A Magistrate judge in Tennessee has ruled that CIC Services should not be awarded attorneys’ fees in its case against the Internal Revenue Service (IRS), arguing that the agency’s losing position was substantially justified.
A Bloomberg Law article reported that in siding with the IRS over the fees, Tennessee Magistrate Judge Jill E. McCook said the agency had not disregarded any binding court precedent when it maintained that the requirement did not have to go through a notice-and-comment process under the Administrative Procedure Act.
“The IRS therefore did not take a position that was ‘flatly at odds with the controlling case law’ but instead it ‘lost because an unsettled question was resolved unfavourably,’” McCook said.
The firm brought the case to challenge IRS Notice 2016-66, which required captives taking the 831(b) election and their insurance advisers to report on the transactions.
In a GCP Short episode released in March last year, three legal and captive experts from the US discussed the judgement from the District Court of Eastern Tennessee striking down the IRS’s controversial Notice 2016-66.
CIC Services LLC asked for the fees in the long-standing case that had also included a trip to the United States Supreme Court.
The company had highlighted the Equal Access to Justice Act as reasoning for being awarded the fees, as the Act provides parties who beat the US in a civil case with attorneys’ fees unless the government’s position was substantially justified or other special circumstances make an award of the fees unreasonable.
CIC Services agreed that the agency’s position that the suit was blocked by the Anti-Injunction Act was substantially justified, even though the Supreme Court sided with the firm in 2021, according to the IRS.
The IRS defended its justification for arguing that its reporting requirement did not need to be issued by first giving notice and responding to public comments, even though it lost on that point at the district court in 2022.
The final decision on awarding attorneys’ will be decided Chief Judge Travis R. McDonough at the US District Court for the Eastern District of Tennessee.
Under the Notice, the IRS proposed regulations would see certain 831(b) captives deemed “listed transactions” and other micro-captive transactions labelled “transactions of interest”.
The majority of captives that record a loss ratio under 65% would be considered a “listed transaction”.
More than 100 comments have been submitted in response to the IRS latest proposed regulations, including from CICA, SIIA and the Oklahoma Department of Insurance.
The 831(b) Institute was launched at the of June in the US and has asked for clarity from the IRS around how it regulates micro-captives, arguing that it “unfairly” scrutinises them.
The Guernsey Financial Services Commission (GFSC) has received 21 applications during the first six months of the year, eight of which were for captive licences.
The domicile remains a go-to jurisdiction for UK-based corporates, as well as a strong option for international businesses.
Guernsey added 12 new captives in 2022 while three captives surrendered its licence, taking its total number of captives to 201.
The start to 2023 suggests another strong year of new formations of both pure captives and cells.
“We have seen increased interest in captive formations since 2021 and that continues for firms that are having difficulty in placing their insurance programmes or when the cover they seek is not available,” the GFSC told Captive Intelligence.
If a company is looking to set up a single parent captive in Guernsey, the application can be processed by the GFSC in around four weeks from submission of a fully completed application.
“We have a pre-authorisation scheme for captive cells which means that, within certain parameters, a cell can be formed at short notice by the insurance manager providing the Commission is advised within 14 days thereafter,” the GFSC said.
The GFSC said one of the biggest challenges that Guernsey faces as it aims to continue attracting new captive formations and maintaining its position as the biggest domicile in Europe is attracting and housing sufficient skilled staff.
“This is a matter for government but the Commission contributes to the debate when appropriate.”
Strategic Risk Solutions (SRS) has promoted Elyse Dandeker to deputy managing director of the SRS Guernsey office and head of European operations.
Reporting to SRS Europe CEO Peter Child, Dandeker will be responsible for further expanding the captive manager’s influence in the European marketplace.
“I’m delighted that Elyse’s hard work and dedication has been rewarded by this promotion,” Child said.
“Elyse is a fundamental part of SRS both in Guernsey and across Europe, and I am looking forward to working with her to continue to expand our European footprint.”
Dandeker joined SRS in 2021 as the director of accounting in Europe, based in the SRS Guernsey office.
She has played a key role in establishing SRS in the domicile, focusing on development of the team, the operational platform and delivery of service to a diverse portfolio of insurance management clients.
“I am thrilled to be appointed deputy managing director of Guernsey and head of operations across Europe” Dandeker said.
