Delaware Insurance Department
With a thriving captive industry already established, Delaware’s next challenge is to oppose the newest NAIC proposal, says Steve Kinion
Could you give an overview of the state of Delaware’s captive industry, and also an idea of what your most popular type of captive is?
Delaware is the third largest captive domicile in the US and the sixth largest worldwide. The types of captive that we have vary: from those that create a small annual premium volume of around $500,000 to, at the other end of the spectrum, captives that create hundreds of millions of dollars—so there is quite a large difference between the two.
I still think the most popular form of captive in Delaware are those that create less than $1.2 million in annual premiums, which are commonly referred to as falling under the 831(b) election.
Over the next 18 months, I believe that our industry will grow at a pace of around 10 to 15 percent, though we are conscious that this growth will have to be managed accordingly.
What are series business units?
I think Delaware may even be the only state that does them. Series business units (SBUs) are something like cells, in a different format, which exist as a result of the state’s insurance laws. Delaware’s general business laws, upon which our captives operate, allow for the creation of the series.
Where you find cells operating only in an insurance context, SBUs (or the equivalent) are used in multiple other areas of business such as mutual funds, for example.
In this case, series level one may contain the international bond funds, series two could contain European stock funds, series three may have the US funds—but the key to this is that the mutual fund managers are able to segregate and encapsulate the assets and liabilities of each fund, as they reside in a different series’.
This is the beauty of the Delaware Limited Liability Company (LLC) Act, as it allows for the formation of these types of series.
Each captive sitting in a series is ringfenced from the others that may be under the same LLC in terms of the chain. Even so, they do not have to be separate. Under Delaware’s freedom of contract, they can decide whether they wish to share assets and liabilities with the others in the series, and it is this contractual flexibility that makes the SBUs very popular.
We have between 580 and 600 SBUs at the moment and most, but not all, of these make the 831(b) election.
It has become an easy, low-cost and efficient way for a captive prospector to enter the industry. After a period of time, some owners may even decide to graduate these entities into full, standalone captives.
A cornerstone of Delaware’s insurance industry is what is known as the Three Legged Stool, or the interaction between regulator, statute and industry. What is the key to this relationship?
Collaboration. We work very closely with our captive insurance association and we will consistently meet with captive managers once or twice a year, at least. I, personally, like to speak with captive managers as much as possible. We want to find out what the State of Delaware can do to better serve managers and their clients, and what they see in the industry that we do not.
The feedback is very cyclical, as we can inform captive managers what we are seeing from our end. In 2009, Delaware was not even under consideration as a captive domicile for most people, but today we are one of the most popular, so the relationship has clearly worked well for all concerned.
Delaware has experienced a great deal of regulatory change in the last decade—are there any new developments in the pipeline?
Yes. As a matter of fact, we are currently negotiating a bill with the Delaware Captive Insurance Association (DCIA) and ideally this will be clarified and become law.
The DCIA will, hopefully, make the law explicit that captive insurance companies can become members of the Federal Home Loan Banks System.
This is important, as we are seeing a new trend in the last six months of real estate investment trusts (REITs) seeking to form captive insurance companies of their own. While this is beneficial for them for insurance reasons, it would also allow them a portal into FHLBanks, which would, in turn, allow them to access capital at very attractive price.
However, while this is a very significant step for the REIT industry, for us this is just one of many new regulations that we see—it should not affect our industry to a great extent.
Does Delaware suffer the same interference from the National Association of Insurance Commissioners as other states, or is the industry simply too big?
It does affect us and there is a proposal within the National Association of Insurance Commissioners (NAIC) at the moment that would change the definition of a multi-state insurer for NAIC accreditation purposes.
If this definition, as written, is adopted, then I believe it could have a detrimental effect on captive insurance.
If this new definition becomes NAIC policy then certain types of captives, such as group or association captives, run the risk of being treated as commercial property and catastrophe companies, and having to abide by all of their similar standards. It’s a disturbing development.
Delaware has been very forthright in opposing these laws and we have been for a long time. There is more momentum building from others so we are hopeful that we can affect a change in mentality. We have to submit our comments to the NAIC by 19 May. On 12 and 13 May at the DCIA conference, I will also be addressing this problem. With any luck, we will be able to persevere and come out of the other side stronger than ever.
