Captive.com, January 11, 2019
In this article written for Captive.com, Brady Young reflects on the captive insurance industry in 2018 and looks head to the coming year.
As we begin 2019, it’s worth pausing and reflecting on what happened in the captive industry in 2018 and what the operating environment may be in the coming year. As someone who has been working in and around the captive industry for over 30 years, I would rate 2018 as one of the most challenging for captive owners and those of us who support them. We all faced a variety of challenges over the course of the year including the following.
- A volatile investment world could result in negative returns for many captive owners. While this should not be a surprise after a record bull market period, captive owners and their advisers are spending more time thinking about what investment options make sense given the current and expected environment over the coming 12–18 months.
- Washington State’s aggressive efforts to collect self-procurement taxes from Microsoft (and the ensuing settlement) have emboldened other states. Large captive owners are reviewing their exposure and options for dealing with this issue.
- Efforts by the Internal Revenue Service (IRS) to discourage small captive ownership continues. The Reserve Mech. Corp. v. Commissioner, 2018 Tax Ct. Memo LEXIS 87, (T.C. June 18, 2018), tax decision was the biggest development in 2018 in my view since it created additional uncertainty not only for small captives that use a risk pool to spread and share risks but possibly large captive owners, which many have been using similar pooling arrangements for decades. Hopefully, there will be clarity in this area either through future cases or guidance from the IRS.
- Consolidation in the captive management industry is ongoing with Marsh’s acquisition of JLT, USA risk’s sale of its onshore captive management operations, and the sale of several 831(b) shops (with several more on the market). I expect more “Top 10” captive manager consolidations to continue as other firms, particularly managers owned by publicly traded brokers/insurers, reevaluate whether the risk and rewards of the business make sense in the current environment.
- Certain lines of insurance, commercial automobile liability in general and trucking firms in particular, are difficult while other lines such as medical malpractice are very competitive. We have seen and expect to see more healthcare provider mergers and acquisitions that will result in fewer captives but larger ones that are taking on more risk.