Captive Insurance Companies Association (CICA) board member Mike Mead, who chaired a panel discussion on the association’s most recent market survey at the International Conference in Scottsdale, Arizona, warned that state and federal regulatory issues are guaranteed “to grow exponentially, every year”...
Captive Insurance Companies Association (CICA) board member Mike Mead, who chaired a panel discussion on the association’s most recent market survey at the International Conference in Scottsdale, Arizona, warned that state and federal regulatory issues are guaranteed “to grow exponentially, every year”.
Keeping up with regulatory changes is certain to continue costing captive managers time and money, according to Mead, who claimed that they should strive to research changes as rigourously as possible, in order to stay on top of regulatory requirements.
The prominence of fronting carriers was also raised by survey respondents, as they are more plentiful than ever.
According to Mead, their rise in prominence brings certain benefits to the industry, but its was claimed that they still struggle to accommodate group captives, such as those covered by the 831(b) election in the US.
Sean Rider of the global captive practice at Willis, Joel Chansky of Milliman, Ryan Ralston of Spring Consulting Group and Sara Pucini of Advocate Healthcare also participated on the panel.
NERA Economic Consulting vice president Dr Anne Gron presented predictions about insurance premiums for 2014 at the conference.
She revealed that, in line with predicted GDP growth in developed economies, real premium growth is expected to rise between 2.5 and 5 percent in the coming year, while emerging markets have been forecast to grow by 7.1 percent.
Growth is also expected for non-life insurance, with the market forecast to grow by 3.8 percent worldwide in 2014. Traditional life insurance is also expected to grow, though only by 0.4 percent.
Although this is good news for the captive market, uncertainty remains due to the rising cost of reinsurance, which is primarily due to shrinking interest rates.
This trend has led to an increase in the presence of alternative insurance capital vehicles, reducing the profitability of traditional insurers.
The rising prominence of alternative insurance is expected to affect capacity, pricing and investment in the insurance industry as a whole, with the pricing of new business set to feel the brunt of the impact.
Bruce Wright of Sutherland, Asbill & Brennan LLP and Tom Jones of McDermott Will & Emery LLP used their slot at the conference to warn industry professionals about some of the more complex tax issues for captives.
Cascading tax, which can lead to reinsurance transactions between US entities being taxed multiple times, was raised as a key issue that is likely to affect the captive industry.
Other points, such as the IRS’s increased scrutiny regarding the nature of risks ceded, provisions in pooling agreements and the details of arm’s length considerations for 831(b) companies, were also highlighted as being likely to affect the wider industry.
Wright and Jones cited examples such as the recent Rent-A-Center and Validus cases, and the proposed New York reforms for captives in order to illustrate the issues.
Lower catastrophe losses in the US during 2013 are expected to yield strong underwriting profitability in the coming year, according to another presentation at the conference.
While natural cat losses, such as those caused by hurricanes, adhered to the status quo during the first half of 2013, the number of cat losses decreased drastically from 2012 in Q3 and Q4.
Over the decades, the US has traditionally been affected by more than two thirds of natural cat losses, but 2013 saw a shift in the balance. Due to extensive flooding in countries such as Germany and the UK in 2013, the largest proportion of cat losses were felt in Europe.
This profitability is expected to be offset, however, by declining rates as a result of business shifting to offshore domiciles and alternative insurance vehicles.
Cat losses for natural disasters increased worldwide in 2013 while losses from man-made events decreased. This trend is expected to continue in 2014, with natural cat losses projected to increase overall in the long-term.
