Tax: An Early Holiday Gift

For those of you in the United States, I hope you had a warm and safe Thanksgiving. As we head into the holiday season you can only be thinking of one thing – taxes. OK, maybe not, but we have pulled together our own version of the Three Wise Men to provide you with VCIA’s annual captive tax update on a webinar next week.

On December 8th, VCIA hosts the webinar “Captive Taxation: What You Need to Know” with Chaz Lavelle, a Partner with Dentons Bingham Greenebaum LLP, Dan Kusaila, Partner at Crowe LLP, and Sean Barnes, VP Finance and Administration and CFO with United Educators.

Chaz and Dan have years (and I mean YEARS) of experience and knowledge of captive tax issues and will bring you the latest 2020 tax developments, and outline what will occur in 2021, which is projected to be a busy year in captive tax.  Sean will attempt to corral these two as he moderates the session. Sean brings the captive owner perspective as the chief financial officer and chief investment officer for United Educators Insurance, a Reciprocal Risk Retention Group, one of the largest and most successful RRGs in the industry.

So please join us next Tuesday, December 8, by clicking here to register!

Thanks, as always, for your continued support in these trying times. I look forward to hearing from you!

Black Swans for Thanksgiving

I, for one, am glad its Thanksgiving next week. First, I love the feast! Family and friends (well, er, no friends this year) gather for dinner and conversation – no gifts, no chocolates, no decorations. Just like me: boring but predictable. Second, like everybody I could use a break from the craziness that is 2020, and Thanksgiving does allow one the opportunity to take a reality “time out” at least for a day.

But as my mind drifted to turkey, another bird edged its way into my brain. The proverbial black swan that is at the top of mind for many of us in the insurance community. An article yesterday in the London Times by Alex Wright highlights how many in our world are working to create insurance solutions for things that historically have been labeled uninsurable, like the pandemic.

As Alex outlined in his article, traditionally, companies have mitigated against risk by taking out an insurance policy. Underwriters would spend hours poring over reams of historical data to determine the likelihood of the risk occurring before giving a quote.  But black swans don’t fit this mode well, as by definition they defy historical data – at least in the linear manner we usually think of.

The burgeoning world of artificial intelligence (AI) and machine-learning is looking to change that. The key benefit of AI in insurance is that it can quickly process large data sets and identify significant trends that mere mortals are unable to do.

Dr. Marcus Schmalbach created the VUCA (volatility, uncertainty, complexity and ambiguity) World Risk Index, a parametric index that uses machine-learning to gather data from a range of trusted and verifiable sources, many of which aren’t considered in traditional underwriting. That data is then rigorously analyzed alongside information the technology has gathered from previous experiences to look for patterns and links between events and determine the likelihood of a major event occurring. Among the areas his group has successfully modelled is business interruption loss in the event of a pandemic based on the data they crunched.

Climate change, natural disasters, political and trade conflicts, all could be better priced in the insurance world with new AI applications. AI can also reduce paperwork and the time taken to receive a quote or claim. Using parametrics, AI can also establish if an event has happened, thereby triggering payouts and avoiding any disputes.  Captives are well poised to take advantage of such innovation.

While nobody can predict the future with 100% accuracy, AI will allow insurers to detect anomalies that will help anticipate future events, like pandemics, and maybe better prepare us for the black swans. Perhaps roast black swan instead of turkey….

Thanks, as always, for your continued support in these trying times. I look forward to hearing from you!

Rich Smith
VCIA President

Friday the 13th – It’s Your Lucky Day

All of us in the captive industry, and throughout the broader risk management industry, are very rational thinkers who rely on science to determine the course of action we take in life, right?  A recent report published on November 10, 2020 in Captive International reminded me of how human behavior, with all its biases and superstitions, is a very difficult element in any kind of modelling.

