Delaware Department of Insurance
Stephen Taylor talks to Frances Jones about his role and his ambitions for the Delaware captive programme
How has your previous regulatory experience helped you in your new role? What do you hope to achieve as Delaware captive director?
My roles as the former commissioner, deputy commissioner and general counsel for the Washington DC Department of Insurance provided me with comprehensive experience in insurance regulation. I gained a deep understanding of how captive insurance should be regulated, as well as knowledge of how to grow a captive programme and maintain its competitiveness with other domiciles.
As Delaware’s captive director, I’m working with Commissioner Trinidad Navarro to ensure Delaware maintains its best in-class programme with the finest statutes, regulations and network of service providers.
We’re working to ensure that Delaware sets the standard for smart, flexible, innovative, fair, professional, transparent and consistent regulation of captive insurance. It’s important to stress that we really want to have a great programme so that the Delaware domicile remains highly desirable and respected.
The programme provided is flexible and responsive to meet the risk management objectives of businesses. As Delaware was the first colony to ratify the US Constitution, we want to ensure it remains a great first choice for forming and expanding captives.
What do you think are the strengths of the Delaware captive programme? How do you intend to build upon those strengths?
Delaware is the third-largest domicile for captives in the US and the world’s fifth-largest. The state is renowned for its specialised insurance regulatory expertise. First and foremost, our captive team is what really makes the programme special.
For the captive programme, we have a knowledgeable and savvy team of 36 dedicated individuals. The team is extremely experienced and many of them are highly credentialed in the insurance and financial fields. This means we have the know-how when it comes to regulating captives.
Each captive company is assigned a regulatory analyst, who will act as the captive’s liaison into the programme, which really helps captives with any operational needs.
Another key strength of the Delaware programme is that it is built upon what’s called a ‘The Delaware Advantage’ — Delaware’s corporate law. This state business law is the ‘gold standard’ for business formation and corporate law in the US. Also, our modern corporate laws are regularly updated by the legislature and there’s an expert corporate legal bar that helps shape the law. Finally, the Chancery Court has special jurisdiction to interpret corporate law adding predictability and stability.
Given the evidence supplied, it’s no wonder 50 per cent of Fortune 500 companies call Delaware home.
The captive programme has been constructed on top of ‘The Delaware Advantage’. Delaware’s captive law also provides businesses with a great deal of flexibility. Our captive laws provide many options in terms of a captive’s legal form, as well as allowing the licensing of multiple entity types.
Furthermore, we have a very business-friendly state government and a stable political and corporate environment. Delaware is also a great location on the East Coast — proximal to the US financial centres of New York, Philadelphia, Boston and Washington DC.
We work closely and collaboratively with The Delaware Captive Insurance Association (DCIA). This partnership promotes and supports the captive industry, helping to maintain the best regulatory environment to address the needs of captives and the businesses they support.
We also have a robust and expert network of captive management companies, insurance professionals, law firms, actuaries, financial institutions, accounting firms and other service providers.
Finally, our philosophy is to be collaborative and open to explore captive insurance solutions for businesses while staying responsive and transparent.
In an interview with AM Best you said you would like to explore more opportunities in ESG. How do you plan to do so?
As I mentioned then, many participants in our industry are looking at addressing ESG initiatives that have become a strategic imperative for many organisations over the past year. I think interest has grown partially due to some of the social, economic and political shocks that were created by the COVID-19 pandemic. Indeed, increased emphasis on ESG initiatives often originates from pressure and focus from investors, regulators and employees to make it not just a focus at the board level, but also an essential part of an organisation. There’s a growing interest in the use of captives to address ESG issues and Delaware stands ready to help meet that interest through our programme.
For example, some say a captive demonstrates good governance because a captive is a formalised entity licensed by a regulator. It’s a regulated entity which has been established to protect your organisation against threats, provide structural risk management oversight and to facilitate tax and regulatory compliance.
In terms of the “S” (the societal aspect), captives can offer organisations the flexibility and control to address their people risks that might impact their businesses, including employee benefits and employee engagement programmes.
I’ve seen captives being used as a mechanism to harmonise benefit coverages across geographies, for example, providing coverage that may not be available in some locations such as maternity benefits or to enhance diversity and inclusion programmes.