“I am dedicated to maintaining our commitment to deliver a high – quality service to our clients, whilst ensuring operational excellence in all aspects of our business. With the support of our talented team, I am confident that we will exceed expectations and further strengthen our position in the market.”
Extreme weather and inflation creating ‘perfect storm’ for rate increases
Captives under greater consideration, but warning against short-termism
Captives pushed up the tower, with commercial market keen for primary layer
Concern over fronting capacity and structure on property programmes
The current environment for property risk has created the “perfect storm” for writing the line through captive insurance companies, although important questions concerning collateral, retentions and long term strategy need to be considered for insureds.
Globally, weather events have become more capricious and more locations are becoming exposed to frequent, dangerous and costly environmental catastrophes.
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The Big Ticket data platform will provide Specsavers with more confidence to retain risk within its captive, according to Lee Worth, head of group insurance at Specsavers.
Big Ticket launched its neutral digital infrastructure hub for corporate insurance customers at the Airmic Conference in Manchester, UK in June, after four years of development.
Guernsey captive owner Specsavers is the first client on the platform and Worth was part of the launch.
“Big Ticket will give us better data and it will give us the data in real time,” Worth told Captive Intelligence.
“It will allow us to do much more analysis and if we can then do that analysis ourselves or alongside our broker, it gives us a lot more confidence to retain that risk within the captive.
“One of the things we are looking to do is to start diversifying the captive, but we can’t diversify into other types of risk unless we’ve got confidence in the data being provided.”
Worth noted that Specsavers has historically always been quite reserved with it comes to the utilisation of its captive.
“We’ve always had a captive, but we’ve not necessarily used it to its full potential, and we’ve transferred a lot of our risk to the insurance market,” he added.
He said that property is currently the main focus of the Specsavers captive, but the captive also has some liability risk.
“In particular with Specsavers being a healthcare provider, we also have the need to write medical malpractice,” he said. “I’m keen to get more data from the industry so I can plan ahead and not be reactive.”
Rob Bartlett, co-founder and CEO at Big Ticket, said the platform allows brokers, insurers and captive managers to provide one version of the truth, “so we solve the problem around data capture and transmission during the renewal process”.
“Everyone is sharing the same data, they know where it came from, and they know the quality of it,” Bartlett added.
He believes that the Big Ticket platform provides a great opportunity for captive managers to improve the way they operate, if they consider some of the challenges of moving data between captives and reinsurers.
Bartlett noted that captives are an increasingly important part of the insurance ecosystem “and all the data benefits the insurer can get from Big Ticket is even more true for captives”.
“It might even be more important to the captive as it is part of the corporate and it’s their captive, and therefore, the accuracy and quality of that data is even more important,” he said.
Ken Fraser, co-founder and president at Big Ticket, highlighted that once companies are on the platform, it doesn’t necessarily just have to be used at renewal.
“One of the advantages is that captives can start thinking more strategically over the course of the year, so when it comes to the new renewal, the captive can be more aggressive if it wishes,” he said.
“Having a high confidence level in the exposure data puts the insured and their broker in a position where the captive can send a different message into the market essentially saying that the captive is very comfortable taking more risk if your rate goes too high.”
Big Ticket is backed by founding partner MasterCard and has a Global Advisory Board which includes members Aon, Aviva, Oasis, Zurich, Pool Re and Motive Partners.
Airmic CEO Julia Graham is chair of the Big Ticket Advisory Board.
“Big Ticket is the solution that the risk management community has been crying out for,” Graham said.
“Every year at the start of every insurance renewal, hundreds of thousands of companies use an industry-imposed process to collect exposure data.
“They are asked to use unencrypted spreadsheets and e-mail to do this; a painful, laborious and insecure process which takes up to nine months to complete at an annual recurring direct operational cost globally of US$25 billion, on top of which it actually increases vulnerability to data privacy and cyber security risks.”
Douglas Plenty is a Partner in Insurance Consulting at Ernst & Young LLP, based in London, United Kingdom.
Imogen Gammidge is a Senior Consulting in Insurance Consulting at Ernst & Young LLP, based in London, United Kingdom.
Unprecedented disruption, a hardening (re)insurance market, and the onset of new major risks have increased interest in captive use by corporate risk managers. The captive market – once seen as an alternative to traditional commercial insurance – is establishing itself as a valuable risk management tool and a market in its own right.
