Michigan’s captive premium volume grew beyond US$3 billion in 2023 as it continued to establish itself in a competitive US market. Ned Holmes investigates how the domicile has made up for lost time
In a crowded US captive market, standing out is an achievement in itself, but Michigan — the birthplace of Chrysler, General Motors, Ford, the Republican Party, and Motown — has always been a cradle for innovation and industry.
While the Great Lake State was fairly late to the captive party, it has made up for lost time and become well established over the past two decades.
According to recent data from the Department of Insurance and Financial Services (DIFS), Michigan has been in the top 10 US domiciles in terms of captive premium volume.
That figure rose 25 per cent year-on-year to above US$3 billion for 2023, which, alongside a steady growth in captive formations — up to 27 at the latest count — shows positive momentum and suggests that the state is clearly doing something right.
Sustainable growth
Michigan’s captive legislation was signed into law in 2008, with the first formation following a few months later. Despite some initial obstacles, the state's status as a hotbed for manufacturing and industry, as well as businesses' increased desire for control over risk management following the financial crisis, have helped drive formations.
“Early on, Michigan faced the same challenges that any new captive domicile faces,” explains David Piner, director of the captive programme at the DIFS. “Newer domiciles can have to defend their very existence amid rumours of not having the captive industry in its best interests.
“As in, ‘they will licence anyone just to get their licensed captive numbers up’, which is, of course, a complete falsehood. But sometimes, new players in the domicile space can cause unease. This was at a time when other domiciles were conducting road shows in Michigan.”
The best response to any early doubters has been consistent and sustainable growth, which, according to Scott Geromette, lead member at Primarius Law, is due to the domicile’s “calculated approach to the growth strategy”.
He expands: “Over the last ten years or so, the industry has seen some domiciles chase the latest and greatest trends in captive formations, with 831(b) captives serving as a perfect example.
“That approach resulted in tremendous and rapid growth for a number of domiciles. However, as we have seen, the IRS scrutiny and other issues with 831(b) captives have caused substantial volatility and other issues from which some domiciles have found it difficult to recover.
“My sense is that DIFS and Dave Piner know that it is unlikely that Michigan is going to overtake Vermont with respect to captive formations, and they have set their growth and sustainability strategy accordingly by focusing on programmes that truly make sense for Michigan.”
Thanks to the domicile’s improved standing in the US captive market, the DIFS has been well placed to accommodate the growing demand for alternative insurance coverage options in Michigan in recent years.
Piner says: “We’ve seen some movement from offshore to Michigan, both in redomestications and in parent companies deciding to set up a captive here versus offshore — or in addition to having a captive offshore. I believe that is being driven by increased visibility of the captive industry. Michigan has demonstrated that it knows how to regulate captives.
“Another matter was that Michigan voters approved the use of cannabis for both medicinal and recreational purposes. Whatever your opinions are about that industry, they have insurance needs just like any other. Michigan responded to that need and licensed the first onshore captive specific to that industry.”
Record, receptive, relationships
While increased visibility has undeniably helped to facilitate Michigan's success as a captive domicile, it has been in conjunction with two key factors: their proven track record and progressive approach to new ideas or emerging risks.
Indeed, experts in the industry share Piner's opinion that the state "has demonstrated that it knows how to regulate captives".
“Michigan is a successful domicile because Dave Piner, Dennis Dawis, and the DIFS team have a tremendous amount of experience and expertise in all facets of the insurance industry,” Geromette says.
“But they apply their expertise in a pragmatic manner that strikes the proper balance between flexibility and regulation.
“Within that balance, the flexibility helps to ensure that Michigan captives can engage in the types of operations and activities that address and promote the legitimate interests of their owners and insureds, while regulatory safeguards remain in place to ensure programmes are operated in a prudent and compliant manner, thereby protecting the credibility and reputation of the domicile as a whole, which, in turn, protects captives in the domicile.”
Seth Herdoiza, vice president for captive consulting at Marsh Captive Solutions, notes: “The DIFS has an established track record of ease of access and rapid response times within its captive division for existing captives and potential future captives alike.”
Success stories like Motown and the Big Three automakers in Michigan highlight the jurisdiction's innovative history, and the state's enterprising spirit is evident when it comes to new challenges or ideas.
Herdoiza adds: “In Michigan's continued efforts to evolve with the industry, it welcomes unique ideas and initiatives and actively collaborates with clients in prospects to develop optimal solutions for all involved parties.”
Cherie Brown Baker, head of North American risk management for Stellantis (the automotive manufacturer that has Chrysler among its brands), offers the same conclusion.
“The word that I often use to describe Michigan as a captive domicile is, friendly,” says Baker.
“The captive regulator has, and continues to, work collaboratively with captive owners. In addition, as some other domiciles have perhaps restricted what can be written by those captives, Michigan has been consistently amenable to placing emerging risks in captives.”
Crucial, too, is the strong relationship that the regulator has built and maintained with both captive owners and the rest of the industry.
