During conversations with US captive directors, it soon becomes clear that there is no single, foolproof formula for cultivating a successful captive domicile...
During conversations with US captive directors, it soon becomes clear that there is no single, foolproof formula for cultivating a successful captive domicile. A strategy that has served one state well might not work in another, and so on. One certainty is that, in terms of the top four US domiciles, a strong philosophy is quite often at the heart of each state’s success.
It’s a marathon, not a sprint
South Carolina’s captive industry is built on the twin pillars of solid infrastructure and effective regulations. The former is based on the ubiquity of the industry’s biggest hitters, with captive managers such as Marsh, Aon, Willis, USA Risk Group, Kane, Strategic Risk Solutions, JLT Towner, Advantage International and Wilmington Trust all settled in the state. In addition to these firms, the state has access to a large pool of highly skilled actuaries, accountants and lawyers.
In terms of regulations, South Carolina is again in possession of a competitive calling card. According to Chris Stormer of Bauknight Pietras & Stormer, who is also president of the South Carolina Captive Insurance Association, one of the stronger initiatives that the regulator has implemented in recent times is the establishment of a captive insurance director that is not politically appointed. This protects director Jay Branum from being affected by a change in state governance as, quite often, a new governor also means new director of insurance.
Stormer explains: “Every change of captive insurance director could be detrimental to the industry, and the fact that we do not have to worry about this gives our state great stability. Our director is more of a long-term appointment than in some other states.”
While South Carolina has experience with smaller, 831(b)-type captives, Stormer says that “a great deal of South Carolina’s experience was gained” in dealing with “the very complex” Fortune 500-style captives, as well as risk retention groups (RRGs) and special purpose financial captives (SPFCs).
Support from the legislature has also given South Carolina the ability to strengthen its incorporated cell company (ICC) legislation, after new laws came into effect in June. Although there is currently only one ICC application on file, the state has earmarked them as a growth area for the future. While Stormer does not expect some of the “more aggressive” 831(b) captives to call on South Carolina, the state is equipped to deal with the gamut of structures.
“The state has long been focused on quality over quantity, and if you were to look at the amount of premium dollars or capital invested in a state’s captive industry rather than the actual number of captives, you would definitely put South Carolina near the top.”
A state in its prime
Hawaii has been a captive domicile since 1986 and currently stands as the largest in the Pacific Rim, predominantly attracting owners from the western US and Asia Pacific regions. Hawaii’s 188 captives generate $2.9 billion in premiums with assets of $15.6 billion, which indicates average premium volume of more than $15 million per captive.
The state also has one of the lowest premium tax structures in the US—with no minimum premium tax, and zero premium tax for fronted programmes, reinsurance and other programmes where the premium is taxed elsewhere. Hawaii’s highest premium tax rate is 0.25 percent with a decreasing rate scale once premiums exceed $25 million.
The captive insurance branch of the Hawaii Insurance Division serves the needs of Hawaii’s captive owners and their service providers, priding itself on highly experienced personnel in both the public and private sector. Having such an experienced and stable infrastructure makes the state attractive for its consistent regulatory approach and knowledgeable teams to assist captive owners. The Hawaii Captive Insurance Council (HCIC) also actively liaises with the regulators, to continually review captive laws, regulations and processes.
Fay Okamoto, Artex Hawaii’s senior vice president of captive management, comments: “Over the years, I’ve seen Hawaii go through its regulatory growing pains. Captive regulation is like a pendulum—swing it too far one way or the other and you have problems. The challenge for any captive domicile is to find that ‘happy medium’ between effective regulation and over-regulaton. With its long operating history, Hawaii knows what works for effective captive regulation.”
The HCIC and the Hawaii Insurance Division have been allied, along with many others in the captive industry, in their opposition to the National Association of Insurance Commissioners’s (NAIC) recent ‘multi-state reinsurer’ proposal, feeling that it could have a profound impact on the regulation of captives domiciled anywhere in the US, should it move forward. Regardless of the outcome though, those doing business in Hawaii feel there is sufficient groundwork already in place to weather any oncoming storms.
