and like the vast majority of other captive jurisdictions, a captive domiciled in Iowa will be required to have a director or manager that is a resident of the state.

Additionally, the parties responsible for managing each captive will be required to hold an annual meeting in Iowa each year.

Iowa will also have dedicated captive insurance regulators, and the Insurance Division is expected to establish a captive insurance bureau to carry out its obligations.

The bureau will be staffed by three new full-time employees: a bureau chief, an examiner specialist and an examiner.

Relaunched Oklahoma association keen to drive captive growth and education

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Oklahoma is a “sleeping giant” of captive potential, according to Renea Louie, COO at Pro Group Captive Management Services, and a new Oklahoma Captive Association (OCIA) board member.

There were 11 new captives formed in Oklahoma last year, taking its year-end total to 52, the Department of Insurance also signed up Steve Kinion at the end of 2022 as its new captive director.

“We will hustle and do it right and work hard,” she said. “Oklahoma is quietly becoming one of the fastest growing domiciles in the US. It’s a sleeping giant.”

Louie was speaking to Captive Intelligence following the recent news that the OCIA was being relaunched, chaired by Heather McClure, general council and chief risk officer at Helio Risk.

Louie joined the board earlier this month along with Randy Pierce, director of risk and insurane at local oil & gas company OneOK.

McClure highlighted that the state’s bylaws allow the association to have up to nine board members.

“We’ve got seven highly experienced leaders now that represent not just the service provider aspect, but we have captive owners on the board, and in committee chair leadership also,” she said.

“We’re looking to increase that ratio of captive owner membership on the board and on our committees as we grow, and that is already happening as others become aware of the re-launch.”

McClure indicated that one of the first things the Association needs to tackle is publishing and presenting the right education and materials to captives who are domiciled in Oklahoma, “as well as those that are actively considering domiciling here”.

She highlighted that the catalyst for revitalising the OCIA was two-fold.

“A number of experienced captive owners domiciled in Oklahoma, and the uniquely supportive energy of the Oklahoma Insurance Department in desiring to partner with industry,” McClure said.

McClure noted that she gets emails every week asking her about participating.

“So, it’s almost like there’s like this bottleneck of interest, and now we’re ready to take off,” she added.

“We’re in that fortunate position of a lot of high interest from a number of industries.

“Oklahoma has such diversity of industries and I think we get pigeon-holed in being mainly agricultural or mainly oil & gas, but we’ve got a lot going on here.”

Louie said that the overall goals for the Board will be a collective team effort “and I’m sure that all the board members have a big vision, and I can’t wait to combine all those visions to make it a very strong association”.

“The challenge is serving the industry well and doing it in the timeframe that the industry needs us to is going to be where hard work and innovation will be needed and we will get the work done,” Louie added.

The OCIA will be holding its annual captive conference on 15 – 17 April 2024.

Captive funding for cyber risk prevention the next step for Solvay

Large corporate cyber programmes must look to the whole market, as well as consider utilisation of captives and mutuals, in order to find the capacity and coverage required, according to the risk, insurance and captive team at Belgian multinational chemical company owner Solvay.

The challenges of managing cyber security and the role of risk financing was debated at length in a GCP Short, featuring experts from Zurich Insurance alongside risk, captive and information security professionals at Solvay.

Solvay works closely with Zurich on fronting for its cyber programme, which contains large self-retention and captive layers.

“The cyber landscape of threat is evolving all the time so optimization means for us, in risk management and insurance, to get enough capacity to cover a catastrophic risk scenario,” said Sonia Cambier, head of corporate insurance and prevention at Solvay.

“It’s about loss of intellectual property, trade secrets, but also business interruption. It’s clear that there is not enough capacity in the market, so to optimize and to obtain what we need, we use extensively the captive, but also all initiatives to bring capacity into the market like mutuals, like MIRIS, where we are participating.”

MIRIS is a European cyber mutual launched in December 2022, which Solvay is a member of.

Concerning the evolving cyber threat landscape Xavier Paulus, Solvay’s deputy chief information security officer (CISO), also joined the discussion to provide an assessment of current trends and what direction cyber risk is heading.

He said Solvay’s cybersecurity strategy is built on the three pillars of defence, resilience, and insurance.