The report, titled Viruses, Contagion and Tail-risk: Modeling Cyber Risk In The Age Of Pandemics, aims to better understand what modelers looking at pandemics and cyber risk can learn from each other.  The report highlights the lack of data from both types of viruses in trying to determine useful models for risk management. However, what caught my eye was this statement: “Although pandemics originate from pathogens, it is the individual and societal reactions to them that are hardest to model…”

I have always been fascinated by behavior economics as it tries to tackle our human foibles in a way that can be interpreted by economists to better understand how our world works. Even very intelligent, seemingly rational individuals are swayed by their internal biases. Science and economics are getting much better at “adjusting” for these very human traits and captive insurance will no doubt benefit as the industry sharpens risk modelling in everything from workers comp to liability. But just in case, hold on to that lucky talisman for now.

On another note, I want to wish Kevin Heffernan of Artex bon voyage as he announced he will be retiring in March 2021. Kevin has been with Artex for many years in a number of leadership roles and for the past 14 months has led captive operations across the US as executive vice president. Kevin was the first finance chair for VCIA at the start of my tenure over ten years ago and he did an excellent job of guiding the committee as well as providing me solid  advice on a wide range of topics Thank you, Kevin, and good luck!

Thanks, as always, for your continued support in these trying times. I look forward to hearing from you!

Rich Smith
VCIA President

It’s an Election…. Now What Happens?

In case you may have missed it, we had a national election this week where the United States picked who will be our President for the next four years… well, almost. As of this filing, the winner has not been declared and there is talk of court cases and recounts. Such is the way of our world these days.

I have been asked several times (OK, once) how I think the captive industry might be impacted under a Biden administration if he were to win. The short answer, from my perspective, is probably not much. Certainly, there are macro issues that may change if Biden were to tack toward a more open border economy than Trump as seems likely. And he is probably going to tighten some of the regulations that Trump loosened in his four years. Perhaps those policies offset each other, but all the same, I don’t think it will have a huge impact on our industry. And I don’t see much of a change in the IRS’s attitude against 831(b)s!

The hardening of the traditional (re)insurance marketplace that ostensibly started last year looks like it will keep steaming ahead into the upcoming year. That will most likely have a greater impact on our industry than policy shifts under a new administration. Certainly, policies impacting the economy, world affairs, and the continuing pandemic will have an effect, but captives are very good about adapting to new risks and economic environments.

One policy change that might provide a little boost to captive formations is if Biden raises the corporate income tax that was lowered under Trump. The lowering of the corporate income tax decreased the federal tax benefit to captive owners, as the accelerated deduction for losses incurred but not recorded will be worth less at a 21 percent tax rate than at the previous rate.  I will be curious to see if a raise to the corporate income tax (if it happens) will have a perceptible effect in our current market.

So, my advice to you all is to strike “impact to captives” off the list of things you are worried about regardless of who ultimately wins. However, if you want to hear more about what may be coming our way in terms of policies, laws and regulations that will impact the captive industry, join VCIA’s annual members-only Captive State of the Union with Dave Provost, myself and other luminaries as we discuss the outlook as part of VCIA’s Annual General Meeting on November 18th. Click here for full information and how to register.

Thanks, as always, for your continued support in these trying times. I look forward to hearing from you!

Rich Smith
VCIA President

Boo!

As if there aren’t already enough things to be frightened of, the World Economic Forum recently released an international jobs report that highlighted the top concerns for global business compared with previous years. Unemployment and spread of infectious disease were the top two risks cited by business executives globally, with fiscal crisis — last year’s top concern — falling to third place.  Not really surprising.

The Regional Risks for Doing Business 2020 survey results are based on 12,012 responses from business leaders in 127 countries. They were given a list of 30 global risks and asked to select the five global risks that they believe to be of most concern for doing business in their country within the next decade.

Cyberattacks have dropped down the list of top concerns for global businesses compared with previous years but remains the biggest risk for U.S. businesses.  While the top risks for global businesses are mostly related to economics, climate-related risks are causing greater concern this year, with natural catastrophes, extreme weather events and failure of climate change adaptation all rising up the list, the WEF said in a statement accompanying the report.

