An innovative new captive in Connecticut is helping residents save their homes and may boost the industry’s reputation in the process
An innovative new captive in Connecticut is helping residents save their homes and may boost the industry’s reputation in the process
In recent years, the captive insurance industry has not had the best public reputation. Perhaps this is unsurprising, most captives serve multi-million dollar businesses behind the scenes and the majority of the public has no reason to know what a captive is or does. The nature of the business means that when captives do make it into the mainstream news it is usually related to wrongdoing and centred on the tax benefits.
An innovative new captive in Connecticut, formed to improve the lives of thousands of the state’s homeowners, is showcasing how captives can be used for social benefit and may simultaneously improve the world’s view of captives.
The Connecticut Foundation Solutions Indemnity Company (CFSIC), is a non-profit captive set up to distribute the Crumbling Foundation Assistance Fund and provide remediation to homeowners in Connecticut impacted by the ‘crumbling foundations’ issue.
Crumbling foundations
The issue, caused by the presence of the mineral pyrrhotite in the concrete foundations of buildings, has the potential to cause devastating damage to more than 35,000 houses in the north, east and central parts of Connecticut.
The mineral has been traced back to a quarry in Willington and is believed to be limited to houses within a 50-mile radius of the quarry that were built between 1983 and 2015.
When exposed to oxygen and water, pyrrhotite causes the slow deterioration of the concrete causing web-like cracks that start small and can take more than a decade to appear, but the damage caused is irreversible. The only solution to the problem is to replace the foundation altogether, which is estimated to cost between $150,000 and $250,000.
Commercial insurers have generally denied coverage responsibility, refusing to cover the issue and denying claims on the basis that it does not fall under the ‘peril of collapse’. Residents, whose homes had been left worthless due to the structural issue, were in desperate need of a solution and turned to their state government.
The CFSIC
Michael Maglaras, president of Michael Maglaras & Company, says that about a year and a half ago, while he was chairman of the Connecticut Captive Insurance Association (CCIA), he was contacted about the issue. He explained: “I was asked to advise state government officials, and others, about what the best way to pay a client is when an insurance company doesn’t exist. In other words, in the situation where the commercial market would not cover these homeowners.”
Maglaras advised the state officials of the “wonderful captive statute” and “enlightened and intelligent regulator and commissioner” in the state, and recommended they “think about using the captive statute and creating a claims management programme that allows for these property claims to be effectively reserved, adjusted and paid in a timely way”.
The state embraced the idea, and in June 2017 as part of SB 1502, the 2018/19 state budget, they passed legislation, which authorised the formation of a non-profit captive, CFSIC, and eight months later, in February 2018, the Connecticut State Bond Commission approved $350,000 in funding to form the captive.
CFSIC’s primary aim is to assist homeowners affected by the ‘crumbling foundations’ issue by distributing the Crumbling Foundations Assistance Fund, which has been allocated $100 million of state bonded funding over the next five years, in annual tranches of $20 million.
In April, following a strenuous selection process Michael Maglaras & Company were selected as the captive’s superintendent, to oversee the formation of the captive.
Maglaras, an industry veteran with more than 30 years of experience in captive underwriting and administration, is based in Connecticut and says the company had been aware of the “terrible situation” for a long time and felt an added sense of responsibility given the captive’s impact on people’s lives.
He adds: “We are approaching it differently. We have been given a public trust, these are public funds, this is not a fortune 500 company.”
“We are being given $100 million over the next five years by the state of Connecticut and that is a public trust. What that implies is a very high degree of transparency, accountability, nothing disguised or hidden from the public and operating at all times with an enormous amount of demonstrable integrity.”
“I’m not for a moment suggesting that we don’t do that every day of the week but we have to prove it here because this is a public trust. On a personal note, after having been in the business for 41 years, it is an opportunity to use my professional skills for the public good.”
“There are people in Connecticut who are being forced from their homes because they are collapsing, we are going to make that right, and we take an enormous amount of pride that we were selected. We see this as a chance to give back, and we are delighted to do it.”
Wheels in motion
Due to the severity of the issue, Maglaras wants to get to work straight away and says that the captive will be licensed before the end of July and paying claims before the end of August.
Stephen DiCenso, current president of the CCIA, says the association is supportive of the process and is happy to see how efficient the progress has been so far.
DiCenso explains: “As an association, we are very pleased to see such an accelerated implementation timeline for such a unique and collaborative solution that this captive insurance company will provide.”
“The formation process is in full gear, and this rigorous process will provide homeowners in Connecticut with the knowledge that the appropriate progress is being undertaken quickly and effectively on their behalf.”
Funding
The Connecticut General Assembly passed new legislation in May that meant a $12 surcharge would be added on to all homeowner insurance policies in the state, with 85 percent of the money raised going into the captive to cover initial tests to help identify whether homeowners have the issue.
Maglaras is a massive supporter of this new legislation but says this “wonderful idea” is just the start and more funding will be needed.
He explains: “There are as many as 34,000 homes in Connecticut with a crumbling foundation, so, we are going to be very, very, dependent on seeking corporate contributions to this tax-exempt captive.”
Using the Connecticut Department of Housing’s estimations, replacing the foundations of 34,000 homes would cost in the ballpark of $6.8 billion, which would mean that the currently allocated $100 million will barely scratch the surface.
One of the ways Maglaras thinks the captive can get additional donations is by reaching out to the insurance and reinsurance industry many of whom denied the homeowners’ original claims.
“I am going to create a tax-exempt captive that is fulfilling a public trust, making people’s lives whole again and I want to build a strong argument for the insurance and reinsurance industry to come in and participate, contribute to the surplus of this captive. Let us give back to the state of Connecticut.”
Addressing the homeowners directly, Maglaras added: “Help is on the way. We will do what we said we will do and help is on the way.”
A precedent for positive captives
From a captive insurance standpoint, CFSIC represents an exciting innovation that has already showcased how the flexibility of captives may see their uses branch out into different sectors in the future. If the captive succeeds over the next few years in helping the Connecticut homeowners with their recovery, then we may see the government non-profit captive structure copied in other jurisdictions.
DiCenso hails the importance of the collaboration of the Department of Insurance Captive Insurance Division, the Governor’s Office and the State Legislature in creating the innovative model.
“Rarely do you find public policy issues that call for such cooperation between the insurance industry and government,” DiCenso points out. “We are proud to be part of this public-private partnership solution to this serious, pressing problem.”
“This is an extremely serious and impactful issue for many homeowners in Connecticut that shows the flexibility and positive work that captive insurance can provide a risk financing and risk management solution.”
In the future, Connecticut’s approach to solving this issue may be borrowed by other jurisdictions. Due to the issue being related to location, it is thought that parts of Massachusetts and Canada may also be affected. Should this be the case, governments in those jurisdictions may look at the captive approach as their solution.
Changing perceptions
The concept of a captive insurance company used for social benefit is not an entirely new idea, in 2004 the World Trade Centre Captive Insurance Company was set up in New York by the Federal Emergency Management Agency to provide coverage for the risks of the city and its contractors following 9/11, but there is the potential for CFSIC to set a precedent for future captives for a similar cause.
Maglaras believes that CFSIC could also play an important role in improving the reputation of the captive insurance industry.
He explains: “When we have a captive that comes along like CFSIC, formed for a legitimate higher purpose to legitimately pay claims, that needs to be publicised as much as the Avrahami decision was.”
“We need to emphasise that just because we have a few bad actors in this business doesn’t mean that captives themselves are tarnished.”
“So much good news about captives doesn’t make it into the public media because captives are at their best when they’re boring and when there is nothing eventful going on then it means the captive is running just fine.”
