In the first of two articles on captive legislation in US states, Diana Bui talks to regulators from Vermont, Utah and North Carolina about their strategies to stay competitive and adapt to industry changes
With the formation of the first captive in Vermont in 1981, the US has surpassed traditional off-shore jurisdictions Bermuda and the Cayman Islands to become the world’s largest domicile, encompassing all states with captive statutes. Currently the country is home to 3,365 captives, accounting for more than half of the total worldwide.
The captive insurance industry is evolving rapidly in the US in response to a challenging insurance market. Captive insurance offers companies the flexibility to customise coverage for hard-to-insure or emerging risks, making it an increasingly appealing option.
Effective regulation, which ensures stability, compliance, and market confidence, is critical to this sector’s success. Recent significant updates to captive legislation in several US states reflect ongoing efforts to enhance regulatory frameworks, making them more robust and adaptable to the dynamic needs of businesses.
As companies seek more control over their insurance costs and coverage, domiciles like Vermont, Utah and North Carolina, are refining their regulatory architecture to attract and support captive insurers.
Vermont: The ‘Gold Standard’
Often referred to as the ‘Gold Standard’ in captive insurance, Vermont has long stood out in the captive industry as a mature and established onshore jurisdiction. Since its inception in 1981, Vermont’s captive regulatory framework has been designed to support a growing and dynamic captive industry. The state offers a stable regulatory environment, experienced professionals, and a legislative structure that allows for flexibility in financing and risk transfer methods.
Sandy Bigglestone, deputy commissioner of captive insurance at the Vermont Department of Financial Regulation (DFR), explains that in Vermont, captive regulation starts with a pre-application process with the prospective captive owner and captive consultants. These meetings assist in evaluating a company’s motivation for establishing a captive, determining its legality, and serving as a dialogue between the company and regulators.
She adds: “Vermont’s standards include a licensing process that incorporates an evaluation of a captive insurance company with the resources of its parent, owners and affiliates in mind, as well as assessing the quality of its chosen business partners. We also consider the insurance coverage the captive plans to retain, the future funding resources it will have access to, and the organisation’s risk management strategies for managing and controlling losses, among other factors, to assess the feasibility and viability of any captive programme.
“Beyond licensing, Vermont’s regulatory framework involves regular monitoring for solvency and compliance with laws and regulations. We achieve this by requiring ongoing regulatory filings for approval, financial filings, and performing analysis and examinations.”
With the formation of 38 new captives, 2023 marked a strong year for the sector in the Green Mountain State. In the first quarter of 2024, Vermont added 15 new captives, taking the total number in the domicile to 669.
According to Brittany Nevins, captive insurance economic development director at the Vermont Department of Economic Development, the captive insurance industry has significantly benefited Vermont’s economy, and for this reason, the state’s legislature is consistently supportive of the industry.
“For example, every year, the Vermont Captive Insurance Association (VCIA) collaborates with the DFR to put forward a proactive captive bill based on industry feedback to update Vermont’s laws to keep pace with the needs of the industry. This is a unique, collaborative process that benefits captive owners tremendously,” states Nevins.
The director reveals that in the 2024 session, the captive bill H.659 was introduced that primarily included technical corrections and clarifications relating to controlled-unaffiliated risk, conversions of captive insurance companies into protected cells, parametric contracts and confidentiality.
After passing the Vermont General Assembly, the bill was signed into law by Governor Phil Scott on 20 May. The amended legislation aims to clarify the previous law in multiple instances to improve the process and consistency of regulatory practices, address unnecessary redundancies, and better align requirements with the captive marketplace.
Notably, the statute provides an update to the state’s cell legislation, enabling a captive insurance company to be converted into an unincorporated cell, with all of its assets, rights, benefits, obligations and liabilities remaining unaffected by the process. It also simplifies state confidentiality and information sharing, as well as giving regulators more flexibility in sharing and reporting captive information.
Finally, the amended legislation lowers the minimum capital requirement for an agency captive insurance company from US$500,000 to US$250,000.
In comparison with other US states, the Vermont captive sector is known for having the largest team of captive insurance regulators, with 32 staff members focusing entirely on the regulation of captive insurance companies.
