The District of Columbia’s captive market presents unifying leadership during trying times of US political instability
It is almost impossible to discuss the District of Columbia (DC) without evoking images of the Whitehouse and its controversial resident. Stability is something that the current president doesn’t seem to offer, but the same can not be said about DC’s captive market.
With Dana Sheppard, associate commissioner, Risk Finance Bureau of the Department of Insurance, Securities and Banking (DISB), the longest serving captive regulator in the US, at the helm, DC has developed into a domicile that offers an almost oxymoronic combination of stability and flexibility.
The market
Soft market conditions caused most captive domiciles issues over captive growth last year. DC, however, was not one of those. The domicile saw a remarkable leap in growth year-on-year, adding 17 new captives in 2018, in comparison to 2017 when there were just three new captives licensed.
At the end of last year, there were 154 captives licensed in the domicile representing $1.4 billion in annual premiums. The domicile caters to all types of captives and currently licensed in the district are 39 pure captives and 21 pure captive cells, 37 risk retention groups (RRGs), 12 rental captives and 23 rental captive cells, 11 association captives and two association captive cells, three agency captives and three agency captive cells, and three branch captives. For pure captives, the minimum capital requirement is set at $250,000, while for most other captive structures it is set at $400,000. There are no set minimum capital requirements for cells in DC, instead cell minimums are established by the insurance commissioner based upon the cells business plan.
Sean O’Donnell, director of financial examination, risk finance bureau, DISB, notes that last year saw the most formations in the domicile since 2015, driven in a large part by activity in the protected cell captive (PCC) space.
“The majority of new formations were either PCCs or cells,” says O’Donnell, “which continues a trend over the last four to five years. Of the 17 new risk-bearing entities, 15 were either PCCs or cells. We expect to see PCCs and cells continuing to be popular.”
Another recent development in the cell space in DC is the expansion of Aon’s White Rock Group. At the beginning of March, Aon announced it would be expanding its protected cell facilities under White Rock into the domicile.
Nancy Gray, regional managing director, captive and insurance management, commercial risk solutions at Aon, noted that the move was a “strategic decision” that recognised the “geographic preference” of Aon’s clients.
Melissa Hancock, director of Strategic Risk Solutions, says the district has always had very strong regulation when it comes to cell captives.
She explains: “The rules are laid out already for how cells need to be handled on a day-to-day basis what the regulators need to see for filing. DC has always been super clear about that.”
Strengths
“The DC captive market is quite robust,” says Hancock, “last year was one of the best in recent memories and 2019 has started strongly.”
“I think the domicile is well positioned to keep growing for a number of reasons.”
One of the domicile’s key strengths, according to Jon Harkavy, executive vice president and general counsel of Risk Services, is its accessibility. He explains: “It may sound minor, but it is significant—it is not easy to find a domicile with such ready transportation and ease of access. It is very attractive that it is so easy to get a train, drive or fly into a meeting.”
Harkavy continues: “What makes it even easier is the fact that DC, unlike most domiciles, permits conference call board meetings if it is in a service providers office. That is very, very useful.”
Another of the domicile’s strengths is its standing and reputation in the global captive market.
“DC has been in the captive arena for a number of years,” says Harkavy, “they are accessible to other regulators and well thought of. While, technically, that shouldn’t make a difference the stellar reputation of the district is helpful.”
In agreement, Joe Holahan, counsel at Morris Manning & Martin and recently appointed head of the Captive Insurance Council (CIC) of DC, comments: “DC has a well-deserved reputation as a solid platform for captive programmes of all types.”
The domicile also boasts a wealth of experienced service providers, however, its defining feature is the balance of flexibility and stability provided by its captive legislation and the DISB that regulate the market.
Its initial captive statute was passed in 2000 and was updated in 2004, and then, in 2014, the Captive Insurance Company Amendment Act of 2014 provided more innovative updates to the domicile, which, according to the CIC DC, has “been credited with having the most advanced US captive enabling laws”.
A particularly useful provision of the DC statue is the best practice act. Harkavy breaks down the provision: “The act basically says if you can find, in another legitimate captive domicile, a certain type of structure or a certain law has been reasonably implemented, in that it can be recognised in the regulatory captive community, one can form or take advantage of their best practices through the provision.”
He adds: “This provision, which has not been called upon very much gives flexibility in the operation and formation of captives. It is not easily pulled out all the time but it is the ultimate flexibility if called upon. That is very valuable.”