“The defence pillar is all about implementing strong cybersecurity measures to prevent cyber-attacks from succeeding,” Paulus explained.

“It includes cyber threat intelligence that allows us to receive real-time information on emerging threats and vulnerabilities, and that helps us to identify and respond to potential attack proactively.

“The resilience focus on our ability to detect, to respond and to recover from cyber incidents. That includes a robust incident response plan, backup and disaster recovery strategy.



“Finally, we also have the insurance pillar that provides a protection against the financial and the reputational damage that can be caused by a cyber-attack.”

Xavier Groffils, the Luxembourg based captive director for Solvay, explained that the group’s captive plays three key roles in financing cyber risk.

“The first one is to be a first layer cover to increase the attachment point for the insurance market, so that they are attaching much higher than just after the true deductible,” he said.

“The second role for our captive is to work as a solution to cover gaps in the insurance market capacity.

“Generally, you can sometimes find a fronter and first layer insurer, and then you find high excess cover, but sometimes you are not finding the in-betweens very easily and so the captive is sometimes a facilitator in order to close your capacity.”

The third and future role for the captive is on risk prevention.

Cybersecurity and prevention

Cambier said she expects the captive to play a role “more and more” in financing cybersecurity initiatives at the group level to reduce the risk of future losses.

“Historically, we have always been focusing on prevention first before insurance,” she added.

“We are taking a huge self-retention, we have a big captive, but the next role for the captive to play is to help investing in resiliency and risk prevention in respect of cyber.

“We are, with Xavier Groffils, developing a project where a percentage of the captive premium will be dedicated to prevention to provide additional resource for developing programmes, training and so this is the next step.”

Vivien Bilquez, principal cyber risk engineer at Zurich Resilience Solutions, said cyber insurance is “the most important safeguard today, but it is triggered when it is too late, when the bomb has exploded”.

“To limit and avoid it, it is crucial to be prepared,” he added.

Risk, insurance, CISO collaboration

Collaboration between group risk and insurance, those responsible for the captive and the CISO was the key to designing and implementing a fit-for-purpose risk financing strategy for cyber.

“A collaboration at the level of risk management and cyber security with regular meetings to update each other, that’s a basic, but important thing to mention,” Groffils said.

“Collaboration is key because it’s not possible to be efficient by working in silos on the risk prevention and the risk financing since all represent the three risk protection pillars, that’s our philosophy, especially for cyber risk. All aspects must collaborate together in order to develop the best solution for the company.”

Andreas Ruof, head of proposition development & senior captive services specialist at Zurich, said he expected to see more risk managers going down a similar path and utilising their captive to access greater capacity, contribute to group cybersecurity efforts and understand and market the risk better.

“More and more risk managers are leveraging their captive to centrally collect high quality cyber claims and cyber incident data,” he said.

“It enables superior cyber risk analysis, risk insight and, as a result well-targeted, effective cyber risk mitigation measures. Over time, the cyber risk quality continuously improves which can further boost your captive’s cyber underwriting profitability as well as your cyber risk marketability.”

Listen to the full GCP Short discussion here, or or any podcast app. Just search for ‘Global Captive Podcast’.

GCP Short: Cyber risk strategy built with captive fronting and CISO collaboration

Andreas Ruof, Zurich
Vivien Bilquez, Zurich Resilience Solutions
Sonia Cambier, Solvay
Xavier Groffils, Solvay
Xavier Paulus, Solvay

This GCP Short, produced in partnership with Zurich Insurance, takes a real deep dive into cybersecurity and the role for captives in both risk financing and supporting risk management on the fast evolving and difficult to insure risk.

Richard is joined by three members from the risk, insurance and cybersecurity teams at Belgian multinational chemical company and captive owner Solvay, as well as Andreas Ruof, head of proposition development & senior captive services specialist at Zurich, and Vivien Bilquez, principal cyber risk engineer at Zurich Resilience Solutions.

From Solvay, we hear from have Sonia Cambier, head of corporate insurance and prevention, Luxembourg-based captive director Xavier Groffils, and Xavier Paulus, the group’s deputy chief information security officer (CISO).

This is the first time we have had a CISO on the pod, and the insight we receive from the Solvay team on their risk and insurance challenges, and how they work together on solutions, including utilization of the captive, is a really fascinating discussion.

For more information on Zurich’s captive services, visit their Friend of the Podcast page.