Geromette believes that the close personal and professional relationships that have been formed in Michigan are “very unique to the captive insurance industry” but “critical to the success of a captive domicile”.
He says: “Unlike in the commercial insurance context, good captive regulators are often viewed as partners in the alternative risk finance journey of the entities they regulate. Ultimately, they are responsible for monitoring compliance with the applicable laws and regulation, but there are a number of ways that monitoring can be accomplished in a supportive manner and without being unnecessarily overbearing.
“To this end, Dave Piner and his team frequently attend industry events and have regularly offered to travel to client or prospect meetings to discuss the domicile and answer questions. That balanced, but open approach, in my opinion, instils a significant amount of comfort that allows efficient operations and a free flow of information between the DIFS and regulated captives.”
Ken Ross, vice president and counsel for government relations at John Hancock, adds: “We have very much appreciated the strong working relationship with DIFS Director Anita Fox and senior leadership, including the Captive Division team, who we have found to be consistently flexible, creative and more than willing to work with us.”
Regulation changes
Different types of captive vehicles, such as pure, association, industrial insured, sponsored, non-profit pure, and special purpose financial, can be established in Michigan, each with different capitalisation and surplus requirements.
The state does not have a tax rate, but captives are required to pay a renewal fee based on premium volume.
According to Piner, Michigan's regulation puts control in the hands of the captive owner while ensuring that the framework is there to provide any necessary assistance.
“Michigan does not mandate the use of a captive manager,” he says. "Michigan does not dictate to a prospective captive owner which firm to use for the audit or the actuarial certification of loss reserves."
“We believe these prospective captive owners have the business acumen to make these types of decisions. Certainly, if they have questions about these areas, we are happy to offer guidance.”
Changes made to the domicile’s captive law in 2018, which altered its reporting requirements, speak to the collaborative relationship between the industry and the regulator.
Indeed, Ross praises the DIFS’s attempts “to continually adapt and stay on the forefront of legislative authority," which he believes will “serve the community well in the coming years”.
He adds: “Michigan DIFS actively seeks out ways that it can make its captives law more progressive, and their team is very proactive in reaching out to stakeholders to gather perspectives.”
Further evolution may be coming, as Piner reveals the regulator has been working with the industry on proposed changes to the legislation.
He expands: “When our initial captive laws were written, there was some internal concern that Michigan could get an avalanche of applications.
“To address that perceived risk, a higher application fee was championed. While the application fee is rarely the determining factor in choosing a captive domicile, Michigan is trying to have its application fee more in line with other domestic domiciles.
“During the Covid epidemic, most if not all domiciles granted waivers for having an in-state board meeting. The captive regulation continued without a hiccup. While we always encourage people to visit Michigan in person, we see no need to mandate an in-state meeting to regulate captives.
“Michigan’s current definition of sponsor is quite narrow. Captive industry representatives encouraged us to develop a broader definition of sponsor that would allow cell captives to be easier to form.”
As Geromette points out, improvements like those included in the proposed legislation are necessary.
He says: “Michigan’s law was originally enacted in 2008 and, aside from the implementation of clarifying regulations, it has not undergone the comprehensive ‘modernisation’ updates that have been undertaken by other domiciles.
“The enabling law will always serve as one of the most critical factors for any captive domicile because it establishes the boundaries for what is possible and permissible. As a result, even the most dedicated and practical regulators are going to be somewhat restricted in promoting and growing a domicile if the captive law is comparatively outdated.”
Continued momentum
This year is not expected to bring another significant increase in captive premiums; in fact, it could see a decrease because the recent growth in premium volume has been linked to sizeable changes in operations in companies that own large captives in the domicile.
“2023 was representative of that type of movement,” Piner explains. “Premium growth is not always linear. I expect a possible retreat in total captive premium in Michigan for 2024.”
Even so, the future looks bright for Michigan, which is setting ambitious targets for redomesticating captives with ties to the state.
“Michigan was relatively late adopting captive insurance laws,” notes Piner. “Many companies with established Michigan ties had already formed captives in other jurisdictions decades earlier, offshore and onshore. We would like to get those entities to consider returning home to Michigan.”
The optimism about the future is shared in the industry, where the feeling is that the domicile can continue its recent momentum.
Ross backs Michigan to “continue to be a state of choice, particularly for those insurers that are domiciled and regulated by Michigan DIFS” while Baker and Herdoiza both emphasise the importance of a continued progressive approach.
The former says: “If Michigan continues to be open to new risks, while verifying that captive owners are prudent and diligent in examining their risk profiles, I can only see the Michigan market expanding.
“I would love to see a Midwest captive conference, or other knowledge-sharing opportunities to educate captive owners about what Michigan has to offer as a captive domicile.”
Herdoiza adds: “Continuing to foster and support unique ideas and initiatives will enable Michigan to build on the success it has seen to date.
“As insurance markets continue to fluctuate, organisations of all sizes will require innovative solutions. Michigan's foresight and flexibility will further enable its success as market competition remains steady.”
