Utah’s captive insurance industry finished last year on a high after welcoming a total of 42 risk-bearing entities, taking its total to 435 captive insurance companies.
Although the state did lose six captives in total, those working within the industry were pleased to see larger companies moving to the state with more robust risk management programmes, higher premium volume, and a long-term outlook for the use of their captive.
Despite a bumpy road so far in 2020 with the ongoing COVID-19 pandemic, Travis Wegkamp, captive insurance director at the Utah Insurance Department, reveals that the total amount of premium volume reported by the state’s captives is at an all-time high.
Wegkamp says the captive market in Utah “continues to be a healthy and dynamic one.”
The state has continued to receive and process new captive formations and/or business plans for new entities with unique and creative insurance programmes, according to Wegkamp.
Utah’s captive industry was also boosted by amendments to its captive insurance legislation.
The bill, known as House Bill (HB) 37, was introduced late 2019 and was signed into law by Governor Gary Herbert in May. The bill contained an amendment which permits a captive insurance company to provide reinsurance by another insurer with prior approval of the commissioner.
Wegkamp explains that the recently passed, and now in effect, legislation allows Utah captives to reinsure pure third-party risk from highly rated traditional insurers with pre-approval from the commissioner.
He adds that this will allow captives in Utah the ability to participate in captive risk pooling arrangements without first having to qualify all participants as ‘controlled unaffiliated businesses’ (CUB).
“We're always considering ways to update and improve our captive laws and competitiveness as a captive jurisdiction. While nothing has been decided yet, we are evaluating and considering lowering the minimum capital requirements for sponsored captives”, says Wegkamp.
Commenting on legislation updates within the state, Brandy Alderson, vice president at Marsh Captive Solutions and president of the Utah Captive Insurance Association (UCIA), notes that the Utah Department of Insurance submits proposed changes to captive legislation on an almost annual basis.
Alderson explains that these proposed changes are to enhance the existing legislation and make operating a captive in Utah a more positive experience.
“Some of the recent changes to the legislation made it overall clearer and easier to understand, as well as the addition of dormant captive legislation,” she adds.
A bump in the road
In terms of challenges, Wegkamp notes there are none solely unique to Utah, but rather those facing the industry as a whole.
He says: “Namely, awareness of captives and their benefits, and unfortunately the need to overcome the stigma and challenges of targeted Internal Revenue Service (IRS) scrutiny.”
As part of the targeted IRS scrutiny, UCIA board members sent a letter to Utah's congressional delegation in response to the IRS’ letter sent to micro captive insurance company owners.
In the letter, the board explained that Congress has supported the captive insurance industry, and as part of the PATH Act of 2015, chose to increase the allowable premium under section 831(b), as a way to increase the effectiveness of micro captives.
The letter also outlined Utah’s captive statistics, stating that all captive insurance companies within the state pay licensing and corporate structure fees to Utah, and are all required to have an annual board of directors meeting held in Utah.
Additionally, board members noted that the total economic impact of the captive insurance industry to the state of Utah is estimated at more than $17 million each year, and those that are domiciled in Utah hold more than $1 billion in cash and other assets in Utah financial institutions.
COVID-19 impact
At the end of 2019, no one predicted that COVID-19 would provide heaps of economic uncertainty worldwide. Alderson suggests this is no different in the captive industry. However, she says that so far “we have not seen any major repercussions, but it has the potential to impact new formations in the near future”.
At the time of writing, Utah had over 30,000 confirmed cases of COVID-19.
Alderson explains that due to the ongoing pandemic, the state is seeing business plan changes and new captive formation discussions driven partly by the transitioning commercial insurance market.
She continues: “Many insureds are finding certain lines of coverage harder to procure or are being required to take higher retention on their current programmes. This is causing many insureds to consider retaining more risk in a captive or explore reinsuring risk through a captive. COVID-19 seems to have increased interest in captive utilisation.”
Wegkamp suggests that the pandemic and effects of government-imposed stay-at-home orders and business closures have created a once-in-a-lifetime opportunity for captives to shine.
“Captives are uniquely positioned and capable to respond much more nimbly and accurately to these conditions and the needs of their insureds/owners. This chance to prove their worth and legitimacy should result in a strong growth of new formations and coverages in the near and foreseeable future,” he adds.
Alderson adds that captives have allowed many business owners more flexibility during COVID-related uncertainty. Mature captives in good financial condition have been able to provide dividends or loans to support the parent company cash flow.
She outlines that they have also seen increased interest in writing pandemic related coverage in captives.
The Utah regulators have been incredibly responsive during discussions about business plan changes, dividends, loans, and filing extensions due to COVID-19.
“We have experienced no interruption in response from Utah even during the initial shutdown and quarantine,” Alderson notes.
In light of COVID-19 and concerns around the welfare of those due to attend, the Western Region Captive Insurance Conference (WRCIC) board cancelled its conference, which was due to take place on 18 to 20 May 2020.
A new date of 10 to 12 May 2021 has been announced and will be held in Little America Hotel in Salt Lake City, Utah.
