Airmic captive group to focus on reinsurance and cyber as BEPS proves less of a concern

Reinsurance, cyber and employee benefits are the top three priorities for captive owners in the post-BEPS world, according to a poll of Airmic’s captive group. Recent years have seen captives come under increased scrutiny by regulators and tax authorities. This started with the implementation of capital and risk management requirements under Solvency II and more recently with the OECD’s base erosion and profit shifting (BEPS) measures. A number of tax authorities, including the UK’s HMRC, have challenged captive owners to justify captive structures and demonstrate compliance in areas like premium and transfer pricing. However, if a recent poll of Airmic’s Captive Special Interest Group (SIG) is anything to go by, owners are now looking beyond BEPS. It was ranked fifth priority by SIG members, who would rather see the group focus efforts on reinsurance structures and cyber. According to the SIG’s organiser, Richard Cutcher, who is also Airmic’s research and development manager, this reflects progress made on BEPS over the past two years. “The discussion on BEPS two years ago was around awareness and relevance. Now captive owners are more comfortable with the issues, while tax authorities have engaged with the captive community. It is still a concern, but captive owners are now more aware of what needs to be done,” he said. With BEPS seemingly less of an issue, the innovative use of reinsurance structures was cited as the top priority for captive owners attending the recent quarterly meeting of Airmic’s Captive SIG. “Corporations want to deploy their capital as efficiently as possible,” explained Mr Cutcher. “Cover is becoming more restrictive for some Airmic members as the insurance market becomes harsher, and companies are leveraging their captives for extra capacity. Owners are also exploring aggregated reinsurance coverages, bringing lines of insurance together under multi-line multi-year programmes,” he told CRE. Cyber is also topical in captive circles. A number of companies are looking to use in-house insurers to cover cyber risk, according to Mr Cutcher. Several have implemented cyber insurance programmes through their captives in order to access capacity and plug gaps in cover, he explained. Captive involvement in cyber risk can also give insurers comfort that companies have some “skin in the game” for this emerging line of business, he added. Airmic members are also looking to use captives to back international employee benefits (EB) programmes. This gives more control over EB and brings diversification benefits. Around half the attendees at the SIG meeting already use captives for EB business, while a number of others are exploring options, according to Mr Cutcher. While BEPS has slipped down the agenda, governance remains an important area for captives, he explained. Airmic published a guide for independent non-executive directors (iNEDs) at its conference in Harrogate. The paper, produced with Aon, sets out best practices and shows the benefits of non-executive directors for captive insurers, and the role they can play. It is also relevant for risk managers who want to re-evaluate the effectiveness of their captive’s board and iNEDs. Julia Graham, deputy CEO and technical director at Airmic, said the guide suggests a range of “simple but really important steps” that can be taken to ensure captive company board oversight is “fit for purpose”. Topics of less priority for captive owners involved in Airmic’s SIG included pension risk and insurance-linked securities (ILS). A small number of captives have sponsored ILS to access reinsurance cover. New York’s Metropolitan Transportation Authority (MTA) used ILS to purchase windstorm and quake cover, as has US rail company Amtrack. However, ILS structures require time and effort on the part of sponsors and are not necessarily cheaper than traditional reinsurance markets. But in the case of MTA and Amtrack, ILS enabled companies to access reinsurance that was not readily available in the market. Airmic’s Captive SIG is hosting a captive networking event at the Airmic Learning Hub in Harrogate at 5.30pm on Tuesday 4 June.

Airmic captive group to focus on reinsurance and cyber as BEPS proves less of a concern

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