Delaware backed up an ace 2017 with steady growth last year, and with the recent addition of the conditional licensing leglisation the domicile’s growth looks set to continue
Amongst its many nicknames, Delaware is known as the ‘small wonder’. A handle that seems appropriate where its recent performances in the captive market are concerned. The state licensed 46 captives last year, impressive in the current market conditions but a drop compared to 2017, when 117 new captives were licensed in the state, leaving the number of active captives in the state above 1,000. Steve Kinion, director of the bureau of captive and financial insurance products, Delaware Insurance Department, emphasises, however, that it is not just quantity that is important to the state.
Kinion explains: “We have a commitment to licensing captive insurers with sound business plans formed by reputable individuals. Measuring a captive domicile is not just the number of captives; it is also the size of captives, and the amount of premiums they receive.”
“In 2017, Delaware’s captive annual premiums increased to $12.5 billion dollars from $4.5 billion in 2016. That makes Delaware the second largest captive domicile in the US in terms of total premium.”
The Delaware Advantage
The state prides itself on the ‘Delaware Advantage’, a collection of benefits that it offers to businesses. These include: flexible and modern business entity statutes, respected courts, exceptional service, stable environment, significant case law decisions, and unsurpassed corporate law expertise.
It offers a flexibility in terms of the captive structures that can be formed, licensing pure captives, agency captives, association captives, branch captives, industrial insured captives, risk retention groups, sponsored captives (for example, ‘protected cell captives’ or ‘rent-a-captives’), and special purpose financial captives.
Additionally, the state is one of few US domiciles to offer series captives, which are structures that are owned by a parent company with individual captives or cells. They differ from segregated cell captives as rather than treating the cells as accounts, a series captive allows those individual members of the series to be treated like a captive.
These ‘series business units’ (SBU) differ from a segregated cell captive in that SBUs exist in accordance to alternative entity laws and not pursuant to the captive insurance statutes that define protected cells.
This has a number of notable advantages. It means series captives are not subject to the minimum premium tax requirement or a standard minimum capitalisation, are more flexibility to define its governance mechanisms, and can be designed for simpler administration than a protected cell captive. Another advantage, is that series entity law protects the assets of one SBU from the debts and obligations of other SBUs.
Regulation
One of the key recent changes to the Delaware market is the conditional licensing legislation that was passed in October last year. The speed-to-market programme, which is operated through a web-based protocol system, allows for selected captives to receive a conditional license on the same day an application is submitted to the Delaware Insurance Department, with six months to establish a permanent licence in the state.
Captive’s are required to provide with “evidence of the minimum capital and surplus required by chapter 69 and a certification from the captive owner that the application materials comply with the requirements of chapter 69” and carries a $100 fee.
This allows captives in Delaware to conduct business while the regulator reviews their application, and has been well received, as 30 of the 46 captives licensed last year were on conditional licenses.
He states: “It permits the issuance of a conditional license to a captive insurance applicant on the same day as application submission. Only Delaware offers a conditional licensing method prescribed in law.”
Joanne Shaver, president of the Delaware Captive Insurance Association and senior vice president of the Intuitive Companies, agrees with Kinion on the importance of the legislation, and notes that it has been a “positive move for the domicile”.
She adds: “Throughout 2018, the regulators and the association worked closely together to ensure the legislation would be well received by the industry. The Delaware Department of Insurance feels as if the new legislation has given it a competitive edge over other US domiciles because of the captive’s ability to write coverage immediately.”
“The Delaware Department of Insurance is anticipating continued growth throughout the year due to the success of the conditional licensing process.”
Another recent regulatory change was the move to extend the annual filing and tax payment deadlines from 1 March to 15 April, which according to Kinion, “allows the captive insurance industry an additional six weeks to better prepare a financial statement”.
Relationship
The strength of the relationship between the captive insurance industry and the regulator, which is evidenced by the collaborative work done on the both conditional licensing legislation and filing date extension in 2018, is one of the domicile’s key strengths.
Shaver says this collaboration sets Delaware apart from other US markets. She explains: “The regulators in Delaware are very receptive to discussions and open to ideas to improve the way that captives are regulated here.”
“At the same time, the regulators are not afraid to say no when it is necessary, which leads to a level of mutual respect between the regulators and the association that has benefited the state for many years.”
Kinion echoes Shaver’s comments and says that the “good relationship” is upkept by frequent communication between the two parties. He adds: “The DCIA serves as the eyes and ears for the regulators because it provides valuable information about what is occurring in the industry. We want to hear what the industry has to say.”
Jerry Messick, CEO of Elevate Captives, says during a long relationship with the state, it is the regulator’s attentiveness and willingness to evolve that has set Delaware apart.
“They’re very responsive every time we make a request,” states Messick.
“That’s not just convenient for us, but it means our clients can execute on their risk financing objectives much quicker.”
“What differentiates them is their willingness to be open to new ideas and spend time to learn. Elevate put together the first statutory trust captive in Delaware for adverse party legal risk. After several meetings, they embraced the concept and the captive was born.”
Looking ahead
Messick suggests that moving forward, this progressive attitude will be key to continued growth for Delaware.
He expects the state to remain a leader in the space and to continue to excel, but highlights its need to maintain sufficient resources to service its current captive portfolio, in addition to being open to new ideas, such as cannabis.
Additionally, he highlights the need to continue to weed out abusive captive structures. Messick refers specifically to section 831(b) micro captives, which have been the target of continued scrutiny from the Internal Revenue Service (IRS) in recent years.
Over the past two years, two key US Tax Court decisions, Reserve Mechanical and Avrahami, have ruled against the structures, which were also included on the IRS’ dirty dozen list. Kinion says that these decisions, in addition the federal law changes imposed by the Protecting Americans from Tax Hikes Act, must be taken into consideration from a regulatory standpoint.
He says: “Captive insurance regulation is evolving. I have been the chief captive insurance regulator in Delaware since 2009. 10 years ago we regulated captive insurance differently than today. Delaware’s regulation is evolving to these and other changes.”
Kinion remains optimistic about the outlook for captives.
“Captive insurance formations faced a number of challenges in 2018. Despite the headwinds, Delaware’s reputation as having knowledgeable captive regulators continues to attract quality applicants.Despite the headwinds, the fundamentals of captive insurance remain the same. Captive insurers formed for risk transfer purposes should overcome the headwinds.”