Changing risk profiles, from tangible assets, including physical property, to intangible assets, such as intellectual property, has meant that corporates are seeking alternative methods to provide coverage or capacity where traditional insurance cannot.
We estimate that the captive market grew to a total gross written premium of US $250bn in 2022 (Source: EY Nextwave Insurance – commercial and reinsurance paper). Through offering flexible and sophisticated insurance solutions, captives have expanded globally and diverted premium from the open market – and there’s every reason to believe they will continue to do so.
Addressing the changing needs of corporate customers
The changing needs of customers in the commercial market, including corporate risk managers, global businesses, and mid-market organisations, is a major driver of this growth.
Customers are seeking tailored insurance solutions that meet their exact risk profiles and reflect their virtual asset base, operating models, and geographical footprints.
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Large corporations have been examining their insurance strategies and selecting captives to provide a range of capabilities unavailable on the open market and will continue to if traditional insurers cannot meet their requirements.
For many smaller corporates facing new and more costly risks, captives are also being seen as a potential tool to manage the impact of pricing shifts which have substantially hit some industries.
As businesses expand their operations into new markets and increase their reliance on technology, they also become more vulnerable to intangible risks, such as climate events, political volatility, changes in regulation, and cyber-attacks.
With the increasing value of intangible assets from corporate companies, the demand for coverage, and more robust protections from cyber and climate threats through advanced risk insights, is ever increasing.
Companies of all sizes and sectors are now seeking effective risk advisory services and packaged solutions that feature data and analytics services, provision of risk engineering and market-specific offerings, tailored to local laws and regulations.
Solving for intangibles and new threats
To solve for the rise of intangible risks, which now comprise most of the value on company balance sheets, many corporate risk managers have embraced self-insurance for coverage and risk insights that are not readily accessible on the open market.
Corporates have realised the potential for captives to provide advanced analytics and insight generation capabilities, which has led them to master their parents’ risks and build effective loss prevention strategies.
Reduced losses, in combination with use of sophisticated reinsurance purchasing, has resulted in a reduction in portfolio volatility and captives becoming increasingly comfortable taking on more risk.
Captives are further deploying data analytics tools to enhance their risk retention reviews, pricing and coverage negotiations, and risk management efforts. Having grown increasingly self-sufficient and profitable, many large captives see little reason to turn to the open market.
The largest captive insurers are going beyond covering their own risks because they see an attractive path in commercializing their capabilities.
Insights into specific customer needs also means that captives can generate innovative solutions to protect society from its greatest threats. For instance, captives are being used more frequently as incubators for product development, including cyber threats and parametric coverage for intangible assets, to understand companies’ evolving exposures.
Captives offering cyber insurance emerged in response to reduced capacity and rising pricing of this product line in the traditional market. Cyber cover provided by captives now typically forms a fundamental component of their parent’s cyber risk management strategy.
Similarly, a withdrawal of carriers willing to underwrite “brown” risks, due to increasing ESG concerns, has led customers to consider bifurcation of their “brown” and “green” exposures through captives, or bundling of these exposures to support the onward transfer of risk.
The role of brokers and insurers
There is huge opportunity for brokers and insurers to be doing more for their captive clients. Specifically, around alternative revenue streams, including risk advisory and data-led services to provide expert advice on risk management, regulatory compliance, and industry benchmarking.
These services can help captive owners to regularly evaluate their insurance programmes and identify opportunities for improvement. Captives are a tool to solve problems that cannot be solved in the commercial marketplace, and they should work in harmony with the wider ecosystem.
Brokers and insurers have the capabilities to facilitate this relationship and in doing so, support both themselves and captive owners seize further revenue and growth opportunities.
To support clients in their decisions to build out captives and gain the benefits of continuous product development, advanced insurance strategies and risk insights, collaboration may be the best path forward for insurers and brokers. In turn, new growth opportunities may be realised for captives, too.
A success story in this space is the collaboration between captives and managing general agents (MGAs).
Their flexible structures allow for captives to support in a myriad of ways, primarily through providing access to reinsurance markets.
The prevalence of these arrangements is in its early days. However, we believe there are more opportunities for MGAs to exploit – and more innovative captive partnerships on the table to drive growth.
