A Look Ahead: What's in Store for Captives in 2018?

22 February 2018

What events will rock the world of captive insurance in 2018? Which trends will accelerate and which ones may fall by the wayside. JLT Insurance Management (USA) LLC’s Thomas P. Stokes, Managing Senior Partner, and Executive Vice President and Captive Practice Leader Anne Marie Towle examine the issues that may have an impact on captive insurers in the coming months.

By Thomas P. Stokes and Anne Marie Towle

Change happens. From a historic reduction in U.S. corporate taxes to the eternal watch for rising insurance premiums, a variety of events will continue to influence the captive insurance industry during the next few months. Here’s our take on what may be in store:

Corporate Taxes and Regulations

Congress and the Trump administration have accomplished two things that they promised the business community, including captive insurance companies: reduce regulations and lower taxes. The latter move was dramatic, as the Tax Cuts and Jobs Act of 2017 slashed the corporate tax rate from a high of 35% to 21%.

While this tax reduction is generally favorable to companies that conduct business domestically, multinational companies still need to gauge the administration‘s impact on their global tax picture, as well as related developments. 

There are some events that could make redomestication pick up this year. One is a low, one-time repatriation tax of 8% on illiquid assets and 15.5% on cash from U.S. businesses’ foreign earnings, thanks to the recent U.S. tax law. Another is the reality that some entities will pay more for offshore reinsurance. Finally, a complicated Base Erosion Anti-Abuse Tax (BEAT) provision that mandates a minimum tax on certain payments to foreign companies may also influence where captives domicile.

While offshore captives coming back onshore might increase the number of domestic captives, corporate tax savings might not prompt as many new captive creations, if history is any indication. The calculated benefit of taking a deduction for premiums paid to a captive is at least temporarily reduced, though indications are that state income taxes may be on the increase, offsetting the federal reduction for some captive owners. There will, however, remain those forward-looking captive owners that continue to appreciate a captive-centric approach to controlling their total cost of risk.

Hard Market Coming?

It seems as if industry observers have waited a lifetime for the next hard market. You might think that reinsurers’ billion-dollar losses in 2017 due to a spate of catastrophic wildfires, floods and windstorms would bump up commercial rates. Swiss Re estimated the cost of these events at around $136 billion. While we haven’t seen a race to raise premiums yet by property insurers and reinsurers, how long will market efficiencies and alternative capital keep premium costs down?

Beyond property insurance, we’re beginning to see the impact of increased claims in some specialty lines. The flood of harassment claims in so many parts of business may bring Employment Practices Liability Insurance (EPLI) to the forefront if there is a corresponding bump up in claims. We have already seen a rise in cyber-related insurance claims coinciding with rampant cyber attacks and identity theft. And product liability insurers are still figuring out pricing for new-age products, including self-driving cars, drones and robotics. Presently, we are seeing premiums begin to rise for product liability and EPLI.

Employee Benefits

With near-record low unemployment – it was 4.1% at year-end 2017 – and the total cost of compensation rising, employers will increasingly look toward employee benefits as a way to attract and retain talent in a competitive environment. Expect a renewed interest in companies using their captives to fund at least some employee benefits.

Healthcare stop-loss captives

Is the combination of the new tax bill and the slow death of Obamacare going to force insurers and Medicare to sock it to providers again? Will employers, who provide the bulk of health insurance access in this country, look at stop-loss captives to slow the rise of premium increases?

Until federal regulators clear up the confusion about the “who” and “what” of this type of captive, there will continue to be a good deal of analysis to determine the best next steps for companies. Ultimately, we believe new formations designed for stop-loss coverage will continue for single-parent, group and cells. Stay tuned.  

Group captives

Everyone talks about mid-market and group captives, but where can we expect the most action? Look at risk retention groups and other group captives forming for single purposes, with a number of them related to entrepreneurial uses for insurance companies and agencies.

831(b)’s 

Will Avrahami ever go away? This court case eventually will run its course, but there are other cases in the pipeline and decisions to be reached over the coming months to keep our attention on 831(b) captives, the lightning rod segment of the captive insurance industry.

TRIA 

It’s back! Don’t look now, but the Terrorism Risk Insurance Act is expiring near the end of 2020. If you believe that almost three years is enough time for Congress to deal with this federal terrorism risk insurance backstop, remember how previous renewals have gone down to the wire. Our guess is TRIA will make it under the wire again in some form, but we likely will have to ask the same question again next year.

A Look Ahead

Continued escalations of catastrophic losses, terrorism, geopolitical conflicts and global economies that can turn on a dime are among the usual events that can turn even the most sure-minded predictions upside down. The best bet for captive owners is to work with their captive professionals to keep up with events that might affect their operations, now and in the future. 

 

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This insight by JLT Insurance Management (USA) LLC. is intended to provide only general information based on sources we believe are reliable.  JLT Insurance Management (USA) LLC. makes no representations or warranties, express or implied, as to the accuracy of any of the information herein, which is not intended to be taken as advice with respect to any individual situation and cannot be relied upon as such.

Any statements concerning tax, accounting, legal or regulatory matters should be understood to be general observations based solely on our experience as captive insurance management and captive consultants.  We are not tax, accounting, legal or regulatory professionals and any such information provided is not professional advice.  These matters should be reviewed with your own qualified advisors in these areas