The 2019 Captive Insurance Forecast

Formerly reserved only for the largest corporations, captive insurance solutions have become an attractive risk management solution for smaller business operations over the past decade. Captives provide for enhanced insurance coverage at lower rates than other self-insurance solutions, giving companies the ability to lower overhead costs while protecting their financial assets. As with any business operation, strategies and solutions have evolved rapidly, and captive insurance is no exception. With 2019 here, it is a good idea to look at the state of the captive industry and to understand some of the emerging trends in this dynamic insurance solution.

A Look at the 2018 Captive Insurance Industry

2018 saw substantial changes for the captive insurance industry. Perhaps the largest of these changes was a tax court case opinion that offered new guidance for acceptable means of risk distribution for smaller captives. Companies that used risk-sharing pools, particularly those where premiums were not determined by actuaries, were forced to adapt to the new guidance provided by the case summary. Some smaller firms were driven out of the market entirely, unable to adapt their structures accordingly.

In New Jersey and in Washington, 2018 represented a shift in how collection of self- and direct-procurement taxes were handled, with tax courts arguing that domiciles weighed heavily on how taxes were paid on premiums. New Jersey’s passage in 2010 of the Nonadmitted and Reinsurance Reform Act (NRRA) influenced the state’s 2018 Tax Court decision in denying a multi-million dollar tax refund to Johnson & Johnson. In the specific case, the court found that the state legislature intended to include all non-admitted insurers, not only surplus lines, and therefore Johnson & Johnson was obligated to pay taxes on all premiums it had collected for risks throughout the United States. Similar results were had in a case argued by the Washington State Insurance Commission. In the case, the state demanded payment of a two percent sales tax on $91 million in premium payments from Microsoft to its captive insurer, Cypress Insurance Company.

Emerging Trends for 2019

Across the insurance industry, retirements and a lack of appeal for the industry among younger members of the workforce has led to a talent shortage. The captives industry has not been immune to this trend, and industry organizations have made great strides in reversing the loss of talent. The Captive Insurance Companies Association (CICA) has taken the lead in promoting the industry, launching the CICA Mentorship Program in mid-2018. This has served both to attract new workers to the field and to help improve retention rates of experienced insurance professionals.

On the university level, many programs are now offered that focus on captives, especially in presenting information and resources to college-level students. University systems across the country are following the lead of the University of California system, which has had impressive success in captives-focused curriculum. In the University of California program and in similar programs in colleges throughout the U.S., students are encouraged to attend and participate in captive industry conferences, helping them to gain a thorough understanding of the industry and its challenges. These initiatives can only improve the standing of the industry, allowing it to generate interest in the next generation of insurance professionals.

Mergers and acquisitions activity was also strong in 2018, and this trend is expected to carry into 2019. Numerous smaller captives joined together, and several larger captive firms acquired competitors. Some of the newly-merged companies faced new competition, with new captives forming at an accelerated rate. Industry analysts suggest that an increased tolerance for risk is driving the expansion of the captives market. Several emerging risks, like cyber liability and specialty/catastrophic risks, are also influencing the interest in expanding the captives market.

2019 promises to bring new regulatory changes and challenges to the captive insurance industry. The unpredictable nature of the traditional insurance market and skyrocketing premium expenses have made captives an attractive and cost-effective insurance solution, a trend that points to greater success in the coming years.

About Caitlin Morgan Captive Services

Caitlin Morgan Captive Services provides clients with captive insurance solutions supported by years of experience in establishing the successful formation and implementation of a wide range of captives. To learn more about how we can help you, please contact us at (317) 575-4440.