The Texas captive market is still in its infancy but already has a defined character based around its bespoke regulations on captive structure and parent location
They say everything is big in Texas and captive insurance companies in the state are no different.
While the market is still in its infancy and is not huge in number of total captives, boasting 42 at year-end 2018, it produces more than $4.5 billion dollars in captive premium (at year-end 2017, when market size was 38 captives), making it the largest US domicile with less than 100 captives in terms of captive premium.
The Lone Star State is, perhaps more than anywhere, a domicile defined by the decisions it has made over its captive law. The law, which was established in 2014, only permits single-parent captive structures and specifically precludes companies from outside the state, or without a significant interest or operation in the state from forming a captive in Texas.
2018
Due to the legislation, Texas’ captive market is tightly linked to its economy, but it still appears to have experienced a similar slowdown in captive growth as many other domiciles. Four new captives were licensed in the state last year, marking another year of reduced growth (following eight new captives in 2017, and fourteen new captives in 2016), but in contrast to many of the other domiciles, there were no licences lost, closed or dissolved.
“Last year was fairly quiet,” says Andrew Marson, director at Strategic Risk Solutions and Texas Captive Insurance Association (TxCIA) board member, “but I think that would jive with a lot of the other states as well.”
Diane Walker, partner at Johnson Lambert and TxCIA treasurer and board member, however, says the market has is still seeing formations and continued to grow at a “steady rate as expected, given how the Texas legislation is written, its purpose and the types of captives it is set up to accommodate”.
The market
Texas’ two self-imposed limitations, over captive structure and location of parent, define the state’s market and Walker says they are evidence that the market is designed for a key purpose, “to support and serve Texas companies”.
Marson says that the limitations are a “very unique” part of the law and prove that it is “designed for Texas captive companies and not looking to attract business from other states, which is obviously quite the opposite of states like Vermont”.
He explains: “The single-parent captive structure is very much designed for the state’s target market, large Texas-based organisations, which can obviously work within the constraints of the law that exists today.”
The high premium to captive ratio is evidence of the number of large businesses that operate out of Texas, and Walker says the unique way the statute is written supports a market with a small number of captives and high premium.
The key strength of the market, Walker notes, is that it “is very supportive to Texas business.”
She adds: “If you’re a Texas company with a significant Texas presence, it is a very attractive domicile, and there are some very large companies headquartered or with significant operations in Texas.”
A large number of the huge companies in Texas are from the oil and gas industry and have suffered quite badly over recent years.
“A significant number of companies in the state are in the oil and gas industry and are very sensitive to commodity prices,” says Marson, “the recent fall in oil prices over the last four or five years has meant companies in the oil and gas industry are sat on significant new operating losses.”
“The benefits of owning a captive exist for them, and hopefully once these companies get back on the feet and become profitable again they may consider forming a captive or expanding their current captive.”
According to Marson, the size of captive premiums in the state, means allowing a Texas company to have a captive in its home state is a key advantage to be considered.
He explains: “One of the main reason a Texas based company would choose to domicile here is to avoid having to pay self-procurement tax. If you’re a Texas based-organisation with a captive in another state then you have to be concerned about the premiums being subject to the tax, which is levied at 4.85 percent.”
“That’s $48,500 for every $1 million of premium you send to a captive outside the borders of Texas, which is fairly sizable. It’s a material number when you look at the size some of premiums that are being written in Texas today.”
According to the National Association of Insurance Commissioner’s statistics, $4.6 billion was written in total captive premium in Texas at year-end 2017, meaning that approximately $227 million would have been paid in self-procurement tax if the captives had been domiciled outside Texas.
Relationship between TDI and industry
The state regulator, the Texas Department of Insurance (TDI), can be viewed as both a strength and a weakness of the domicile. The relationship between the industry and the TDI was highlighted by both Marson and Walker as a great positive. Marson notes that despite some education still taking place due to the domicile’s infancy “the TDI have been very open and receptive to ideas and very good in terms of understanding different people’s perspectives”.
Walker adds: “They’re supportive of formations and I think are receptive to meeting with people, providing feedback. It is a positive environment.”
On the negative side, the TDI does not have any staff that are fully dedicated to regulating captives and, as a result, the application and formation process for a new captive is usually a lot slower than in other domiciles. Marson suggests that this is something that could change in the future.
He says: “The state may look towards creating that separate dedicated division for regulation, which I think would be a positive thing. I don’t know what the tipping point of that will be, in terms of how many captives need to be licensed for that to happen.”
Regulatory changes
Recent changes to the state’s captive regulation may, amongst other things, help to speed up the application process for new captives. In December last year, the TDI amended the captive regulation to implement changes that had originally been passed into law by the Texas legislature in 2015 and 2017.
Among them was a change to implement procedural changes to the way in which captives are authorised, allowing the secretary of state to form a captive insurance company prior to receiving TDI approval of the captive’s formation documents.
Marson suggested this change was “huge” and would “streamline the process and reduce the time from submission to receiving the certificate of authority”.
Walker believes the market is beginning to come into its maturity, and as such, is unlikely to see any huge regulatory changes soon. The Texas legislature meets every other year and although 2019 is a legislative year, Walker says that from the perspective of the TxCIA there are no regulatory changes on the agenda.
She explains: “The feedback from our membership was that people were pretty happy and satisfied with the current legislation and that it meets their needs. But other organisations can bring forward a bill, which is something that happened in the last legislative session and might happen again this year.”
One potential amendment that may be proposed in the next few years is the expansion of the captive law to include group captives. Marson explains that this is an idea that has been proposed by some parts of the domicile from the very start.
He says: “I know there’s been some calls for potential expanding the law to include group captives.”
“I believe the initial law had group captives written into it but there were objections to that, as people felt they would compete with the traditional market, so, that was written out of the the initial law back in 2013.”
“It is still only single-parent captives that are offered in Texas, and based upon what I’ve heard, that isn’t going to be something that changes anytime soon.”
Outlook
Marson suggests that the state’s “solid law” and the stable growth in its early years is going to help the market to succeed moving forward.
“It hasn’t tried to do too much, too soon,” he says, “it has a solid foundation of locally owned captives, which is only going to be a great foundation for them to proceed.”
“I think the outlook is only positive and it is going to go from strength to strength.”
The self-contained nature of the Texas captive market means its growth is closely tied to the state’s economy and Marson says this makes him “only optimistic about the market prospects.”
“I think the growth in Texas will be driven by economic growth. The Texas economy drives the Texas growth. Other domiciles can piggyback off the benefits of nationwide growth but this domicile is focused on those Texas organisations.”
“The size of the companies with captives in Texas is great for the market. The nearly $5 billion in premium volume shows that a lot of the big players have captives and having their interest in the industry can only be a positive thing as we look to potentially expand the law in the future and keep everything
going smoothly.”
Walker has a similarly optimistic view on the outlook for Texas but stresses that given the nature of the market it is important to temper expectations.
She says: “My expectation is for continued steady growth. I don’t think we will see any huge change.”
“There won’t be 100 captives at the end of the year, but it’s been growing at a steady, consistent pace and that will continue.”
