Q&A: Michael Lusk

Risk Management, August, 2008

Risk Management recently spoke with Michael Lusk, chairman of the board of the Captive Insurance Companies Association (CICA) and vice president of insurance and risk management of the Decatur, Illinois-based Archer Daniels Midland Company, to see what is in store for the captive industry and the risk managers who make use of it.

How do you rate of tile overall health of tile captive insurance industry today?

You can't separate captives from the insurance market as a whole. The insurance business is softer at the moment, which means more people are getting the terms and pricing they need. So there is less captive activity now than there has been over the last few years. But the health of the captive industry is still strong. People are continuing to look for captives, risk retention groups or other vehicles to handle hard-to-place risks or those where they want to retain some of the risk.

Is tile downturn more pronounced in some areas?

Not really. There is not a huge distinction between levels of captive activity in the United States and Europe. The United States still has more activity in captives, but the drop-off is pretty much the same across the board.

The IRS recently considered some regulatory changes that ultimately didn't occur How did that play out?

The IRS proposed a regulation that would not have allowed captives to deduct their reserves, unless under very difficult-to-achieve circumstances. For example, Arthur Daniels Midland owns a captive in Vermont. Under the proposed IRS rule, when Arthur Daniels Midland would consolidate the results of its captive, the reserves drop away from the consolidated tax statement. This would have affected single-parent captives much more than risk retention groups and association captives, but it was a very big deal, nonetheless.

How did the industry respond?

Both ClCA and the Vermont Captive Insurance Association campaigned hard on this. They put together a technical response to the IllS and got a lot of people from Montana, Vermont, Utah, Arizona and South Carolina involved on the political side. In the end, the IRS dropped the proposed regulation, which was a major victory for the captive insurance industry. It showed a lot of leadership and a lot of unity from states with a stake in this.

Had the industry ever cooperated on this level before?

No. Previously, the industry has been much more fragmented and it did not have the leadership to do something like this. You had different domiciles that did what they needed to in their states, so from the federal perspective, this kind of unified campaign against the IllS legislation was unprecedented.

I think the industry has grown to the point that people realize that if something hurts part of the industry, then it is liable to hurt the rest of the industry, too. I don't think that major international domiciles like Bermuda, the Cayman Islands and the British Virgin Islands looked at this proposed IRS legislation as an opportunity to gain business. I think they looked at it as an attack on how captives are treated. They realized that the shoe could be put on the other foot, and next time, it might be them under fire.

Looking at the number of companies registered in various domicities, it is evident that Utah has really exploded in recent years. What is its secret?

Utah has filled a need that existed and it decided to put an effort into what it wanted to accomplish. Utah had a focus, and in doing so, it was able to achieve some of its goals. A lot of it has to do with the appointment of Donnie Spann as captive insurance director. He has done a lot to help the domicile.

To what degree is that success or failure of a captive domicile dependent on a few key people?

It's different for an established market, like Vermont, Hawai'i or South Carolina, than it is for an emerging market like Utah or Montana. At the beginning, it is very critical that you get the people who have the vision and energy to get it off the ground. If you don't have that, then the domicile can really lose its momentum quickly. It's at this stage when you've got to establish the infrastructure so you can meet the needs of the people who come to you. For an up-and-coming domicile like Utah, the focus needs to be on "who do we attract?" and "what do we do for them?"

The next step is like in any maturation process; it becomes bigger than any one person or set of people. With a captive domicile, the service providers--captive managers, banks, audit firms--and the captive owners need to come together, form a strong association and drive it further from there to accomplish what is best for all. That cooperation is what will get the domicile to the top level. If you get to a point where those three parties are not working together, then people will look elsewhere to conduct their captive business.

What trends do you see shaping captive insurance outside the United States

The globalization of the world economy has people looking to make efficiencies in highly regulated industries like insurance. Because of that, captives are always looked to as a vehicle to create that kind of efficiency. That is a major trend going on right now. Because of that, for example, large corporations are looking at operating in more than one domicile. They are looking at applying captive insurance to areas outside of their normal activity, like in the fields of employee benefits, European firms handling workers compensation in the United States, and a lot of other different abilities, depending on what type of company the parent organization is. The big question is, what are their driving forces? Sometimes it's employee benefits, sometimes it's product liability, property ... it all depends on the wants and needs of the organization.