In a congested US captive market, Connecticut is looking to focus on innovation to separate itself from the field
Connecticut is a state with insurance running through its veins. It has the highest ratio of insurance professionals of any US state, and its insurance hub, the city of Hartford, is known as the ‘insurance capital of the world’.
In recent years, there has been a focus on innovation and emerging technology, with Hartford developing a strong ecosystem as it strives to become an ‘insurtech capital’.
This push for innovation is reflected in the domicile’s captive industry. In a congested US captive market, Connecticut is not concerned by huge growth in formations, but is trying to differentiate itself by focusing on innovation.
Michael Serricchio, managing director of Marsh Captive Solutions, and member of Connecticut Captive Insurance Association (CCIA) board, explains: “We’d like to think there are some differentiators in our captive market, but in reality everybody is doing similar things.”
“So, as a board we are trying to do things outside the box. We are trying to disrupt the market, through things like blockchain and insurtech.”
CFSIC
One of the ways Connecticut has differentiated itself is through the Connecticut Foundations Solutions Indemnity Company (CFSIC), a non profit captive set up to assist homeowners affected by the ‘crumbling foundations’ issue. There could be some 30,000 homes in the state impacted by the forming of web-like cracks in their foundations, which can do irreversible damage.
Commercial insurers generally denied coverage responsibility for the issue and, so, with residents in desperate need of a solution, the state government launched the Crumbling Foundations Assistance Fund to help impacted homeowners and launched CFSIC to distribute the remediation funds.
CFSIC launched officially on 10 January 2019 and had 174 applications within the first 55 minutes. Michael Maglaras, superintendent of CFSIC and principal of Michael Maglaras & Company, notes that the captive is “very well launched and has paid out almost $2 million dollars in claims”.
He adds: “When you think about captive insurance companies, this is in many respects the most unique captive ever created because it is delivering coverage to homeowners who never paid it a premium.”
CFSIC hopes to begin the process of lifting houses and replacing foundations in April. Maglaras said that, as of early March, the captive had $56 million in incurred claim liabilities, and expects to have nearly $90 million by the end of June. The captive currently faces an issue of funding, with Maglaras suggesting that at its current rate, it will run out of all expected funding by May 2020, even though its mandate extends through 30 June 2022.
He notes: “I am working with US senators and a number of key congressmen from Connecticut and we are actively actively engaged with the federal government for additional financial assistance.”
Further than just providing life changing aid to thousands of local homeowners, the crumbling foundations captive may also be extremely beneficial for the captive market itself.
CCIA president Steve DiCenso says: “It will certainly be an education for folks to better understand captives. Others will see the benefit of it and eventually that will trickle into the commercial space more than it has, the general awareness of captives will continue.”
He continues: “To the wider captive market I think it shows that we’re creative, we’re flexible, and we’re willing to work with captives like this, especially in the non profit space.”
2018
Away from CFSIC, 2018 was a slow year for Connecticut in terms of formations, as it was for many captive domiciles. The state added just one new captive last year, while one captive redomiciled to another jurisdiction.
At year-end 2018, there were 15 captives licensed in the state, underwriting more than $300 million of captive premium, across a range of both traditional and non-traditional risks including casualty, property, medical stop loss, professional liability, flood, and custom coverage.
While there are many positives of having a large insurance sector, according to Serricchio, Connecticut is more focused on the next best thing, which might be hospitals, not for profits, innovation and technology companies, biotech companies, and hedge funds”.
Janet Grace, captive programme manager, Connecticut Department of Insurance, explains that the state has its sights set on “second movers to the captive market including middle market manufacturers and health care centres, key sectors of Connecticut’s markets”.
DiCenso says despite a “slower than expected year” in terms of formations, the state and the association have got “a lot of momentum”.
He adds: “Our outreach in the community is getting better and better. The insurtech community in the Hartford area we think is an area that has a lot of potential and we are actively involved there. We continue to try and reach out to other areas of entrepreneurialism in the community.”
Regulation & relationship
The association has also been working with the Connecticut Department of Insurance to craft new legislation in order to make a number of amendments to the captive law. The proposed legislation has two main focuses, the first is to clean up and clarify parts of the existing law, some of it relating to agency captives, while the second is related to the issue of self-procurement tax.
DiCenso explains: “We are looking to establish the ability for an existing Connecticut company with a captive in another state to form a branch in Connecticut for its own Connecticut risks.”
“What that would do is provide a Connecticut company with an avenue to have a very clean structure for their tax liability as opposed to the uncertainty that exists now in the industry about this issue.”
The state benefits from an efficient working relationship with the Department of Insurance and DiCenso says that the regulator’s position as an ex-officio member of the CCIA board makes the relationship “very productive” and allows them to communicate “very, very well”.
Serricchio adds: “They’re approachable, they advise the CCIA board, they speak at events, they’re very friendly, and they want to get business done.”
Strengths
The close working relationship with the regulator is undoubtedly a byproduct of the thriving insurance presence in the state. Another advantage that presence offers is the strong pool of industry talent available.
Maglaras says the depth of talent in Connecticut has helped it to “come to the attention of the worldwide captive industry” and provide some “huge business opportunities”.
He expands: “Connecticut is already an insurance state. Underwriting talent, accounting talent, audit talent, actuarial talent—there’s a ton of it in Connecticut. I think that helps Connecticut stand out and all indications are that Connecticut is poised for a captive boom.”
DiCenso says the depth of talent gives Connecticut the unique advantage of having strong commercial insurance, captive insurance, and insurtech communities.
“This combination is unique,” he says, “no one has all three of those.”
It is this combination, which DiCenso believes allows them to stay on the “cutting edge of insurance trends”.
Outlook
Staying on the cutting edge of trends will allow the state to continue to differentiate itself in the captive market. Insurtech seems a surefire way to do just that but DiCenso believes the rewards of that movement may still be a little while off.
“These things take time,” he says, “we would all like immediate benefits, but we think we will see them longer term.”
Serrichio adds: “Insurtech, blockchain, cryptocurrencies, and the digital third party space, that is where captives are headed, and the states like Connecticut that get onboard faster I think will really do well.”
Aside from technology, the early success of CFSIC may mean that becomes a trailblazer in the unusual coverage space.
“I could see Connecticut gaining a reputation for more unique and non profit captives,” notes Serricchio, “there are a couple of captives in that space.”
“There is CFSIC, CREC, and a handful of other not for profit captives that are not technically insurance taking vehicles but they are a regulated formalised way of solving a business need. To an extent we can become that.”
“It would be interesting to see in the future if captives got into writing things like workers’ compensation on a direct basis, or more taboo-like subjects such as cannabis, or in coverage for the sharing economy and gig workers.”
“I think that is where captives are going and the states that get on board quicker are going to be the ones that succeed longer.”
Grace says the department “anticipates more innovative, ‘out-of-the-box’ solutions to come forward in 2019 and beyond.”
However both the global and state’s captives markets fare and evolve in the next few years, one thing appears to be for certain, Connecticut’s primary focus will be innovation, innovation, innovation.
