Although the captive insurance industry in Connecticut is still in its infancy, the state’s regulators have embraced an unusual philosophy to allow maximum support for potential clients
Although the captive insurance industry in Connecticut is still in its infancy, the state’s regulators have embraced an unusual philosophy to allow maximum support for potential clients.
When regulating a captive, the Connecticut Insurance Department has shifted the focus away from the common ‘rules-based’ approach, towards a more ‘principles-based’ form of regulation. In other words, the state has fostered a responsive regulatory regime that is flexible, knowledgeable and can attempt to act as more of a business partner than an overseer.
This is not to say that specific rules do not apply—the laws and regulations do provide certain financial requirements and compliance standards. However, ‘principals-based’ regulation recognises that every company is different, and that each company has different goals for its captive programme.
This ideological change was born out of a desire to carve a competitive niche to attract new managers and entities to Connecticut—ahead of its more seasoned rivals.
John Thomson, head of the captive regulatory unit at the Connecticut Insurance Department, says: “Many of the other states are more interested in ticking boxes and maximising the number of licences that they have put in place over a given year. I would much rather have a smaller number of well-done captive programmes than have 34 poorly designed and understood programmes on the books.”
As a result of the youth of the captive industry in Connecticut, the state’s regulators are keen to build a ‘hands-on’ reputation from the ground up, and concentrate on maintaining the flexibility and sustainability of each individual captive operation. This involves interacting with entities themselves, understanding their objectives and strategies, and ultimately helping them to get their actuarial and accounting pro forma statements vetted.
Thomson continues: “I have a real commitment to governance. I am always looking to see the details of the process first-hand and discover how the governors are owning and managing their captives—I think this is something unique to Connecticut.”
The state is currently planning to examine its first captives—the oldest of which are still only in their second year. These captives will be checked every three years, as will any that follow in the future.
Connecticut’s youngest entities, such as the six-month-old StanleyBlack & Decker (SBD) captive, are experiencing both the rough and the smooth of locating themselves in an inexperienced and unconventional captive domicile.
Tim Perra, vice president of communications for SBD, says: “Connecticut is a very new domicile which has been working with us to make the SBD captive a success for both parties … There are some learning curves that have delayed the timeframe of implementation, but this likely happens in other new domiciles as well.”
“There are always growing pains related to any new process. For example, there are start up issues with understanding regulatory requirements of a captive in a state that is more familiar with traditional insurance. Understanding what is required from the actuary and from the audit are two examples. Another example is working through an investment strategy that makes sense to all parties. However, the regulators have demonstrated a genuine interest in working with SBD Insurance during this process and providing flexibility in necessary areas.”
Perhaps as a result of this relatively short-track record, many of Connecticut’s competitors, such as Vermont, still do not see it as much of a threat—at least not yet.
Daniel Towle, director of financial services for the Vermont Agency of Commerce & Community Development, says: “Vermont continues to license captives at a consistently strong pace. New captive domiciles coming into the market every year has been a trend for quite some time. Vermont continues to seek quality companies that are forming captives as a better way to manage their risk, and this strategy has not changed regardless of market conditions or competition.
“Connecticut is certainly very late to the captive insurance industry and I am not sure what took them so long since I know in the past they have considered themselves as an insurance centre. As a relatively new jurisdiction, I have not had any experience with Connecticut as a domicile.”
Although Connecticut is less familiar with captives than some of its contemporaries, it does claim to be more different. Rather than advertise itself as cheaper or easier in which to set up, the state says it is typically less aggressive and restrictive in its regulation—and not to the detriment of sustainability, either.
As Thomson explains: “Connecticut is unique in the wider US in that it has led with sustainability, even though others may say they achieve this by maintaining rules but allowing flexibility. Connecticut is the only state to focus on the strategic intent for the captive as well as how the owner manages it.”
