Continuing the discussion about captive legislation in US states, in the second of two articles on the topic, Diana Bui speaks to regulators from Missouri, Delaware and Oklahoma about their strategies to stay competitive and adapt to industry changes
Missouri: Leading domicile in Midwest
Since the enactment of the captive law in 2007, Missouri has become the largest domicile in the Midwest, well-known for its stability, responsiveness, and regulatory-friendly approach. Missouri, with its strategic location in the central region of the US, boasts a thriving business community, making it an ideal and accessible choice for companies looking to establish their captives in the state. The domicile witnessed a surge in its gross written premium, increasing 142 per cent year-on-year in 2023 to more than US$8.6 billion.
Sam Komo, captive manager at the Missouri Department of Commerce and Insurance (MDCI), states that Missouri maintains a trained in-house team that can perform everything from application to examination. “This group of experienced professionals understands the captive industry, state captive law, and works hard to regulate without over-regulating. This regulatory balance is what makes captives grow strong in Missouri while protecting their long-term success,” says Komo.
He emphasises: “At a time when the stability of governance is more important than ever, Missouri stands strong by design. Missouri has a variety of industries that develop captives within the state. To ensure success, we work to understand their needs and provide guidance in developing their captive structure. This exemplifies our commitment to supporting all businesses, regardless of their primary industry.”
The captive manager asserts that while each captive may share similarities, their creation stems from the distinct needs of their parent company. Missouri understands this concept. As a result, the regulators interpreted the laws in a way that supports the captives licensed in the state. The MDCI has partnered with the Missouri Captive Insurance Association (MOCIA) on industry needs and legislative relationships to assure the ability to make changes when the need arises.
“The stage was set in the beginning when we passed our first captive legislation in 2007 and expanded that legislation in 2013. Each stage in this process allowed the agency the needed flexibility to ensure we could view every application on its own uniqueness and merit while still maintaining our commitment to regulatory requirements,” Komo explains.
The MDCI regulates more than 2,000 insurance companies, the wide scope of which means the department has a great deal of experience and flexibility in administering (re)insurance and programmes. Captive structures available include pure, association, industrial insured, branch, sponsored, and special purpose life insurance captives. The Missouri legislation stipulates that pure captives cannot insure risks other than those of their parent or affiliated companies, and no captive can offer personal auto or home insurance coverage.
Furthermore, the law states that no captive is allowed to accept or cede reinsurance, though they may reinsure workers’ compensation under a qualified self-insurance plan of their parent and affiliated companies. In addition, MDCI rules relating to insurance solvency and company regulation dictate that all captive companies must have an annual audit by an independent certified public accountant.
Even though Missouri has not moved forward on new legislation in the past few years, state regulators believe that the jurisdiction already has the tools needed to develop advancements in the captive realm.
The domicile seeks to be proactive, rather than reactive, towards the captive industry. Komo notes: “From my discussions with the group, there is an ongoing effort to develop proposals that can be part of future legislation. These efforts include the organisation conducting a legislative day at the state capital in January each year and working on an event that will coincide with the governor’s conference on economic development in September as a way to educate the legislature on the captive industry.
“The state programme will continue to work within the flexibility of our laws to address current needs while remaining open to the ideas of our community partners,” he adds. The captive manager asserts that the art of risk management lies in the ability to understand future trends while maintaining flexibility to address the unknowns of this ever-changing industry.
“Since 2007, Missouri has been part of key conversations on industry trends, has developed a captive team that accepts new challenges head-on, and works directly with industry specialists through the MOCIA to find solutions. This winning formula is why Missouri is where captives grow strong,” Komo says.
Delaware: Business-friendly approach
As the global financial market continues to harden, more companies are turning to captives as a viable alternative to traditional commercial insurance. Among the fastest-flourishing captive domiciles in the US, Delaware has experienced a significant increase in its captive insurance industry, growing from just five licensed entities in 2005, to 670 by the end of 2023. Known for its business-friendly policies, including low-cost tax and simplified corporate laws, Delaware has established itself as a preferred location for companies looking to incorporate their business and optimise operational efficiencies.
Disclosure of officers and directors may not be required in company formation documents filed with the state. Furthermore, if the business does not conduct its operations in Delaware, the state’s corporate income tax may not apply. Instead of paying the income tax, Delaware businesses pay a much lower franchise tax. Additionally, the jurisdiction also has a strategic location on the East Coast — proximal to the US financial centres of New York, Philadelphia, Boston, and Washington DC. The state attracts a diverse array of corporate structures — from domestic and foreign corporations to limited liability companies and partnerships — all eligible to set up captive insurance entities. Delaware’s captive statute also permits the licensing of numerous types of captive insurance companies, including pure, associations, special purpose and series captives, and others.
