Renowned globally for its cultural and natural wonders, Arizona has also developed a thriving captive insurance industry to add to its riches.
In 2008, Arizona was the sixth-largest captive domicile in the US. It has seen steady growth in captive numbers since it began promoting itself as a potential domicile in the 1970s. But in the worst economic environment that most US citizens can remember, it is sure to face challenges to maintain its global relevance. US Captive asked the captive division’s chief analyst, Stephanie Lefkowski, about the Department of Insurance’s plans.
Why should captives choose Arizona?
The Arizona Department of Insurance (ADOI) has a stable, cohesive team of captive insurance professionals and is known in the industry to have a competent regulatory programme. Arizona’s pro-business environment includes an efficient, cost-effective application process, audit and actuarial exemptions, no premium taxes and excellent captive advantages.
How many new captives did Arizona license in 2009?
ADOI licensed seven captive insurance companies in 2009.
How many captives are currently licensed in Arizona?
As of March 8, 2010, 99 captive insurance companies maintain active Arizona licences, ranking us among the top six largest domiciles in the United States.
We have already licensed one RRG (risk retention group) in 2010 and have four quality applications pending, which will likely obtain their licences before the end of the first quarter 2010. The parent companies for these four applicants are impressive: one ranks on the Fortune 100 list, one on the Fortune 1000 list, another on the Forbes Global 2000 list and the fourth ranks on the Forbes Largest Private Companies list.
How does your no premium tax structure increase the attractiveness of your domicile, and what types of companies and coverages does it attract?
Arizona’s no premium tax structure provides significant savings to captive insurers, especially those with a higher premium volume. Over the past few years, we have had about half a dozen captives with premium ranging from $100 million to $600 million, and anotherhandful of captives with premium volume approaching $100 million. But all captives benefit from the no premium tax structure regardless of premium volume, because more premium dollars stay in the captive to pay claims and provide other financial support.
How will the ADOI maintain its commitment to regulation, economic development and service for the Arizona captive insurance industry in an environment of budget austerity and even budget reduction?
We are mitigating the impacts of agency budget cuts by: (1) improving communication with the captive community to help the industry better understand the regulatory process, so that they can anticipate and plan their approval requests earlier in order to give ADOI ample time to research and evaluate the necessary details to make informed regulatory decisions; (2) promoting quality over quantity—regulating a quality captive requires far less time and energy, and allows us to adequately and appropriately distribute our attention among all captives; and (3) increasing our efforts to train and educate the captive community. For instance, we recently co-ordinated ADOI training events to further educate captives on how to prepare their annual reports and Schedule P filings.
What is Arizona’s commitment to the captive community?
Arizona is unequivocally committed to a high-quality professional environment for Arizona captive insurers, licensing quality captives with sound business plans, adequate pricing, reserving and capital, and good corporate governance standards.
What is your long-term vision for Arizona’s captive insurance programme?
Our goal is to set a standard of excellence that other domiciles will strive to achieve and to continue improving the quality of the programme. Our captive insurance companies have weathered the recent economic storm and speak to the success of Arizona’s programme.
We are proud that 18 percent of our captives’ parents are Fortune 1000 companies, 16 percent are Fortune 500 companies and nine percent are in the top 100. In addition, 11 percent of our captives’ parents are ranked on the Forbes Global 2000 list and three percent are on the Forbes Largest Private Companies list.
The Arizona Captive Insurance Association has elected to hold a Western Region Captive Conference. How do you think this event will benefit Arizona as a domicile?
This is a tremendous opportunity for ADOI to provide first-hand information about our domicile and to interact with the regulatory community, and also to network with other regional regulators to discuss ‘best practices’.
How does the Arizona Captive Insurance Association help you advance the captive industry in Arizona?
Partnering with the Arizona Captive Insurance Association provides excellent opportunities to enhance captive communication, education and development, and promote our quality-over-quantity ideology.
A captive domiciled in Arizona may not be required to have annual actuarial studies or independent audits by a CPA (chartered public accountant) if certain requirements are met. Is it anticipated that this will continue in the future, and how do you ensure that there is sufficient scrutiny in this environment?
ADOI based its 2008 decision to extend these exemptions for captives on our historical regulatory practices for traditional insurance companies. We decided it was not necessary to regulate the captive insurance companies to a greater extent than the traditional insurance companies and concluded that it was appropriate to allow the exemptions for captive insurers. We expect to continue to allow the Actuarial Opinion and the Audited Financial Statements exemptions going forward.
ADOI requires all non-RRG captive insurance companies to file their annual reports, while all RRGs must file annual and quarterly financial statements. Our review and analysis include procedures to identify solvency issues and several precautionary measures with respect to the exemptions.
A captive insurer with affiliate receivables is not eligible for (and we will not grant) an exemption from the Audited Financial Report filing requirement, regardless of premium volume. The director may exercise discretionary authority to require an Actuarial Opinion or an Audited Financial Report for: (1) the year end in which ADOI will examine the company; and (2) anytime the analysis of a captive insurer’s financial condition indicates that policyholders, claimants and other creditors are at greater than normal financial risk.
RRGs are subject to a routine financial examination every five years at a minimum, but if our routine surveillance of an RRG identifies an issue, we may accelerate the examination schedule. Non-RRG captive insurers are not subject to routine financial examination, but may become subject to examination if we determine that it is prudent to examine the business, transactions and affairs of the company to ascertain the captive insurer’s financial condition, itsability to fulfil its obligations and whether the captive has complied with our statutes.
What are some of the recent successes for captives in Arizona and what do you think was their deciding factor in domiciling in Arizona?
Instead of trying to guess why businesses choose Arizona, we put that question to those captives that are currently domiciled here. Although the reasons differ, they speak well of our success:
Bob DeFillippo, Prudential
Prudential started its first Arizona captive in 2004 (Prudential Arizona Reinsurance Company or PARCC). We now have three captive reinsurance companies in Arizona and are currently seeking approval for a fourth. We have found the Department of Insurance to be very knowledgeable and familiar with our life insurance business, and we have developed a long-standing working relationship with the department that allows us to explore options and seek approval for our changing needs.
Janice Chamberlain, Costco
We moved from Bermuda to Arizona for a number of reasons. The first was to avoid the negative perceptions regarding ownership of an offshore company. We also think Arizona is a captive-friendly domicile with knowledgeable regulators. It also has astute captive managers, which means that administration is easier than in an offshore domicile and less expensive, as are the ancillary services. Finally, the transport links are good—it’s relatively easy to travel from the Pacific Northwest.
Marcia Philpott, Salt River Project
Salt River Project, which is the third-largest public power company in the United States and which is located in Arizona, redomiciled its Bermuda-based rent-a-captive, Salt River Project Captive Risk Solutions, Ltd, to a single-parent captive in Arizona in 2003, in order to insure property terrorism risk exposure through the Terrorism Risk Insurance Act of 2002. It was a relatively easy decision for us to select Arizona as the domicile for our captive. First, we’re an Arizona-based business. But we also liked the ease of working with the regulators, the workable capital requirements and no premium taxes.
What is the future for Arizona and captives? How do you intend to keep it competitive on the global stage?
Again, by focusing on quality over quantity, we intend to keep Arizona at the forefront of the captive community. Furthermore, the reputation of the Arizona domicile and its captive managers is exemplary and keeps Arizona competitive on the global stage. We are committed to maintaining our high standards in the captive community nationwide. Arizona regulators are among the best in the country, and we attract first-rate, top-quality captive business and plan to continue every effort to continue to do so in the future.
Stephanie Lefkowski is the chief analyst at the Arizona Department of Insurance. She can be contacted at: email@example.com