For the environmental side, captives can capitalise on gaps created by commercial insurers that are reducing their appetite and ability to underwrite carbon intensive risks as they work to reduce their carbon intensive investments and underwriting. We’re also seeing some captives being used to address other coverage gaps and exclusions.
For example, we have some captives that are writing business interruption coverage as well as protecting against supply chain issues. This demonstrates that a captive can serve a critical function as a business resilience tool, as they can help fund an organisation’s risk up front.
We also might see ESG driving up the interests among owners to redomicile their offshore captives to address issues of corporate responsibility.
What challenges do you foresee for the Delaware captive market? How are you planning to face these challenges?
This current hard marketplace, of course, provides the general macroeconomic challenge of inflation.
Also, we’re looking at how the Internal Revenue Service (IRS) has impacted the captive space.
Captive insurance companies that have exercised the Section 831(b) election continue to be under the scrutiny of the IRS. That’s the election for small businesses where it gives them some federal tax benefits as they work to manage their risk. Subsequently, we’ve lost a number of smaller captives due to the scrutiny from the IRS.
Many in the captive industry argue that the recent proposed regulation from the IRS will impose onerous reporting requirements. If the proposal is passed in its current form, captives electing 831(b) that fail to meet the new loss ratio requirements of 65 per cent, or engage in related party financing, will be subjected to significant reporting requirements under the threat of severe penalties.
While we fully support the IRS’ tax enforcement efforts, we agree with many in the captive industry that the proposal is overboard and would adversely impact small businesses that legitimately used the tax law as intended when Congress enacted section 831(b).
We hope to see those better efforts targeted at bad actors who are engaged in tax abuse rather than those businesses that have established legitimate insurance operations under the law, which is what we do in Delaware. We make every effort to ensure that those companies are operating as insurance companies and not using our domicile to set up tax abuse entities.
With the IRS, we’re continuing to monitor and provide any support to ensure that the appropriate tools are focused to eliminate those few truly abusive tax schemes and not harm a perfectly legitimate industry.
A further challenge for the captive industry is the war for talent. The challenge remains for insurers to attract and retain the best people. Captive insurance seems to lag some of the other ‘sexier’ industries. However, I think captives are pretty sexy. It’s a fun industry that offers ample and diverse opportunities for young talent.
The nature of work creates meaningful and varied career paths with ample room for development. It demonstrates that insurance can be a professionally and personally rewarding industry, as any other.
Is there any recently introduced key legislation that you think could dramatically change the captive market in the next year to 18 months?
Delaware has a new law that allows its corporations to obtain side A coverage for directors and officers liability (D&O) from captives.
Delaware licensed the first captive that issued policy for side A D&O and the industry was excited about that. Due to the increased costs of D&O coverage, the law came in at a good time for the commercial space.
Following this, we’re also going to be issuing some guidance for D&O coverage, responding to piquing market interest.
Also, while the legislation will not be involved, we’re looking to deal with some of our policy and procedures. We will be taking some of the procedures that we’ve had in-house and codifying those public facing policies and procedures to increase the consistency and transparency of regulation.
This will be in addition to modifying some of those concepts which are either outdated or unnecessary to create the most streamlined experience for captives in the state.
For example, we are looking at our process for confirming the appropriate capital and surplus for companies.
The team will be doing a comprehensive review of our statutes and regulations to identify areas where we can change and improve.
Finally, how would you describe the growth of the Delaware captive market? What is Delaware doing to remain competitive with other captive markets?
Akin to most other industries, the COVID-19 pandemic had an adverse impact.
However, over the past couple of years, we’ve seen some growth. Mirroring the wider captive industry, which itself has grown 2 per cent worldwide.
Captive use is growing as commercial insurance rates for lines such as cyber have increased over time. This means that companies are increasingly looking at captives for these types of lines.
Captives are also being used to fill gaps in higher layer programmes as opposed to just being for vehicles to fund a lower layer of coverage.
The captive industry in Delaware remains strong given Delaware’s respected captive programme, team of regulators and our productive partnership with the DCIA over the last couple of years.
The state has witnessed a good number of new captive formations and the number of captives in Delaware is increasing.
This is despite a few of our smaller captives deciding to dissolve rather incur the costs of the increased IRS scrutiny of small businesses and their captives.
Last year, we saw 63 new captive formations and we’ve seen 11 this year so far. We’re growing through our collaborative relationships with captive owners and service providers to develop optimum business plan programmes to achieve risk management objectives.