Captives will continue to be integral to their owners in optimizing recovery and building greater preparedness into their business models in order to be more resilient in the face of future disruptions. For more information of the survey, go to this link:

https://www.weforum.org/agenda/2020/10/risks-for-doing-business-survey-unemployment-coronavirus/

Thanks, as always, for your continued support in these trying times. I look forward to hearing from you!

Rich Smith
VCIA President

Homey

The COVID-19 pandemic has drastically altered the workforce with companies across the country suddenly moving to a remote or semi-remote structure to protect their employees.  There has been a lot written about new or increased risks from at-home workers and how captives can play a role to fill some of there emerging insurance gaps.

However, the captive industry is ALSO working remotely these days for the most part. This includes not only the risk managers of the captives themselves, but also the captive managers, service providers and even the regulators (not to mention your vaunted captive association VCIA)! What are some of the tools that the industry is using to manage this far-flung enterprise taking into consideration the potential increase of cybersecurity exposure?

Join us October 28th from 2:00 – 3:00 ET for our next informative webinar, “Working Remotely in the Captive Realm” which will provide a rich discussion on the difficulties faced and opportunities found while working remotely as part of the captive insurance industry. Our panel will share the many ways that societal shifts have pushed us all to think outside the box. Unique perspectives will be shared from a captive manager, a captive owner, an insurance regulator, and a startup founder in artificial intelligence designed for captives. Each will provide insights and changes to their organizations in effort to navigate current socioeconomic and public health conditions.

Captive programs have always played a valuable role during times of uncertainty. Join us for the insightful webinar where we will demonstrate the importance and resiliency of the captive insurance industry and the creative minds that support it.  Click here for more information.

Thanks, as always, for your continued support in these trying times. I look forward to hearing from you!

Rich Smith
VCIA President

Boom Times!

Finally, maybe a little good news in this difficult year. As we all know, the hardening of the traditional insurance market has produced a surge in interest in the formation of captives by new entrants into our industry, as well as an expansion of types and amounts of risks in current captives.

Anecdotally, all my recent discussions with VCIA members have circled around how busy they have been with inquiries and expansion plans since the beginning of the year. Ellen Charnley, president of Marsh Captive Solutions, reported not long ago that Marsh has broken records in the number of captives formed this year. Marsh formed a record 76 new captive insurance companies between January and July 2020, an increase of over 200 percent compared to the same period in 2019 – amazing!

Here in Vermont, DFR Deputy Commissioner Dave Provost and his staff have echoed the reports. Vermont has licensed over 25 captives already this year. For comparison, twenty-five new captives for the entire year is considered a good year normally! And usually the fourth quarter is the busiest for our friends at DFR, as organizations seek to form their captive programs before the new year.

Looking ahead, it doesn’t look like there will be much abatement in captive growth. With a continued hardening market forecast into 2021, and the impacts of the pandemic continuing to unfold, organizations will continue to seek the financial stability and cost savings that captives can often bring to their owners. Let the boom roll on!

Thanks, as always, for your continued support in these trying times. I look forward to hearing from you!

Rich Smith
VCIA President

And the Winner is…

It’s award season in the captive community (aw, heck, it’s always award season…) and not unusually several recent awardees have deep connections with Vermont.

Captive publication, Captive International, named the winners of its inaugural U.S. Captive Awards this past week and many of the winners were from Vermont or had lasting connections to VCIA. I won’t list all the winners, but here is a smattering from Vermont. First and foremost, Vermont was named Domicile of the Year. Some of the Vermonters who won include Beecher Carlson’s Pete Kranz, named as Captive Management Professional of the Year; Stephanie Mapes of Paul Frank + Collins, who is incoming VCIA board chair, received the Individual Legal honor; and former VCIA board chair Tina Truax McCuin of TD Wealth received the Individual Banker of the Year – are you sensing a pattern here?