Trinidad Navarro, Delaware insurance commissioner, remarks: “The captive industry in Delaware is strong. The industry benefits from our exceptional team of dedicated regulators, our responsive and robust regulatory environment, and our partnership with the Delaware Captive Insurance Association (DCIA). As a result, Delaware remains a leading captive formation jurisdiction in the US and around the world. As the ‘First State’, we hope to be the ‘First Choice’ for captives.”
Over the past year, the Delaware Department of Insurance has made significant strides with its Delaware Captives 2.0 initiative, launched in October 2023, to refine the regulatory framework for captive insurance companies. The department has adopted a more flexible approach to captive applicants’ capitalisation requirements, including allowing the use of brokerage accounts in certain circumstances. Additionally, the department has recalibrated capital and surplus requirements to prioritise consulting actuaries’ adverse case projections.
Several process changes are anticipated to improve approval timelines and speed to market. Unless otherwise noticed, the review of initial application filings will decrease from a goal of days, to 30 days. All routine requests for approvals, such as dividends, business plan changes, statutory dormancy, and changes in approved service providers, will now be reviewed within ten days of receipt.
Stephen Taylor, Delaware Captive Bureau director, emphasises: “These process and regulatory improvements have increased the competitiveness of and interest in Delaware captives. These have helped to foster new formations, and we expect to see an increase in the number of captives and premiums written.
“Under a new law that went into effect in 2022, the department has also provided crucial advice on how to license captives set up to write corporate Side A Directors and Officers (D&O) coverage. Implementation of this law, including the creation of regulatory guidance, will serve to expand opportunities for affordable D&O coverage in a hardening commercial market.”
Meanwhile, Navarro states that the Delaware Captive Bureau continues to engage with the captive insurance community, including the DCIA, to address additional needs or concerns and respond to both emerging opportunities for innovation and emerging areas of risk.
Predicting the future direction of the sector, Taylor comments that the industry could benefit from risk management in areas of cyber defence, parametric risk transfer, ESG, surety and performance contracts, as well as in public captives. “While successes in other domiciles certainly draw our attention and are an area we would draw from for ideas, Delaware has proven time and time again that we are comfortable being out in front in creating innovative opportunities as well,” he adds.
Most recently, the Delaware Senate passed SB 249 to update captive regulation. This bill amends Chapter 69 of Title 18 relating to captive insurance to reflect the current financial environment and practices of financial institutions and captive insurers. Financial institutions other than banks can safely hold assets, and in many cases, the type of risk does not necessitate their holding in Delaware. In addition, the Commissioner will have the authority to impose additional capital and surplus conditions on captives, ensuring their solvency and efficient operations.
Commenting on the efforts of state regulators to stay up-to-date with the industry, Navarro says that the Captive Bureau will continue to codify, revise, and eliminate outdated processes to reflect the current regulatory and business environments and reduce unnecessary and burdensome friction points. “At the same time, we continue to work to address existing and emerging issues and trends, allowing us to best serve both current and future captives,” he says.
On the other hand, Taylor remarks that Delaware supports identifying and eliminating real abuses, but hopes those efforts are better targeted so as to not sweep up the companies that have established legitimate insurance operations under the law verified by state regulators.
“Current and prospective captives can see that Delaware’s firm regulatory environment helps them to clearly combat any related concerns. We are also closely monitoring the proposed rulemaking from the IRS, which could impose reporting requirements on certain captives using the Section 831(b) election if they fail to meet a new loss ratio test or trigger a related-party financing test. The criteria outlined may unfortunately saddle many productive, compliant, and lawful captives with undue reporting burdens and strict penalties in addition to our already robust state-based regulation,” says Taylor.
Delaware is dedicated to becoming a top choice for licensing captive insurance companies by constantly improving its regulatory environment to keep up with the industry’s changing needs. Moving forward, Delaware’s emphasis on flexibility and business-friendly rules is set to propel even greater expansion and achievement within the industry.
Oklahoma: Fast-growing captive domicile
Oklahoma implemented its captive legislation in 2004, but it was not until the state revised the law in 2012, introducing a premium tax cap of US$100,000, that it began to gain traction in the industry.
This strategic change paved the way for significant growth, and by the end of 2023, the state reported a total of 59 captive entities, marking a robust 31 percent annual increase in licensed captive insurers.
The diverse landscape of licences includes 34 pure captive insurers, one association captive insurer, fourteen special purpose captive insurers, two sponsored captive insurers, four entity-protected (incorporated) cells, one protected cell, and three series captive insurers.