Lawrence Bird to re-join Marsh Capitve Solutions in Singapore

Marsh Captive Solutions has created a new consulting role in Asia with Lawrence Bird, currently at WTW, re-joining in Singapore.

Bird, who will begin working for Marsh again in July, will be captives consulting leader, Asia, leading strategic client conversations on captives across the region, including feasibility studies, strategic captive reviews, and long-term captive strategies for clients.

He is currently director of captive and insurance management for Asia Pacific at WTW, who he joined in February 2022.

Bird has previously worked for Marsh in Guernsey for seven years and as head of office for Marsh Captives in Bermuda.

Ellen Charnley, president of Marsh Captive Solutions, said: “We are delighted to have Lawrence re-join Marsh in Asia, and support our clients and colleagues amid significant growth in captives in the region.”

Bird will report to Peter Johnson, head of advisory, Marsh Asia, and his appointment follows further reshuffling of the captive team announced at the end of last year.

Captive Intelligence reported in December Stuart Herbert, Singapore-based since 2011, was moving to the UK to become international captive consulting practice leader, with Nisala Weerasooriya moving from New York to oversee offices in Singapore, Labuan and Australia.

Asia remains a key growth area for captives. Three new captives were established in Singapore in 2022 with five formed in Labuan.

For more captive domicile statistics, visit the Captive Intelligence data page.

Brembo, Hitachi Energy form Switzerland captives, Swisscom re-domesticates

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Two new captives have been authorised by the Swiss Financial Market Supervisory Authority (FINMA) this month, with a third re-domesticating from Liechtenstein earlier this year.

Brembo Re AG, owned by the Italian manufacturer of automotive brake systems Brembo S.p.A., and Hitachi Energy Re, owned by the Japanese multinational, received ‘C3’ captive reinsurance licences in May.

Brembo Re has also hired Fedele Cappiello as its general manager. Cappiello was previously responsible for captive strategy at Stellantis and managing director of Neptunia Marine Insurance Ltd, the group’s Swiss-domiciled captive.

Captive Intelligence understands both are managed by Strategic Risk Solutions, which opened an office in the domicile in 2021, taking its number of captives under management in Switzerland to four.

Brembo Re will be writing liability and product recall, while Hitachi Energy Re is insuring property, liability and marine.

Telecommunications company Swisscom has also chosen to re-domesticate its Liechtenstein reinsurer to Switzerland, first establishing a new subsidiary and then merging in the existing vehicle.

Swisscom Re AG has received a C1 reinsurance licence, rather than a C3, and is self-managed.

There are several large captives in Switzerland, such as those owned by Nestle and Ikano, that are classified as C1 under the FINMA regime.

Captive Intelligence understands there is expected to be further re-domestications from Liechtenstein to Switzerland.

The three new licences in 2023 follows the formation of STMicroelectronics Re SA in December 2022, owned by STMicro, a Dutch multinational headquartered in Geneva, Switzerland, and Barry Callebaut Re AG earlier last year, a captive for the Belgian-Swiss cocoa processor and chocolate manufacturer Barry Callebaut. Both are C3 licences.

Captive sector has strong selling points for future workforce

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The captive insurance sector has a good story to tell graduates and young professionals when they are considering career choices, but the industry must be pro-active, according to members of CICA’s NextGen group.

The Captive Insurance Companies Association (CICA) launched its NextGen initiative in 2019 in an effort to support the career development of new professionals in the industry.

Speaking on the Global Captive Podcast at the Association’s International Conference in March, Bailey Roese, partner at Dentons Bingham Greenebaum LLP, said the sector should be confident in what it can offer to the next generation.

“We think of this question of how we attract and retain new talent as a really intimidating question, a really hard question,” Roese said on GCP #84.

“But I also think we have the answers as an industry if we are just intentional about it. This is a really creative industry. It’s an industry that, it’s people who want to get to “yes”.

“We want to be helpful to our clients, we want to be helpful to one another. And those are the kinds of attributes that are going to lead us to attract new talent, retain new talent.  If we can welcome them in, I think that they will stay.”

Claire Richardson is a captive consultant at Hylant Global Captive Solutions, having attended Butler University where she played an active part in its risk management and insurance (RMI) programme, which included the running of the university’s Bermuda-domiciled captive.