Regulators & relationship
This flexibility within the legislation itself is reflected in the regulators. Sheppard and O’Donnell are extremely experienced captive regulators, and there is a stability amongst the whole of the regulatory team as they are not political appointees.
Hancock describes the team as “knowledgable, accessible and responsible”, which she says “makes a big difference”.
She notes: “They have stuck to their guns about how they regulate and how they work with companies—they’re flexible when they can be.”
Holahan adds: “DC’s captive regulators are highly experienced and responsive to the needs of the regulated community. Captive applications typically are processed within 30 days. Requests for a change in business plan also are handled quickly and efficiently, and examinations are performed at a reasonable cost.”
“One of DC’s strong points is the longstanding commitment of the DISB to maintaining the staff and other resources needed to make DC a first-class captive jurisdiction.”
Examinations in DC are on a five year cycle, which can be extended or waived upon request after the first examination.
Hancock highlights this as a particular area of strength for DISB: “They really excel at examinations. There are only a few other domiciles that are on par with how examinations are handled, they’re very reasonably priced and expertly conducted–it is a really big positive for them.”
According to both Hancock and Harkavy, they also maintain a strong and positive relationship with the industry, and of particular importance to Harkavy is that they’re very reasonable to deal with.
He explains: “I can approach O’Donnell, and while I certainly won’t agree with everything that he does he is there and that is particularly useful. They are reasonable and when we disagree there are no hard feelings.”
Additionally, Harkavy emphasises the important role the DC regulators play in advocating captives at the National Association of Insurance Commissioners (NAIC) level.
He says: “DC is one that is very active, along with Vermont they’re the strongest in advocating for captives. Having advocacy at the NAIC where particularly RRGs and to a lesser extent captives have issues is very valuable and important.”
As with the majority of domiciles, DC is not currently prepared to offer licenses to captives providing coverage for cannabis risk. Harkavy notes: “DC are not prepared to license any captive related to Cannabis without some sort of safe harbor via federal legislation permitting insurance companies to underwrite Cannabis related risk exposures.”
He adds that potential captive owners should not look to license a cannabis captive until such safe harbours exist.
Outlook
The domicile’s greatest obstacles in the current climate appears to be competition from the increasingly congested US market, and Harkavy suggests that it is the quality of other US domiciles, not just the quantity that may cause issues for DC.
He says: “Vermont is vibrant and not slowing down and there are a couple of other solid emerging domiciles, which aren’t too far away; North Carolina, Alabama, and South Carolina. I would also expect to see something from New Jersey relatively soon, as Bill White, the state’s recently appointed assistant commissioner of the Office of Captive Insurance, is in control of the captive programme there. It is less what DC is doing, it is the competition.”
One of the ways the domicile may counteract this is by looking to innovate. In February, the district established a Financial Services Regulatory Sandbox and Innovation Council, which aims to analyse and report on the viability of implementing a financial services regulatory sandbox in DC, and to develop a blockchain and innovation regulatory framework to promote financial services innovation in the district.
The council will be comprised of professionals from a range of financial services industries, including captive insurance. DC has kept up its fast pace through the start of 2019. According to Holahan, the year is off to a strong start and there have been several captive formations already.
He adds: “DC saw in increase in applications and new formations in 2018 over previous years. We expect this trend to continue. The soft market has slowed captive formations in every jurisdiction. DC is no different in this respect, although we are continuing to see good growth even with this countervailing factor.”
The cell captive space is likely to be an area of continued growth, due partially to the strength of the domicile’s regulation on cell captives, but also because it is one of the largest growing segments in the captive market in general.
Hancock notes: “DC has a ton of experience in that space and I think that will continue to be strong for the domicile.”
Amidst the huge growth last year, there was a decline in RRG formations. Only one was licensed, which is the lowest increase since 2010. O’Donnell says DISB expects to see RRG formations remain flat compared to recent years.
Hancock suggests that RRGs have always been an area of strength for DC, adding “they really know what they’re doing around handling those. As long as RRGs are going to be formed I think DC is definitely on the list.”
Harkavy highlights insurance sponsored RRGs as a potential area for growth.
“They have a number already,” he says, “I think the most successful is MedPro RRG, which is sponsored by Berkshire Hathway. I see a number of traditional insurers looking to replicate that type of relationship with their own RRGs. I see that as a potential source of growth in the district.”
There is a consensus among almost anyone you speak to about the DC captive industry that it will continue to grow. As opposed to other important bodies in the capital, in Sheppard, O’Donnell and their team, the industry is in good hands.