Okamoto says: “In 1991, when I entered this industry, there was only a handful of US captive domiciles, the most frequently cited being Vermont, Hawaii, and Colorado. Now there are more than 30. Competition among US captive domiciles is pretty fierce, but that hasn’t stopped Hawaii from attracting captive owners who are looking for that stable and consistent regulatory environment.”
Live and let live
A relative latecomer to the captive industry considering its size, Utah passed legislation in 2003 allowing captive insurance companies to be formed. With direction provided by the state’s governor and legislators, captive fees in Utah were set at $5000 per year, per captive, without premium tax. In addition, to ensure the security and continued viability of the captive division, the enabling legislation set up a restricted account to insulate the division from economic fluctuations of the state’s general fund. The annual captive fee remains at $5000 and the captive division continues to expand to meet the needs of captive companies.
Utah has been ranked as ‘America’s most pro-business state’ for three consecutive years and Forbes has also ranked Utah as the ‘Best State for Business’ in 2011, 2012 and 2013. It is this supportive mentality that has been heralded as one of driving forces behind Utah’s captive industry, allowing it to expand after humble beginnings.
“One of the strategies that helped in Utah’s growth is our early focus on the small and mid-size captive market. Our conservative and steady approach paid dividends through our ability to attract and retain educated and experienced staff. As our expertise and number of staff has grown we have continued to expand into more complex structures,” says David Snowball, captive division director at the Utah Insurance Department.
Although there is competition between states for the abundance of captive business available in the US, Snowball claims that it is also extremely important to be cooperative. Just as the other, more mature states helped Utah to progress, now Utah is finding ways to help some of the newer domiciles.
Utah has grown significantly over the last several years, at a rate of about 26 percent per year, despite other states developing around it. Snowball states that Utah wants continued growth, but he stresses that this should not be at the expense of providing less effective regulation.
Snowball comments: “Utah expects a good year for 2014 in the number of new captives formed, but it is not expected that the growth will be much different than other domiciles. There is just so much business available that all states will have good growth. Rankings are only as good as the definitions given to them and the ideas that are instituted to change the industry. Utah does not focus on ranking, although it is nice to be ranked, but on providing appropriate regulation to maintain a good industry.”
Setting the bar
Since first passing its captive law in 1981, Vermont has been synonymous with captive insurance. Not only are all of the major global captive managers based in the state but, in many cases, their main global office is in Vermont.
Add a full stable of accounting firms, attorneys, actuaries, banks, investment managers and other service providers into the mix and it is clear why Vermont is capable of operating a captive of any size. It is also important to remember that, in terms of premium dollars, population and geography, Vermont is still one of the smallest states in the US.
David Provost, deputy commissioner of captive insurance for Vermont, says: “We have built an insurance industry that is not reliant on any one business segment, line of insurance or type of captive. I’m very pleased that each year when we look at the licences granted during the past 12 months, that we have a mix of single parent captives, group captives and special purpose insurers of all sizes and sponsored by all sorts of different parent companies.”
“Because we have such a varied mix, the impact—negative or positive—of changes in regulations or the environment or other, is muted. We will continue to be a domicile of the highest standards to attract like-minded business that need to form a captive as a risk management and risk financing tool.”
To further protect Vermont’s captive industry, a full time representative has been installed in the state’s Economic Development Department to focus on marketing, so attention can be shifted onto solvency regulation. This illustrates Provost’s claim that Vermont’s best competitive strategy is to maintain the highest standards of regulation.
He comments: “In Vermont, we have always focused on licensing and regulating quality programmes. That strategy has not changed, regardless of competition. If there are 10 quality programmes that come along in any year or 50 quality programmes—we want an opportunity to license them all. If there are not any quality companies, then we are not going to license any.”
