Captive International
8 INTERVIEW: ELLEN CHARNLEY www.captiveinternational.com
swapping dollars and paying a carrier for 100
percent coverage.”
Charnley explains that captive structures
can provide the parent company with a more
structured approach to retaining and financing
its own risk, and over time—if they have a good
risk management structure and strategy and are
controlling their losses—the surplus will grow.
“As their surplus grows, they can see it tangibly
in the captive balance sheet and it gives them
the confidence to take on more risk, perhaps
buy less insurance, and essentially become
less controlled by carriers, and take ownership
of risk financing for themselves.”
She says a good example of this are the many
hospital systems in the US that have captives.
“Few, if any, would be taking the 831(b) election
or any type of tax benefit because many of
them are non-profits and therefore it’s irrelevant
to them.
“But they form captives for all those reasons—
to have really good corporate discipline and
best practices in retaining their own risk.”
In terms of the future, Charnley views 831(b)s
as a significant growth opportunity.
“Not only would we expect growth within the
number of companies simply filing 831(b)s,
but more importantly, we expect the midsize
sector as a whole being the primary growth
area, regardless of whether they file an 831(b)
election.
“That is worldwide, not just in the US. We’re
seeing midsize growth in Europe, perhaps
with companies using a cell facility. We’re also
getting a lot of interest from midsize companies
in Asia and Latin America.
“This is not just a growth wave of the sector
in the US; this is a midsize growth sector across
the globe that we believe will continue,” she
concludes. l
In the last few years, the IRS has audited
more of these captive structures in the belief
that small businesses are using them to insure
against improbable risks that they never pay
claims on, and the premiums then return to the
business owners with little or no tax.
Charnley acknowledges that she would not
be surprised if the IRS goes after similarly
structured entities to the Avrahamis’ captive,
Feedback Insurance Company.
“It’s low-hanging fruit for them because they
are pretty poorly set up,” she says. “The facts
around the Avrahami case were quite blatant; I
don’t think it would be very hard for the IRS to go
after similarly structured captives. I personally
welcome it as they shouldn’t have been set up
in the first place.”
At Marsh Captive Solutions, Charnley
emphasises, the company has never advised a
client—and never will—to establish a captive
purely for tax purposes.
“The main intent of a captive should never be
to set up for tax purposes. There should always
be a business reason. Avrahami essentially
crystallised that; that is to say a number of
structures are not doing exactly that, and are
potentially capitalising on the tax efficiencies
without necessarily having the substance to the
formation and the transaction,” she says.
She goes further to say that the case confirms
what the industry has already known—or
should know—in that the premiums have to be
set properly, the exposures have to be relevant,
and the capitalisation has to be appropriate.
“Any well-educated and experienced advisor
should be able to help a client know how to
structure a captive properly,” she says.
She also believes that there is adequate
guidance of what is, and what isn’t, an insurance
transaction.
“There’s always an interpretation, and we
certainly work with many captive tax attorneys
if there’s ever any level of doubt to provide a
legal opinion on a structure for our clients,” she
adds.
Giving power to the mid-market
The biggest market opportunity for 831(b)s, in
Charnley’s opinion, is for midsize firms—whether
publicly or privately held—which are looking to
evolve their risk management capabilities and
take more control over their risk.
“Companies are now evolving. The world is
starting to experience exposure that it didn’t 10,
15 or 20 years ago, such as cyber. Companies
are trying to understand and quantify the risk
themselves and are getting more comfortable
with retaining that risk as opposed to simply
“As their surplus
grows, they can
see it tangibly
in the captive
balance sheet
and it gives
them the
confidence to
take on more
risk.”
istockphoto / Cecilie_Arcurs