According to Nevins: “captive insurance companies often reflect on how accessible Vermont’s regulators are and how the department works at the speed of business. This is combined with the expertise of Vermont’s team, many of whom have been working in the industry for many years.”
She says that Vermont has experience with all types of captive insurance companies trying to use their captives in unique ways, so this makes Vermont’s regulation highly effective and tailored in its approach. Today, Vermont is a domicile for various captive types, including everything from single-parent and group captives to risk retention groups (RRGs) and affiliated reinsurance companies.
Bigglestone adds that the state frequently monitors changes in the commercial insurance marketplace, and its regulation, to obtain a solid understanding of potential or emerging impacts on the captive insurance sector.
As commercial and captive insurance deals become more intertwined, the deputy commissioner remarks that captive insurance regulators may be required to shift their focus, expanding from the typical pure captive approach, to one more in line with regulators focused on consumer protection.
As times evolve, so do the landscapes of insurance risks. For over 40 years, Vermont has remained a reliable and experienced captive domicile, working with thousands of business entities in their efforts to manage and self-insure risk.
In terms of the industry’s future, Bigglestone anticipates that Vermont will continue to have opportunities for an increase in global captive insurance prospects. “We certainly had success with our mission to Mexico and would like to build from that experience,” she states.
Utah: Innovative captive domicile
Since the passage of captive legislation in the state in 2003, Utah has risen to become the second largest captives domicile in the US. In 2023, the state licensed 56 captive insurers, including 44 stand-alone captives and 12 cell captives, bringing the domicile’s total count to 439.
As one of the world’s top captive insurance domiciles, Utah is known for its business-friendly environment and innovative approach. Travis Wegkamp, captive insurance director at the Utah Insurance Department, remarks that the captive law in the jurisdiction, which does not impose a state premium tax on captive insurers, has made Utah a popular choice for smaller captives seeking to enter the industry. Captive insurance companies in Utah only pay a nominal annual licence renewal fee of US$7,500.
To keep the domicile competitive with other jurisdictions, Utah continues to make improvements and updates to legislative statutes. Wegkamp states that there are three significant updates to the captive regulations this year, helping to make captives a more attractive and viable option for lower and midmarket companies, during what are arguably tough market conditions.
He says: “The motivation behind most of our recent regulatory changes stems from our observations of the continued hard commercial market and feedback from current, and potential, captive owners seeking additional relief and solutions in the alternative market.
“In Utah, when we see opportunities to be responsive to industry concerns and embrace new innovative approaches, we like to seriously consider them and adjust where appropriate.”
Wegkamp adds that the first change is lowering the minimum capitalisation of sponsored captive programmes to US$250,000, with a minimum of US$50,000 from the core/sponsor at all times This is down from US$500,000 and US$200,000 respectively.
“For those that have found the minimum capitalisation requirements of a pure captive, or even a cell captive, to be an insurmountable barrier to entry in the captive space, we hope this may provide them an opportunity to reconsider a captive,” he notes.
The second significant change is to allow association captives to provide personal homeowner coverage on a direct basis to their members. The captive director explains: “This is a unique solution for homeowners in potentially high-risk areas that have found it nearly impossible to find affordable coverage, or coverage at all, in the current market.
“I believe Utah will be the only captive domicile offering this option for captive insurers. As mentioned, this coverage will be limited to association captives insuring their members. To move forward with this, we felt it necessary that all those being insured under such a coverage have ‘skin in the game’, as we like to say.”
The last change is to remove the mandatory five-year examination cycle. “Going forward, we will call examinations as needed based on our review of their annual filings, audit reports, and compliance history. Additionally, while not part of any legislative update, Utah has made the decision to allow for cannabis captives that operate in the medical use space — another exciting opportunity that Utah can be a leader in,” Wegkamp remarks.
However, the director asserts that maintaining compliance with Utah statutes is the primary challenge in regulating captives. Much of the time, this is related to ensuring the required minimum capitalisation remains unimpaired, and oftentimes the crux of this issue comes down to investments.
“When dealing with captive owners that are typically more engaged with their parent company operations, and accustomed to being able to take advantage of investment opportunities, we then have to take the steps to rein them in and remind them of the insurance company investment guidelines, the need to take a more conservative approach than they may be used to, and that any sort of related-party loan must have prior approval of the commissioner,” specifies Wegkamp.