Captive Review also staged their annual U.S. Captive Awards this past week and Vermont was the winner again of Domicile of the Year for the 7th year in a row!  Pete Kranz won Captive Service Professional of the Year in these awards as well, and former VCIA board chair Heather McClure of Academic Physicians Insurance Company (Oklahoma University Medicine Hospitals and Physicians) was named Captive Risk Manager of the Year. Again, I am sensing a pattern…

Many of the great firms and people who received awards from these two esteemed captive publications have strong connections to VCIA and all have played a role in its growth. We are happy to have these professionals among us. Congratulations to all!

Thanks, as always, for your continued support in these trying times. I look forward to hearing from you!

Rich Smith
VCIA President

Welcome Brittany!

I want to say a HUGE welcome from the Vermont captive insurance community to Brittany Nevins. As many of you have heard, Brittany recently joined Vermont’s Department of Economic Development as the new Captive Insurance Economic Development Director. She will be taking over from the estimable Ian Davis, now over at Peoples United (but still in our captive community!).

Brittany will be responsible for the marketing and business development of Vermont’s captive insurance industry, working closely with the Department of Financial Regulation and VCIA to continue to strengthen the state’s reputation as the premier onshore captive insurance domicile.  We have already had several calls and zoom meetings with hew and she is going to be great!

Located in Texas for the last 2 plus years, Brittany served as a community and economic development specialist for Travis County, Texas, managing its property tax rebate program for businesses that sought to develop in the Austin region. Prior to that, she was a policy specialist for the Texas Health and Human Services Commission, where she provided support for a variety of agency regulatory programs.

On top of all that, having lived in Latin America for a little while, Brittany is also fluent in Spanish. And as VCIA and the State of Vermont continue to explore connecting the Vermont captive industry to the Latin American risk management marketplace, it will come in handy. Although, she did warn me translating our nomenclature, such as non-domiciliary reciprocal risk retention regulations, will not just flow off her tongue! And it coincides nicely with next week’s Online Captive Trade Mission with Mexico which VCIA and the State are hosting on September 30th.  By the way, this event is free for VCIA Members – details here.

So, please take a minute to say “hi” to Brittany and welcome her into our wonderful community, like you did for me ten years ago. Her email is brittany.nevins@vermont.gov.

Thanks, as always, for your continued support in these trying times. I look forward to hearing from you!

Rich Smith
VCIA President

Vermont = Competence

I was looking at a LinkedIn message from Tim McQuiston, the editor of the Vermont Business Magazine, the other day and it reminded me of how important the competence of both leaders and agencies in the State of Vermont is to its citizens.

Tim reminded us that Vermont has used a combination of strict health protocols and impressive compliance by students to keep COVID case counts down, despite 40,000 college students back in the state and tens of thousands of tests conducted.

Vermont COVID numbers are low per capita and have been from the beginning. Not that there haven’t been challenges here and there, but Vermont’s Governor, Health Commissioner, and overall team (along with the Vermont General Assembly) have remained cool, calm, and collected. And part of the leadership in the Governor’s team is Mike Pieciak, Commissioner of the Department of Financial Regulation (DFR) – which, as most of you know, includes captive insurance. The Governor relies on Mike and his team to assist with the modelling of the COVID numbers and analysis using actuarial science. The work and reports being generated by Mike’s team are being used to inform the Governor, Health Commissioner, and all Vermont citizens. With this useful pandemic knowledge and insight, we are all better equipped to make good decisions.

Vermont has a history of being practical. Even us flatlanders who came to Vermont from other places seem to adopt that attitude – maybe it’s the weather. That practicality permeates the state and provides a sense of quiet competence regarding our leadership.  And nobody does competence better than DFR – let us all take a moment to acknowledge the great work the DFR staff continues to do, no matter the circumstance.

Thanks, as always, for your continued support in these trying times. I look forward to hearing from you!

Rich Smith
VCIA President