Conclusions
As demand for non-traditional risk cover rises, so will the need for alternative insurance solutions. Corporates and their (re)insurance partners that are ambitious in their action to together navigate changing risk profiles and demands stand to realise benefits from new insurance strategies and considering the role of captives.
Within a complex and ever-changing environment, a combined cross-(re)insurance industry approach, centred around the needs of customers, is imperative.
Those that succeed will invest in the opportunity to form early alliances with captives to drive innovation and build the capabilities needed to add value to customers and protect wider society.
Disclaimer: 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.
MSL Captive Solutions (MSL) has become a full service managing general underwriter (MGU) for Everest Reinsurance Company, effective from 1 June, 2023.
In December last year, Giles told Captive Intelligence that medical stop loss (MSL) captives were on course to account for more than 25% of the overall MSL insurance market.
“The tremendous expansion in the MSL captive market over the past decade has exceeded a comfortable supply of competitively diverse carrier options participating in this segment,” said Phillip Giles, managing director of MSL Captive Solutions.
“Everest is a highly rated carrier and brings stability to the medical stop loss captive sector through the strength of its balance sheet and underwriting philosophy.”
Giles added the agreement should bring the agility to underwrite on a direct and reinsurance basis, expanding MSL’s capacity to deliver tailored captive solutions to both group and single parent captives.
MSL Captive Solutions works with select programme managers, brokers, consultants and captive managers to develop proprietary group and single parent captive programmes.
MSL provides stop-loss captive underwriting management to a number of the world’s largest stop-loss carriers and develops customised captive programmes with each carrier to meet the specific risk, financial, and objectives of its clients.
“MSL Captive Solutions is a predominant MGU in the captive insurance market and we are thrilled to be working with them,” said Shawn Austin, senior vice president and head of accident and health North America at Everest.
“Their expertise in the captive space combined with Everest’s strong financials will bring an impressive offering to this rapidly growing market segment.”
Luis Delgado has relocated to Colombia and been appointed Latam regional director at Strategic Risk Solutions (SRS) with the captive manager planning further expansion into Latin America.
Delgado joined SRS in 2020 as vice president of SRS Bermuda’s captive management operations and has been responsible for growing SRS’ Latam portfolio.
“Over the past few years, we have seen record levels of captive formations, feasibility studies, and general interest and enquiries from prospects across Latam, so it makes sense to be closer to where our clients and prospects are located,” Delgado said.
“Latam is producing strong growth in captive insurance, and we will focus on developing new captive formations from the region.”
Delgado will be responsible for leading SRS’s business development strategies and the geographical expansion of the firm into Latin America.
In his new role, he will continue to lead a team of Spanish speaking qualified accountants with captive experience, but he has personally relocated to Colombia to establish SRS’s presence in the region.
“Latin America represents an important region for SRS,” said Brady Young, CEO of SRS.
“We believe there are significant opportunities for Latam parent organisations to make greater use of captive insurance.
“Luis has developed a good foundation of Latam business for SRS operating from Bermuda as well as building on his captive management experience. Relocating to Colombia brings a greater local presence as we bring more support and resources to support captive insurance in the region.”
Robus has announced four promotions, as well as two new hires, in its Guernsey office in what it says is a result of its continued growth trajectory.
Adele Gale has been promoted to deputy managing director, while Amy Flude, Lisa Dunn and Laura Boyd have joined the senior management team.
Simon Lloyd has joined Robus Guernsey as a claims and underwriting administrator and Gill Le Cras has joined as a senior administrator.
Jamie Polson, managing director of Robus Guernsey has also been appointed group chief finance director.
“We are delighted to be able to recognise the talent and contribution of those promoted during 2023 and to welcome our new joiners who are already making an impact on our business as we broaden out our management team and build on our core client service proposition,” said Polson.
“A key element of our strategy was the launch of our graduate and school leaver programme earlier this year and we look forward to announcing further hires in due course.”
Owned by the Ardonagh Group, Robus is a captive and insurance manager working with single parent captives, cell companies and insurance linked securities in Guernsey and Gibraltar.
This GCP Short, produced in partnership with TMF Group, is all about the tax considerations for non-US captives writing insurance in the United States.
Richard is joined by US-based tax attorney Asher Harris and Joseph Finbow, IPT Assurance Director at TMF.
Asher and Jo discuss the relevant IPT, federal excise and other taxes relevant for captives doing business in the United States, the impact of using different domiciles and closing agreements.
