Preparing for Dodd Frank
Vicky Beckett
Alberici Corporation, a North American construction company, established its third
captive last year in Missouri. It is a subsidiary of one of the company’s two larger captives, set up to avoid surplus lines tax, which will be collected by states under the Dodd Frank
Act.
Vermont-based NC3 is the company’s primary captive, which handles the bulk of Alberici Corporation’s day-to-day insurance programmes. It was formed in
2000 and typically writes between $5m to $10m annually. It covers general liability, workers’ compensation, auto liability, professional liability, environmental liability, asbestos and
subcontractor default insurance risks.
Alberici Corporation also owns Contractors Casualty Company, which was the company’s first captive, formed in 1992. Joe Gallagher, risk manager for Alberici
Group, says: “We utilise Contractors Casualty Company for what I would call specialty or one-off coverages. We are currently using it for a pension fund withdrawal liability policy for the
trade labours. We started that a couple of years ago. We have had some other policies in that captive in the past several years but that is the only active policy in the captive at this
time.”
John Alberici, chairman of Alberici Corporation, believes that while every company has its ups and downs, as his corporation has seen over the past couple of decades,
the captives have always provided a safety net. “They’ve provided a store of funds we can rely on, and a consistency of purpose that has been very good for the company,” he says.
“We have used assets for all of the captives and have had the opportunity to utilise the assets of the captive in maintaining the stability of the operation throughout the
company.”
Since the onset of the economic downturn, Alberici Corporation has used the captives as a way to weather the outside challenges. “Construction has been down
125% compared to where it was a few years ago. It continues to be at a low level for a lot of the work that we do,” says Alberici. “We’ve seen some pick up. But we’ve seen
it more outside the United States in places such as Canada as opposed to finding a real improvement in the economic conditions in the US. But through it all, the captives have provided that
stability that we have made use of in keeping the company constant and plausible.”
Dodd Frank
The biggest challenge facing captive owners right now, Gallagher believes, is where the Dodd Frank legislation is heading. “We responded by creating a Missouri
captive, in part due to concerns over the taxation and legislative issues. We formed that captive at the end of 2011.” Alberici Corporation’s third captive is a subsidiary of NC3.
Alberici says: “Under Dodd Frank states are trying to collect taxes that were perhaps not available to them before. It’s not an issue we have any control over but since there are
penalties involved we thought it would be best to have the captive in place in case that would be needed to avoid those penalties. The captive also might be a way to insure some of the risks that
we have in our home state, which is Missouri.”
Alberici Corporation covers third-party risk in a pooled workers’ compensation programme, named Nexus Re. “We don’t make profit. It’s intended
to establish third-party business but also to pool the risks so that we can reduce third-party liability in a pool,” explains Alberici. The pool covers core casualty coverages belonging to
eight participants. These coverages include: workers’ compensation, auto liability and general liability. Alberici Corporation participates in Nexus specifically for workers’
compensation coverages. Gallagher adds: “It’s essentially shared experience but the emphasis is on third-party business. It’s not a profit focus per se.”
As Nexus is an already established pool, Alberici Corporation can participate and have it managed by others. This gives the company the benefit of other
participants’ risk management experience and also the benefit of being able to spread risk, by covering those belonging to third-parties. Gallagher says: “We do retain third-party risk
in our captive because we have a participatory share of the pool. Each participant is assigned a percentage share depending on how much premium they are running through Nexus.”
Business plans
Alberici Corporation established its second captive, NC3, to keep the captives’ business plans distinct and with separate purposes. “For one thing, we
were looking at bonds in the original captive. That was not something consistent with other programmes within the company so we wanted to sort that out into a different captive,” explains
Alberici. “We also wanted to take advantage of different domiciles and a different business plan so we thought it would be easier to keep all of the original intent of our first captive
intact and start a second captive that really emphasised the new business plan that we had,” adds Alberici.
For example, Alberici Corporation has decided to assume some of the pension withdrawal liability risk stemming from labour unions within Contractors Casualty Company.
The company belongs to several labour unions, which Alberici Constructors, Inc., the company’s main operating entity, is signatory to. The company contributes to the pension funds of these
unions. However, Gallagher says that as other firms exit the construction business or withdraw from the unions or fail to adequately contribute to these pension funds, it spreads the responsibility
for the adequacy of those funds over a smaller set of participants, so those remaining face an increased financial burden. “In addition, with the financial crises, lower rate of returns on
investments and an aging workforce in the construction industry, with many contemplating retirement in the next few years, the underfunding of these pensions has become a significant
issue.”
“If we were able to navigate any concerns with ERISA or the DoL it might provide another valuable opportunity to us and our employees”Joe
Gallagher
Domiciles
NC3 was originally domiciled in Hawaii until the latter half of 2007. It was then relocated to Vermont, where Contractors Casualty Company has been domiciled since
its formation in 1992. Alberici says: “It came down to the logistics as we were already working with people in Vermont and consolidating that made it less expensive both for our annual
meetings and being in the same time zone, so we could hold both of our meetings at once with the same managers.”
However, Alberici is complimentary of both Vermont’s and Hawaii’s regulators. He says: “It was nothing to do with the level of regulations. We
thought they were adequate and well managed in both locations.” Alberici found both regulators easy to work with, and maintaining ‘really high standards’. “If it were not
for the logistics I wouldn’t mind being in either location, but it just worked out that Vermont was closer to St Louis. Knowing the people there and having the history that we had in Vermont
made it a very easy transition and very agreeable to all concerned.”
Both Gallagher and Alberici do not foresee any significant changes to the captives or their operations in the next 12 months. However, Gallagher says: “That
doesn’t necessarily mean if an opportunity presents itself or we seek one out that we would shy away from it.” The captive does not cover any personal or medical health care benefits
for Alberici Corporation’s employees. Alberici says: “We have looked at employee benefits and we continue to review it but currently it doesn’t seem to have an economic benefit by
doing it that way. However, we will certainly be open to anything that comes up and we try to keep that on our radar screen so that if that becomes something that would have benefit we would want
to move into it.” Gallagher adds: “Absolutely, if we were able to successfully navigate any concerns with ERISA or the Department of Labor it might provide another valuable opportunity
to us and our employees.”
Marsh Risk Solutions
There’s no doubt that the Dodd Frank Act is encouraging captives to stay onshore, in their parent’s headquartered state, says Michael Cormier, CEO of
Marsh Risk Solutions. “It’s similar to Solvency II – risk managers have their eye on the regulatory environment. Certainly we are advising companies on the ramifications of the
regulatory environment,” says Cormier. “Dodd Frank means companies will certainly consider staying close to their home state as a result of the legislation and what it will mean to
them.”
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