“Continue investing in RMI programmes, or programmes outside of RMI, because we all know that the graduates from those very specific programs are fantastic, but there’s not enough of them to go ahead and fill those holes and gaps that the older generation leaves when they’re retiring in the next five, 10 years,” Richardson said.

“So for the current generation in the industry, continue investing, whether that means funds or time or mentorship opportunities or internship opportunities, really make yourself known. Show up for these students and they will do the same for you.”

Dylan Feringa, assistant vice president in the insurance & specialized industries group at PNC Institutional Asset Management, said he had found CICA’s NextGen group particularly beneficial since joining the industry.

“It helps this next generation coming into this industry really build their network and I think that is a challenging aspect that, as a newer person coming into the captive industry, we see these thousands of people at the conference and don’t know anyone,” he added.

“So having that NextGen group where you know five people out of the thousand. And guess what, those five people know other people and they’re able to make those introductions. So I think that’s one important aspect, of just being able to help build your network.”

Listen to the full discussion with Bailey Roese, Claire Richardson and Dylan Feringa on GCP #84 here, or on any podcast app. Just search for ‘Global Captive Podcast’ and hit subscribe.

Captives are no longer an ‘alternative market’ – Paul Phillips

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Captives should no longer be considered an ‘alternative market’, with the volume of premium and assets under management carried by self-insurance subsidiaries demanding they be viewed as a market in their own right, according to Paul Phillips, partner and global captive network co-leader at EY.

Speaking on a GCP Short with Lisa Wall, executive vice president and risk finance practice leader at Lockton, Phillips discussed the growing prevalence and sophistication of captives, pushing the envelope further with clients and how they may be used to insure ESG-related risks.

“One of the things I’ve been saying on my stump speeches is captives are no longer an alternative market,” Phillips said. “They are in their own right, a market.”

According to data collected by Captive Intelligence, there is more than $100bn in premium written through captives domiciled in the United States alone, while it is estimated 90% of the Fortune 500 own at least one captive insurance company.

Phillips said he is seeing captive owners increasingly explore and push the boundaries of the types of risks they insure through a captive.

“There’s no doubt that we’re seeing new product getting deployed into captives routinely, no doubt that people are becoming more creative around what types of business risks may be insurable, that they can drop into their captive,” he explained.

“Part of that was driven due to the state’s adopting new laws, part of that was driven due to federal tax court cases going in favour of the taxpayer. And the biggest part of that is driven by the hard market and the CFOs looking for alternatives, not to use the same word, but looking for alternatives on ways to finance the risk.”

Lockton, although not a captive manager, does provide risk financing and captive consulting to clients and Lisa Wall said the number of strategic reviews of captives her team have been requested to do has “taken a sharp increase” over the past three years.

“I think it might have been some of the retrenching after Covid, just coming up with what is the best thing for our organisation now in light of where we are,” she said.

“It’s definitely been hard market driven too, but I think it is this view of ‘we’ve got this captive, what else can we do? Can we make it something more and is it going to be more valuable for us?’”

Third party risk continues to be a significant topic in captive circles, with an increasing number of companies keen to explore if they can use their established captive to provide consumer, warranty or affinity types insurances to their customers, contractors or suppliers.

Phillips said this remains industry specific, with some lending themselves more to the opportunity of participating in third party risk programmes.

“In different sectors we do see people who are looking for different revenue streams and seeking opportunities to expand out to third party coverage and basically open their own insurance company,” he added.

“In other sectors, not so much. Other sectors are more conservative, looking at only the first party risk. They’re not very interested in true third-party acceptance of outside risk.”

Wall said entering third party risk programmes does require careful consideration from the captive owner because it can change the profile and purpose of the captive.

“We start every discussion with what are the opportunities here? And put it in the buckets; third party, first party,” she added.

“And if there is a natural fit for the industry sector, then that’s the initial conversation. Is this something that you want to get in to? Is this a business risk?

“Because you’re underwriting. You’re trying to determine is this the appropriate risk that we should take and do we know enough about it to do it? I think it’s just more in the industry sectors where it hits that it is an active conversation.”

You can listen to the full discussion between Richard, Paul and Lisa on the Global Captive Podcast here, or on any podcast app. Just search for ‘Global Captive Podcast’ and hit subscribe.