Cell Captives: Innovation and Expansion. Thursday, Jan :15 12:15

Transcription

1 Captives: Innovation and Expansion Thursday, Jan :15 12:15 1

2 Moderator: Nick Frost, R&Q Quest Management Services Ltd. Speaker: Edward Koral, Deloitte Consulting LLP

3 Protected Captives - Overview Core Individual cells for mid-sized firms May reduce operating costs Faster exit strategy if desired May be able to operate under IRC Section 831(b) if annual premiums are < $1.2 million Each cell is legally independent and separate from other cells and the core Assets of one cell are unaffected by the liabilities of another cell Therefore, assets of one cell cannot be drawn upon in the event of financial insecurity of another cell Each cell must have sufficient capital to cover its potential liabilities s may either rent capital from the core, or put up capital themselves depending on the business plan of the sponsor Letters of Credit commonly used as capital In some, but not all, jurisdictions, if a cell becomes bankrupt, creditors can claim against the core; In others, assets of the cell are segregated from both other cells and the core

4 Protecting the Core Capital In some, but not all, jurisdictions, if a cell becomes bankrupt, creditors can claim against the core; In others, assets of the cell are segregated from both other cells and the core Core How to protect the core when it is liable for the debts of a cell Impose an aggregate and per occurrence limit on coverage provided by each cell, therefore creating an upper limit of liability for each cell Require each cell to hold assets up to the aggregate limit Some PCC owners are more lenient, and may allow a set percentage of expected losses to be held as collateral (e.g., 120%)

5 Size of Insured Who uses cell captives? Usage of cell captives has evolved over the years: Development of PCC/ICC legislation Increased competition in service providers drives down operating costs Regulatory competition has led to increased domicile choice and innovation Large Single Parent ( Pure ) Captive Medium Small 831(b) Captive Captive Small RRG or Association/Group Captive

6 Evolution of cell captives Rent-acaptive Protected cell Segregated cell Incorporated cell Series???

7 Vermont One domicile s experience By the numbers: 19 active sponsored cell companies Total of 42 active cells 2 of those cell companies have more than 10 cells each 2 have a handful, the rest have 1 or 2 Premium volume in 2012: $72.5 million 7 Footer

8 Delaware Another Experience By the numbers: 13 active cell companies Total of 404 active series units 375+ of those units were licensed in three years companies have more than 10 cells each Delaware also boasts 223 active captives, nearly all of which have been licensed since Footer

9 Protected vs. Incorporated Which provides more/better protection and certainty of outcome? How it that protection provided? Does the statute deal with intra-captive contracts What happens when one cell enters a contract with another cell in the same captive? Governance Regulation Will jurisdictions other than the captive domicile uphold the integrity of the cell walls? How easy is it for the ICC/PCC to spin-off as a standalone captive? Will the advent of ICCs weaken the integrity of PCCs? THIS is where you want to be.

10 New innovation: Series LLC Legal barriers between series units Protects each cell against the others adverse results IRS respects individual series units as stand-alone entities Therefore 831(b) status can be maintained Combinability of series/cells for premium tax purposes Reduces frictional costs Combinability of series/cells for minimum capital requirements Favors smaller structures Cookie-cutter low management costs Heard on the street: All-in fees of $25k for management, audit, tax prep

11 Proliferation of onshore options Series LLC provisions, with internal liability shield Delaware District of Columbia Illinois Iowa Kansas Montana Nevada Oklahoma Puerto Rico Tennessee Texas Utah Series LLC provisions, without internal liability shield Minnesota North Dakota Wisconsin Jurisdictions with Sponsored captive ICC or PCC provisions Arkansas Connecticut Florida Hawaii Kentucky Maine Missouri New Jersey North Carolina South Carolina Vermont

12 Why NOW? Tipping point, related to: Changes in health care legislation Removal of lifetime cap; medical stop-loss captives Regulatory competition Technology automation Lower capital, lower premium taxes Legal protections between walls, and outside the domicile Confirmation of tax advantages Creative innovation in vehicle design and options Ability to offer cookie-cutter programs with very low management costs Lowers operating overhead, lowers barrier to entry Greater certainty of security of cell walls increases buyer confidence IRS acknowledgement of separate and distinct entity preserves possibility of 831(b) use for small owners

13 More traditional program Layer 1: individual cell retention Layer 2: pool layer each cell reinsures the other cells in the captive Layer 3: combined excess layer providing coverage to all cells in the captive Excess Reinsurance from traditional market

14 What s possible now? Medical stop-loss programs Where employee medical is treated as third party risk! Pass-through programs To access global carriers who are repelled by U.S. property policy form/coverage requirements Possible single-use applications No job too small! But Series units can grow up to become single-parent captives (or even their own cell families) And they can redomesticate too

15 Size of Insured Who uses cell captives NOW? Usage of cell captives has evolved over the years: Do Series captives render ICCs obsolete? Increased competition in service providers drives down operating costs Regulatory competition Might even be convenient for large parents, for situation-specific, laser uses Large Single Parent ( Pure ) Captive Medium Small Small 831(b) Small Captive 831(b) Captive Captive Captive RRG or Association/Group Captive