Since it became the capital of the US in 1791, the District of Columbia has been the site of some of history’s most momentous events...
Since it became the capital of the US in 1791, the District of Columbia has been the site of some of history’s most momentous events. It is perhaps this weight of responsibility and expectation that has imbued the state’s numerous associations with a sense of commitment to doing things the right way.
When the District of Columbia’s captive insurance legislation was first enacted, at the turn of the millennium, the market was sparsely populated. Today, domicile competition is much fiercer, but the District of Columbia appears determined to stick its guns, particularly when it comes to its robust and reliable regulatory structure.
Associate commissioner of the risk finance bureau at the District of Columbia Department of Insurance, Securities and Banking (DISB), Dana Sheppard, is thought to be the longest-serving individual in such a position. This has become a symbol of the regulatory stability that the District of Columbia, along with the wider industry, considers to be one of its greatest strengths.
Put simply, the state’s priority is to ensure that insurance companies being formed in the District of Columbia are, according to director of the Saslow Lufkin & Buggy insurance practice group, Glenn Saslow, “real insurance companies with real risks”. The way in which the DISB strives for solidarity in growth has also tied in with the recent reintroduction of founding members of the state’s captive industry.
Saslow says: “What has been favourable of late is the domicile bringing back the individuals who were part of its formation in order to determine what was successful and reintroduce those same principles to continue growth. We have meetings every quarter to ensure that we are doing all the right things.”
Among the main types of captives that can be formed in the District of Columbia include pure, association, agency, branch and rental captives. Segregated accounts companies can also be formed in the state, where each segregated account is capitalised separately, and the assets in the segregated accounts are legally separate from the assets in the other segregated accounts.
In particular, one of the most active areas for the state in recent times has been in the formation of risk retention groups (RRGs). As Saslow puts it: “The District of Columbia is one of the few domiciles in the US that understands how an RRG operates and how is best to regulate them. If you want to form an RRG in the US right now, you are pretty much limited to Vermont, the District of Columbia and possibly South Carolina. Many of the others have not regulated these entities properly and, as a result, decided not to accept them anymore.”
This has allowed the District of Columbia an opportunity to capitalise on the reluctance of its competitors and sweep up RRG business, which many in the industry feel is a definite positive for the state.
Skip Myers, managing partner at the Washington DC office of Morris, Manning & Martin LLP, comments: “It became one of the first incorporated cell states and remains one of the best laws. The regulatory environment is good, thorough and relatively prompt and transparent. It is telling that it is also considered so by other domiciles.”
The fact that the District of Columbia also houses the nation’s capital does present some difficulties for the industry, namely the sheer volume of political decisions being made within Washington DC and the potential knock-on effect they have on the DISB and its affiliates.
A recent example of such a decision was the introduction of the Affordable Care Act (ACA). This has forced the DISB, and concordantly the Captive Insurance Council of the District of Columbia (CIC-DC), to be careful on what they will and will not allow. In particular, the state does not allow medical stop-loss for certain types of structures. This is because it did not want to allow any kind of stop-loss captive that could purportedly bypass certain requirements of the ACA.
Myers comments: “The problem that the state has, in terms of stop-loss captives, is multiple employer welfare associations—which are multiple trusts with a single stop-loss captive. Those are problematic and have been demonstrated to be so as a number of them have gone bust.”
Despite not allowing the establishment of these ‘riskier’ vehicles, the District of Columbia is open to accepting certain kinds of stop-loss business. Saslow, also a director on the board of the CIC-DC, explains: “If you take a large, multinational, Fortune 500 stop-loss captive for example, and this captive did not circumvent the ACA in any way, then the state would be more than happy to take a look at it.”
As well as the politically-conscious mindset the DISB has been required to adopt, it also has to deal with little monetary support—again as the result of a busy government that is occasionally spread thin.
As a response to these kinds of challenges, the District of Columbia has succeeded in bringing another supportive force in acting commissioner of the DISB, Chester McPhearson.
Despite being only eight months in the position, McPhearson has already made a strong commitment to the captive space. Saslow says: “His focus is extremely positive on the industry and I think that is going to pay huge dividends for it.”
