Captive insurers are commonly associated with tax benefits and federal tax exemptions, a perception that is only reinforced when they are located in offshore financial centres.
The majority of captives, however, does not take a federal tax position, showing that operational risk management gains have become the more important benefit of self-insurance, panellists at the Cayman Captive Forum said on Thursday.
Julie Robertson, a partner with Honigman LLP, said tax is always an important consideration but there are many others around business costs and efficiencies.
Only 39% of captive owners in Marsh’s benchmark client survey said they formed a captive to realise tax benefits, noted Ellen Charnley, president of Marsh Captive Solutions. Using a captive to act as a formal funding vehicle to self-insure was the main motivation for 70% of parent companies, followed by access to the reinsurance markets (49%).
Even when federal income tax exemptions apply, state taxes and other taxes are still due. Captives with written premiums of $58 billion, captured by the survey, paid $2.18 billion in taxes.
“The existence of those taxes actually gives some comfort to my board members,” said Ruth Goodell, a senior vice president responsible for insurance and risk management at Trinity Health, which maintains a captive in the Cayman Islands.
When educating the board on the purpose of the captive, it helps alleviate the concern about “the optics” of having such a vehicle offshore. Being known to the IRS and the Treasury through filings and paying taxes “provides a lot of comfort that we are good corporate citizens here in the Cayman Islands and back home”, she said.
According to data from Marsh’s benchmark client survey, other beliefs about captives are also no longer accurate. The panel highlighted that captives are not only formed in hard markets, when commercial insurance rates are high and self-insurance offers more cost savings.
Captives are not just used by large public companies, the statistics showed. Traditionally, large captive that generate more than US$20 million in premiums dominated. Today, small and midsized captives with less than $5 million in premiums account for more than half of all captive insurers.
Captives are also no longer the preserve of traditional property and casualty risk or medical malpractice but used in a variety of industries to insure a wide range of risks. The number of captives writing cyber liability coverage for instance has increased 95% over the past five years.
The Cayman Islands is the global leader for healthcare captives and the second largest jurisdiction for captive insurance.
Erin Brosnihan, the chair of the Insurance Managers Association of Cayman, said Cayman’s strength in this marketplace is reflected in the statistics.
This year already 30 new captives were formed compared with 26 during the same period last year, she noted. Seven more applications are pending.
However, Cayman’s total number of captives and reinsurance businesses declined this year from 703 at the close of 2018 to 655 at the end of the third quarter. IMAC has ascribed this both to captives coming to the end of their natural life cycle and the ongoing consolidation in the healthcare space.
In addition to healthcare-focussed captives, Brosnihan told delegates, “A lesser known fact is that Cayman is also a leader in the group captive space.”
She said more than 5,000 middle-market companies in the US have left the traditional insurance market in favour of joining a Cayman Islands group captive.
“Growth in group captive membership has averaged between 6% and 8% per year in the past several years with no slowdown expected.”
Meanwhile, total written premiums in the jurisdiction have reached nearly $18 billion annually, she added.
The number of portfolio insurance companies has jumped from 19 to 27 in the first quarter of this year, comprising about 600 segregated portfolios.
The Cayman Captive Forum, the largest conference in Cayman and one of the largest captive insurance events in the world, attracted 1,500 delegates this week for a day of educational industry presentations and a two-day conference.