He further adds: “Also, I would say that the whole concept of ‘prior approval of the commissioner’ is one that remains an ongoing effort for us to make captive owners aware of. This relates not only to related-party loans, as previously mentioned, but always to business plan changes involving lines of coverage and/or alterations to limits, as well as various other changes the captive may make.”
With its dedication to creating a favourable environment for businesses of all sizes, Utah stands as one of the top domiciles for micro-captives. Wegkamp says: “As a captive domicile, we do our best to think of ways to make Utah an attractive jurisdiction for captives in any way possible. Our approach to new trends, particularly innovation, is to construct our statutes in a way that doesn’t stifle, but encourages captives to come to us and present their unique ideas.
“We make an effort in our legislative language to be a bit vague, or rather, we don’t say what you can do, but say what you can’t do. In that way, we are able to accept and allow innovations not explicitly prohibited, and once we have gained some experience with these new trends and innovations, we can then craft new legislation, if necessary, to limit aspects of it that just don’t seem to work.”
North Carolina: Modern captive landscape
Ten years after the state’s captive law was passed, the captive industry in North Carolina is thriving. Starting later than other US domiciles, the Old North State has quickly caught up with the competition, reaching a significant milestone in licensing. It has now become the US’s third-largest domicile, with 49 new captives licensed last year. This pushed the total number of risk-bearing entities registered in the state to 1,069, composed of 311 licensed companies and 758 approved cells and series as of 2023 year-end.
Explaining the success of the development of captives in the state, Lori Gorman, deputy commissioner at the North Carolina Department of Insurance (NCDOI), states that the modern nature of the North Carolina General Statutes, passed in 2013, lends itself to the continued growth of the state’s captive programme. North Carolina is an attractive domicile because it continues to offer low-cost formations and operations for captive insurers.
“The NCDOI collects no fees from its captive insurers. The North Carolina Department of Revenue does collect premium taxes, but we believe our tax rates are competitive with those of other US domiciles,” Gorman adds.
North Carolina regulates its captive insurers differently than most states, opting for a targeted examination approach rather than routine reviews every three to five years, and relying instead on annual independent audits and actuarial opinions. However, North Carolina follows the National Association of Insurance Commissioners accreditation standards and examines risk retention groups every five years.
To stay up to date with the innovations in the industry, the NCDOI, under the direction of Commissioner Mike Causey, works closely with the North Carolina Captive Insurance Association to propose legislation, aiming to ensure that captive law remains current and meets the evolving needs of the industry. Gorman says that North Carolina’s captive law provides the department with a great deal of discretion to regulate captive insurance efficiently within a business-friendly framework.
According to the deputy commissioner, there are recently proposed changes before the legislature. North Carolina Senate Bill 319, currently under consideration, seeks to reduce the retaliatory tax applied to foreign RRGs to 1.85 per cent from 5 per cent, encouraging more RRGs to form in North Carolina. The bill clarifies that the cost of examinations for those entities will be the responsibility of the examined RRGs.
Gormans explains that significantly, the bill extends the premium tax holiday for captive insurers that redomesticate to North Carolina, including a waiver of premium taxes for the year in which the captive insurer relocates to the state as well as the next year’s premium taxes.
“This provision encourages captive owners who established their captive insurer before the enactment of North Carolina’s captive law to choose North Carolina as their captive’s domicile. We have held preliminary discussions with captive managers interested in the redomestication process and the low-cost captive operation available in our domicile,” she states.
As emerging risks evolve, captives are providing more types of coverage than ever before. Gorman emphasises that to keep pace with emerging industry trends, the insurance team regularly attends and exhibits at industry conferences throughout the year, where they have the opportunity to participate in focused educational sessions and engage with other knowledgeable industry professionals.
“We continue to see an uptick in interest in cell structure formations, as these structures can provide many benefits to managing a company’s risk, and may often require less time for implementation and have lower operating costs as well as lower initial capital requirements,” she says.
The director predicts that as the commercial market hardens, North Carolina will continue to grow as a captive domicile, with an increasing number of captives in the state. “Captive insurance has become a valuable risk management tool in today’s economy for businesses of all sizes to gain access to reinsurance markets, control costs and customise gaps in coverage,” Gorman states.