Additionally, while not part of the licensing process, Oklahoma tracks the federal tax election made by the captive insurers. Of the 59, 16 opted for the Internal Revenue Code Section 831(b) election, while 43 chose Section 831(a).
Glen Mulready, Oklahoma’s Insurance Commissioner, remarks that the state’s captive insurance programme continues to surpass expectations, saying: “I am pleased to see the continued growth of the captive insurance industry, which provides economic opportunities for our constituents and generates revenue for the state.”
Commenting on the captive legislation framework in the state, Steve Kinion, captive insurance director at the Oklahoma Insurance Department (OID), notes: “The department’s policy for the captive insurance programme is to work with captive insurers so they succeed. Accordingly, the OID applies its captive insurance laws in a fair but firm manner.”
One reason for the state’s success in attracting captive insurance companies, according to Kinion, includes being one of five captive insurance domiciles in the world that is recognised by the International Centre for Captive Insurance Education (ICCIE) as a trained organisation.
He explains: “The ICCIE awards the trained designation to captive insurance organisations having a high degree of captive insurance training. The captive industry seeks out domiciles with highly trained and experienced regulators, and the OID provides exactly that.”
To qualify as an ICCIE-trained organisation, at least 20 per cent of the captive professionals in that organisation must hold the designation of Associate in Captive Insurance (ACI) in good standing.
Furthermore, at least 30 per cent of the company’s captive professionals must either be ACIs, Certificate in Captive Insurance (CCI) holders, or currently enrolled in the ACI or CCI programme.
With this recognition, Oklahoma has proved its position at the forefront of the rapidly expanding captive market. As one of the fastest-growing domiciles nationwide, the jurisdiction continues to draw in a growing number of companies seeking to conduct business in the state. Kinion says that the Captive Insurance division in the OID is committed to making sure the state’s statutes and regulations keep pace with the changing needs of the captive insurance industry, and Commissioner Mulready is dedicated to providing regulation that is both innovative and stable.
Furthermore, the captive director notes that in 2023, the Oklahoma Captive Insurance Association (OCIA) resurfaced as the voice for Oklahoma’s captive industry. “Every successful captive domicile has a successful association. Working together, the OID and OCIA will create opportunities for captive companies in the state,” he emphasises.
Speaking about updates on the captive legislation in the state, Kinion reveals that recently, Oklahoma Governor Kevin Stitt signed SB 620, which will become effective on 1 November 2024. The bill allows Oklahoma corporations to use captive insurance to protect their current and former directors and officers against liability, even when such corporations are not empowered to indemnify them. This protection is customarily referred to as Side A D&O insurance. Oklahoma is the second state, after Delaware, to adopt this legislation.
Despite low D&O rates and ample capacity throughout much of the 2000s, the market shifted dramatically after 2019, with prices skyrocketing. An uptick in US litigation, larger settlements, and a rise in class action lawsuits fueled this escalation, further exacerbated by COVID-19-related insolvencies. As with any challenge in the commercial marketplace, there was a sudden interest in captives.
Kinion explains: “Side A coverage will pay for legal fees as well as settlement, and sometimes judgement costs. Without Side A coverage, the officers, directors, and employees would have to use personal assets to defend themselves in lawsuits and pay any settlement or judgement expenses. Consequently, these persons have a direct interest in the insurance.”
He emphasises that specific areas and sectors that can benefit from this change in Oklahoma captive legislation include joint ventures, special purpose acquisition companies related transactions, cryptocurrencies, cannabis, environmental, initial public offerings, cyber risks, and fiduciary fee litigation.
Talking about the challenges in regulating captive insurance, Kinion says: “Captive industry professionals do not always read the laws and regulations. Unfortunately, this can lead to regulatory consequences. The OID expects all captive managers managing captive insurers in Oklahoma to understand the laws. If there are questions about interpreting the laws, the captive manager should contact the regulator for clarity.”
He believes that Oklahoma’s captive insurance industry will continue to set a high standard for innovation, efficiency, and regulatory excellence. “Experience and training are how the OID prepares. One step is the ICCIE Trained designation, while another is individual training. At the OID, every captive insurance analyst holds the Associate in Professional Insurance Regulation, and the director holds the ACI designation. The ACI is key since it is the highest professional designation for captive insurance, and fewer than 800 people worldwide hold it,” says Kinion.
Amid the rising competition among domiciles for captives, Oklahoma stands out by fostering a dynamic and resilient environment for captive insurers. The OID remains dedicated to continuously enhancing its policies to incorporate best practices, ensuring that its regulatory framework is both robust and adaptable. By cultivating a well-trained regulatory body and working closely with companies and industry associations, Oklahoma is well positioned to navigate market changes and drive future growth in the sector.
