US Captive 2018 45
though the participants in the cells are distinct and separate from
each other. The total number of cells in 2017 was reported as 2,958.
Adding this to the Busine ss Insurance data indicates that the total
number of captive insurance entities is closer to 9,605. A similar
jurisdiction analysis reduces the market share of US-parented entities
to 6,977, or 73 percent of the global captive market.
Conversely, due to operating efficiencies, 831(b) captives in
US domiciles are predominantly established in segregated asset
structures. Therefore, the total number of 831(b) captives would be
4,189 comprising 44 percent of the global captive market.
For captives practitioners, the disturbing trend in this market is
the steady decline in captives owned by non-US companies. While
representing the smallest segment by number, any measurement by
assets would be proportionately higher. This segment has lost 203
captives or 13 percent over the past nine years from prominent,
predominantly European, multinationals.
While there is undoubtedly no single reason, a significant
contributing factor are the number of onerous regulatory burdens
being imposed on captives, particularly in the EU.
Solvency II is an updated regulatory regime that took effect in
the EU on January 1, 2016. It is a risk-based system introducing
a comprehensive risk management framework which determines
capital levels and institutes procedures that identify, measure and
establish risk levels
Solvency II’s objectives are to strengthen regulatory requirements
for insurance companies’ capital and risk management by aligning
capital requirements with a risk profile. The regime should improve risk
awareness and quantification, and the integration of this information
into business decision-making, governance and operation. Through
a combination of these the regulation aims to reduce the likelihood of
an insurer failing or disruption to the marketplace.
Solvency II’s impact on captives is that many of the requirements
have been designed for large multiline insurance companies, not
special purpose vehicles designed to provide value for their parent
company. For example, concentration risk, which is inherent in many
captive structures, imposes a significant capital penalty.
Solvency II appeared to provide relative latitude through the principle
of “proportionality”. While perhaps intentionally vague, proportionality
was intended to adjust the requirements of Solvency II taking into
account the relative size of the insurance company. To date it does
appear that in practice there has not been sufficient relief for captives.
A positive development for captives, which serves to offset the
negative impact of concentration risk, is to include a company’s benefit
programmes. Most captives are reluctant to include unrelated third
party risk in order to achieve diversification. However, by including
employee benefit programmes the captive can achieve increased
diversification, reducing the capital penalty, while increasing the
financial value to its parent.
A second potentially negative development is the pending impact
from the implementation of base erosion and profit shifting—BEPS.
This is being developed by the Organization for Economic Cooperation
and Development (OECD), an organisation comprising 34 countries
including the US and Canada.
Its mission is to promote policies that will improve the economic
and social wellbeing of people around the world. One of its goals is to