Shifting tides and captive decisions
Connecticut has a lot of opportunities for captives. More and more captives choose to be domiciled in the state due to its new business-friendly legislation, negligible fees, experienced and responsive regulators, a thriving ecosystem and a great location between New York and Boston. In particular, more insurtech and managing general agent companies are forming captives in Connecticut to take layers of risks, connect insureds, insurers and reinsurers and accelerate insurtech product adoptions by commercial carriers.
More risks will be transferred effectively out of commercial carriers through captives to private partnership investors to meet increasing capacity needs due to availability and affordability issues that exist in the commercial market.
More Connecticut-owned captives that are domiciled out of the state are expected to come home or set up a branch in Connecticut by June 30, 2023, to enjoy the benefits that the state’s new captive legislation and existing captive laws offer.
More businesses are choosing not to renew their policies, retain more risks and turn them into effective captive insurance to continue coverages or write new risks due to the following reasons:
- Increased catastrophic losses, COVID-19 pandemic impact and 40-year high level economic inflation caused loss cost and reserve increases, many carriers in the US and globally have experienced high loss ratios, carriers have substantially raised deductibles and premiums and restrict policy terms and conditions, withdrawn from writing high severity risks or ask for high retention, loss prevention or control activities. Insureds look to alternative cost-saving and risk management solutions.
- Some insureds have difficulties in responding to new risks, such as pandemic-caused shutdowns or supply chain issues, new technology-driven products associated risks, cyber threats and attacks, and class action lawsuits against directors and officers over ESG and climate risk issues. These unprecedented times have disrupted routine business operations and brought confusion to the point of crisis. A captive arrangement with a centralised database and professional experts can effectively manage the crisis. Businesses experienced more losses over the past couple of years and therefore their risk awareness and interest in financing these risks through a captive solution grew.
Connecticut’s appeal
Connecticut’s ecosystem is a unique environment for captives to thrive with pro-captive laws, low fees, an insurtech hub, convenient US location, and with long-serving, knowledgeable regulators.
Connecticut’s new captive law already in effect this year makes the domicile more competitive and business-friendly. It lowers the minimum capital and surplus requirement , but gives authority to the Commissioner to impose a higher level of capital and surplus if necessary using a risk and principles-based approach to meet policy obligations; permits the Commissioner to waive examinations for pure captives or their branch; removes the limitation of a captive to assume reinsurance only on risks that such captive is authorised to write directly; removes the ‘‘association” entity existence time requirement before forming an association captive, and adds “controlled unaffiliated business” to sponsored captive participants.
The new captive law includes a tax amnesty programme for Connecticut-based businesses with captives that have domiciled outside the state. It establishes a three-year look-back and waiver of penalties on outstanding liabilities for Connecticut insureds that have not paid the non-admitted insurance premium tax and who establish a branch captive in Connecticut or re-domicile a foreign or alien captive to Connecticut by June 30, 2023. All prior years of unpaid taxes, interest and penalties are waived.
The new law provides a more streamlined method with negligible fees for companies to bring their captives back to Connecticut. Insureds would need to pay only three years on unpaid taxes and interest, significantly less than paying a decade of back taxes, interest, and penalties. In return, the insureds can enjoy legal and economic peace of mind in compliance with Connecticut’s state tax regulations.
Some companies with an existing captive domiciled elsewhere may wish to operate with a branch captive in Connecticut. The new law and the Insurance Department are specifically structured to be collaborative and cooperative with other domiciles to suit the needs and best interests of the underlying companies.
The Connecticut Insurance Department works closely with legislators and service providers and understands that captive owners are also policyholders. The department’s attitude toward captives has been business-friendly as they understand that captives need to be regulated with more flexibility using a principles and risk-based regulatory approach.
The department collaborated with Connecticut Insurance Financial Services, Connecticut Captive Insurance Association, Connecticut Society of CPAs, National Network of Accountants, InsurTech Hartford, AdvanceCT and the Connecticut Department of Economic and Community Development in the “Reimagining Business Insurance” initiative to educate businesses on how captives fill gaps in commercial insurance coverage.
Wish list
Connecticut would like to see captives being formed for sound risk management reasons and set up with proper corporate governance in place for long-term success. Such a structure would potentially alleviate the need for regulators, service providers, and captive owners to restructure in the future, saving everyone time and energy
The industry understands that regulators must listen to all stakeholders, all with different opinions and interests. For example, if the Insurance Department had proposed to waive all unpaid non-admitted premium tax in our last captive bill, questions would arise about potential tax evasion which would have caused the bill to fail.
More captives should move back onshore due to the following reasons:
- Evolving federal tax reforms and burdensome reporting requirements are discouraging US owners from keeping subsidiary captives offshore.
- An anticipated 15 percent global minimum tax rate with a target of a late 2023 effective date would reduce the tax status that companies, including captives, desire by being offshore.
- Certain types of coverage for employee benefits and federal-sponsored terrorism coverage, for example, need to be provided onshore.
- US captive owners may be subject to non-admitted insurance premium tax. Using admitted carriers for fronting might help to avoid it, but the costs for collateral, fronting fees, and premium tax are much higher.
- Owners of an offshore captive may be subject to federal excise taxes of 4 percent for P&C direct written premiums and 1 percent for reinsurance premiums, and other taxes, such as base erosion and anti-abuse tax. These tax rates are higher than the US state sliding scale captive insurance premium tax rates of less than 0.4 percent for direct writing and 0.214 percent for reinsurance. Offshore captives can be taxed as a US company by a 953(d) election, but they are subject to higher fees to domicile offshore and increased operational costs. In addition, their US owners may be subject to an additional non-admitted insurance premium tax rate of 3 to 5 percent.
