Paradise Papers shed light on College, higher education insurance industry

The College is a shareholder in a reinsurance company based out of Bermuda, the recently-leaked Paradise Papers reveal. The documents leaked from the Bermuda-based law firm Appleby show that the College owns a stake in School, College and University Underwriters, Ltd. (SCUUL), a reinsurance firm incorporated and registered in Bermuda. The College confirmed its holdings in SCUUL and noted it was a common and legitimate practice for  colleges and universities, but did not comment further by press time. This disclosure sheds broader light on the insurance practices of institutions of higher education.

SCUUL was founded in 1986 by a consortium of colleges and universities in the midst of a liability crisis which made obtaining insurance difficult. According to the Bermudan government’s Registrar of Companies, the company was first incorporated in 1986 and reincorporated in 2006. A 1986 article covering SCUUL’s founding referred to institutions of higher education founding “their own insurance company,” as it would be run by the schools that used it.

As a reinsurance firm, SCUUL takes on parts of other insurers’ portfolios to cover some of their risks. Many of the schools that use SCUUL for reinsurance own shares of it rather than simply being policyholders. As such, the College’s stake in SCUUL is not part of its investment portfolio.

SCUUL is part of a Vermont-based education insurance company known as United Educators (UE), which also has headquarters in Bethesda, Md. According to its website, “United Educators (UE) provides liability insurance and risk management services to nearly 1,600 members representing schools, colleges, and universities throughout the United States. Founded in 1987 as a risk retention group, UE is owned and governed by the educational institutions it insures.”

SCUUL was founded as a reinsurer in Bermuda and a holding company in the Cayman Islands. Initially, according to UE Chief Financial Officer Michael Horning, the company had trouble selling policies, as it was not an admitted insurer in the United States. Hence, in March 1987, the same group of 60 schools, including the College, founded UE as a mutual risk retention group in the United States –  essentially a group of shareholders sharing each others’ risks – which then in turn used SCUUL as its reinsurer. In 2001, the original sponsors decided to have SCUUL pay off the original investments to them as dividends and to use those to recapitalize UE – in essence, to give it a more stable pool of money in the U.S. with which to insure its sponsors.

“In 2001, the company restructured,” Horning said. “The sponsors wanted an exit strategy, so they basically restructured the whole enterprise, and paid out dividends to the original sponsors – the schools that had put their money where their mouth was and started their own insurance company.” UE then paid off those investments over the next 12 to 14 years; the College’s investment in the UE recapitalization was paid off in 2014.

This move to the United States was abetted by a 1997 Vermont law that allowed mutual risk retention groups to transition to a reciprocal structure. This structure allows the insurer to pay its earnings to the sponsors – i.e., shareholders – as dividends and therefore have no tax liability itself. The sponsors assumed the tax liability, but as institutions of higher education, they pay no corporate income tax. This practice is entirely in compliance with U.S. law and is common amongst colleges and universities. “Had UE been able to form as a reciprocal in Vermont, it probably would have been initially structured that way instead, and would not have had to go offshore,” Horning said.

The move onshore in 2001 also meant that the UE would no longer pay a federal excise tax for SCUUL’s reinsurance. Since SCUUL, the reinsurer, had purchased reinsurance for itself, UE chose to leave it separately as SCUUL, USA. This way, if there remained any claims regarding SCUUL, UE could still make use of the reinsurance for SCUUL’s liabilities. In 2006, UE reincorporated SCUUL, which resulted in the 2006 reincorporation date in Bermuda’s Register of Companies.

Bermuda is a common home for the reinsurance industry; the island nation has no corporate tax and no capital gains tax. Bermuda also has minimal capital and disclosure requirements for reinsurers. Since the College is a not-for-profit organization generally exempt from paying taxes, the College itself does not gain any direct benefit with regards to taxation by locating the company in Bermuda, though SCUUL does.

The reciprocal insurance model allows the company and the sponsors to avoid tax liability; it is entirely legal. Infographic by Nicholas Goldrosen/News Editor

The Paradise Papers refer to over a terabyte of data leaked from the offshore law firm Appleby. These documents implicate over 100 U.S. institutions of higher education in overseas holdings, largely away from tax liability or capital or disclosure requirements, as reported in The New York Times and The Guardian. These disclosures come as the latest Republican tax bill proposes a tax on college and university endowments. The College appears in the Paradise Papers solely in the context of its interests in SCUUL.

Reinsurance firms have recently made headlines for their role in stabilizing the insurance market in light of the vast claims made after Hurricanes Harvey and Irma hit the southern United States earlier this fall. Reinsurance companies take on some of the risk from insurance companies and are able to absorb large shocks from natural disasters, hence stabilizing the market. However, the reinsurance economy more broadly has also been implicated in helping hedge funds to shelter offshore capital – up to $42 billion, as estimated by Senator Mark Warner when introducing a bill to curtail this practice – since they avoid the Internal Revenue Service’s passive foreign investment penalty, as outlined in recent reporting by Bloomberg News.