Teamwork makes the dream work

Tom Adams, president and CEO of the North Carolina Captive Insurance Association (NCCIA), opened the Annual Conference by thanking those in the industry who have helped make the state’s captive market the success it is today.

In his opening speech on 21 August, Adams explained that as a result of the industry’s hard work, the state now has a “vibrant, growing, ethical captive industry that is poised for growth in this domicile”. He gave a special mention to former insurance commissioner Wayne Goodwin and former senior deputy commissioner Ray Martinez for their hard work to make captive insurance in the state a reality.

The duo were presented with individual awards for their hard work by Adams and chair of the NCCIA, Jeremy Colombik, who added that the NCCIA and state insurance department’s “hand in glove approach” has been a key factor to the state’s success as a captive insurance domicile.

Adams went on to discuss how North Carolina crafted its captive laws. He said: “We have had a tendency in this country to over regulate the industry, to the detriment of our people.”

“I believe that for the more recent captive domiciles we have been able to craft legislation, establishing and promulgating the best regulatory practices to create appropriate frameworks for regulation rather than simply making an industry jump through hoops to make the regulator look ‘strong’.”

North Carolina learned from the experiences of Tennessee, South Carolina, Delaware and others when drafting its captive statue.

In 2013, North Carolina created a statutory framework that set an “appropriate regulatory standard that has become the cutting edge for captive regulation, and assures that captives in North Carolina are doing business the right way”, Adams said.

The state went “a step further” when a committee chaired by Jonathan Reich developed a voluntary code of ethics for those captives and their service providers that do business in the state.

Adams suggested that the code of ethics “moves North Carolina a step ahead of other domiciles”.

He called for other domiciles to follow the state’s lead and establish their own codes of ethics, even offering to make North Carolina’s available as an example for others to adopt.

Adams concluded: “The important thing is this industry should live up to its values and responsibilities to the public and that goes beyond simply satisfying the regulations.”

Form an orderly queue

This work has yielded significant growth in formations, according to Debbie Walker, deputy commissioner of the North Carolina Department of Insurance.

Walker said that in 2016, North Carolina licensed 85 captive insurance companies and approved 132 protected cells or series The state currently has 187 active licensed captive insurance companies and 348 cells.

A number of captives have also redomesticated to the state since its programme’s inception.

That figure stands at 53, including 25 in 2016 alone. Of those redomestications, 21 percent came from onshore locations such as Alabama, Hawaii, Delaware, South Carolina, Utah and Vermont, while 79 percent came from offshore domiciles including the British Virgin Islands, Anguilla, Nevis, St Kitts and St Lucia.

Walker said: “One of the reasons for the redomestications was captive managers, which already have business in the state, bringing other companies they work with back onshore.”

All of this captive business is having a significant economic impact in North Carolina. Between 2014 and 2016, the state recorded an economic impact of $41 million from the captive insurance industry, creating more than 60 jobs.

The economic impact figure is made up of premium tax, service provider and hospitality revenues.

State tax levies were the subject of an NCCIA governmental affairs committee during the conference.

The association is working with the insurance department to determine if it is reasonable and appropriate to make changes to the North Carolina statutes that govern the calculation of premium taxes due by protected cell and special purpose series captives licensed and domiciled in the state.

A technical corrections bill containing other multiple non-captive insurer related changes to the state’s revenue laws became the vehicle for this undertaking earlier this year.

Senate Bill 628 was amended to rewrite and clarify the language contained in NCGS 105-228.4A regarding the premium taxes for protected cell and special purpose series captive insurers.

But during the legislative session on 30 June, the Senate declined to concur on the changes put forward by the House of Representatives, which meant the bill had to go to the conference committee.

When the Senate reconvened, the premium tax calculation changes, as well as dollar cap language contained in the prior House amendments, were deleted. The amendment was not included in the final bill as adopted. As a result, no change was made to North Carolina’s captive insurer premium tax law during the 2017 legislative session.

The NCCIA government affairs committee said during its meeting at the conference that it and the insurance department plan to revisit the legislation in the coming months to improve on the previous amendments ahead of the next session, which begins in May next year.

Matt Mascia, captive insurance manager at the North Carolina Department of Insurance, emphasised that the state’s captive programme has been a “tremendous windfall” from an economic standpoint. He said: “It just keeps getting better and better and we need to get that message across [to legislators].”

Determined for the state to continue its success, Alex Webb, senior partner at Webb & Coyle, believes it’s time for the state to “ramp it up again and continue to climb the mountain”.

According to Richard Lane Brown, vice president of government affairs at the NCCIA: “If you add [it all] up … you approach a billion dollars for the state, annually. We’re approaching that annually.”

He added: “I think it’s easier now [to convince others of North Carolina’s captive proposition], with social media, there’s more information, more states making more laws. People are realising it doesn’t matter how big or small the states are, but it matters about how good the solution is.”

Taxing times

Attendees of the meeting also discussed the Internal Revenue Service’s (IRS) scrutiny of 831(b) captives and the release of Notice 2016-66.

Webb suggested that the notice has kept the industry in “some degree of angst” since November when the notice was first published.

The NCCIA is continuing to “push back” on IRS implementation of its burdensome Notice 2016-66. To date, efforts to secure rescission of the notice have focused on several fronts. Brown explained that the best opportunity might occur during the forthcoming tax reform debate.

In prior years, major tax law changes have often been the vehicle for delaying, modifying or rescinding IRS regulatory actions that US Congress believes contravene the Internal Revenue Code, exceed Congressional intent, or just represent misdirected policy choices, according to Brown.

The NCCIA initially supported a delay in the effective date for the notice, and the US Treasury bowed to wishes of the captive insurance industry.

Brown said: “The North Carolina Department of Insurance has been discussing the efforts they are going to undertake to, on the one hand, protect 831(b) captives, but on the other hand, to seek congressional rescission to protect 831(b) and seek rescission of it itself.”

“They are two big issues, but the greater issue is of course preserving the 831(b) exclusion, which could have a real impact on North Carolina, Congress and a whole bunch of other states.”

Of course, just hours after the meeting on 21 August, a ruling in Avrahami v IRS court case was issued, meaning that tax became the main topic of conversation at that evening’s drinks reception.

On the last day of the conference, tax experts Bruce Wright of Eversheds Sutherland and Tom Jones of McDermott, Will & Emery addressed the Avrahami decision.

Jones described the decision as “bitter-sweet”. He said: “People haven’t sliced and diced the case yet, it’s really a mixed bag. It’s not just a win for the IRS, depending on what perspective you have, it’s a bitter-sweet decision.”

Jones argued that the decision “reaffirms risk exposure units and most of the bigger captives generally don’t suffer a lot of the issues that existed with this tax case”.

He suggested that small captives have to be put into two categories: the good and the bad. “We know what’s bad but we don’t know where the line is drawn between the good and the bad, and that’s the issue,” Jones explained.

Wright also weighed in and suggested that the industry should learn from this case.

According to Wright, when drafting policies, they should be done so in a “feasible, clear, concise and realistic way”.

Wright explained: “If you are going to write those risks you should have good actuarial back up, which is plausible and the court is going to accept for the premium that is being charged for that particular risk, and the actuarial report should also indicate a reasonable amount of capital to be able to support that particular line of business.”
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