Delaware is one of the world’s fastest growing captive insurance domiciles. Steve Kinion, Delaware’s captive regulator, talks with US Captive about the innovations he has introduced to steer the domicile towards record growth.
Tell us about Delaware.
Delaware is one of the world’s fastest growing captive domiciles. Insurance commissioner Karen Weldin Stewart formed the Bureau of Captive and Financial Insurance Products in July 2009. At that time Delaware had only 38 captive insurers, despite the state having had a captive statute since 1984. She appointed me as director, and charged me to make Delaware a leading captive domicile.
Today, Delaware has more than 550 active captives and is the world’s 10th largest domicile and the third largest US captive domicile. Captives that call Delaware home include pure captives, series captives, risk retention groups, special purpose financial captives and sponsored cell captives.
What challenges have you faced with such rapid growth?
The challenge was how to grow a captive domicile responsibly, while at the same time managing the regulatory risk of turning down unworthy captive applicants. The negative impact for any growing captive domicile is the reputational risk associated with being viewed as a permissive domicile known for low and lax regulatory standards.
I understand that innovation has been one of your concerns. What innovations have you introduced to Delaware?
I implemented a number of innovative measures not tried by other domiciles that ensured the responsible growth of Delaware’s captive domicile. The first measure was recommending to Commissioner Stewart that she allow the licensing of the world’s first series captive insurance company. This pioneering activity allows individual series, either formed under a Delaware limited liability company or statutory trust, to become captive insurers. Until the bureau allowed this form of captive insurer, no other captive domicile had even considered doing so. In only three years Delaware has licensed more than 370 series units.
Has the use of the series captive presented challenges?
All innovations present challenges. To ensure the responsible growth and use of series captives and to protect Delaware’s reputation, I placed certain restrictions upon their use. For example, a series is not permitted to write third party liability risk, it must have a 3:1 premium to surplus ratio, and its investments are strictly regulated in the same way as those of a commercial insurer.
I have also set out higher standards of conduct as regards captive corporate governance and demanded greater professionalism from captive managers. This drive for higher standards has been well received by the industry.
Are there other innovations?
Another innovation we have introduced is advocating that captive insurers become members of the Federal Home Loan Bank (FHLB) system. Numerous commercial insurers are FHLB members. Since 2010, I have strongly advocated that the Federal Housing Finance Agency (FHFA) more favourably views FHLB membership for captive insurers. I recommend FHLB membership because it offers well capitalised insurers of all types a good opportunity to access capital and increase their liquidity. Membership enables them to borrow from the FHLB system and provides insurance companies with the ability to fulfil their current and ongoing obligations to policyholders.
"We are firm, but fair, in our approach. I have been-- and will continue to be-- vocal in my defense of captive insurers."
FHLB programmes provide financial flexibility for insurance company members and are an attractive source of capital because of the low rates offered on borrowing. For companies that invest the borrowed proceeds in their core business for working capital, these obligations are viewed as financial leverage. As a result of the exceptionally low interest rate environment, and how these rates are diminishing the insurance industry’s investment returns, insurers are utilising FHLB funds to enhance investment yields and as a potential liquidity source.
When FHLB capital is used to increase investment spreads, and the insurer can demonstrate that it is managing its asset/liability matching and liquidity, then such borrowing from the FHLB can improve the insurer’s operating leverage.
The National Association of Insurance Commissioners is investigating captives. What are your thoughts about this?
Certain regulators have labelled elements of the captive industry a “shadow industry”, with those formed to reinsure the excess reserve for term and universal life insurance policies a particular point of controversy. Whether it is in articles in The New York Times or in a report issued in June 2013 by the New York Department of Financial Services, this type of captive insurer is under considerable regulatory scrutiny.
As Delaware’s chief captive regulator I believe that my captive bureau does a good job in regulating captives. We are firm, but fair, in our approach. I have been—and will continue to be—vocal in my defence of captive insurers.
There are many new captive domiciles in the US. What is your opinion of this growth?
Any captive domicile, new or otherwise, must have commitment and leadership from the top. A state can have good laws and regulations in place, but without the leadership and vision to implement them, the captive initiative will not succeed on a large scale. Delaware has the leadership and vision in Commissioner Stewart. She was elected in 2008 and re-elected in 2012, on the promise to grow the state’s captive insurance industry. She has fulfilled that promise.
With all the new captive domiciles in the US, what advice can you give to new captive regulators?
Provide clear regulatory guidance. This is not always easy— particularly when faced with new and complex captive proposals. When I give presentations, I try to convey as much detailed guidance as possible and I believe it is working.
Steve Kinion is director of the Delaware captive insurance programme. He can be contacted at: firstname.lastname@example.org
Meet Steve Kinion, Delaware’s captive director
Delaware’s captive team is led by Steve Kinion, an 18-year insurance veteran. Kinion’s insurance career ranges from serving as a regulator to private law practice and the boardroom. He worked for Farmers Insurance Group and has served on the boards of directors of two property and casualty insurance companies. His healthcare experience includes serving five years on the board of directors of the Illinois Comprehensive Health Insurance Plan, and serving as chairman of the Oklahoma Health High Risk Pool for eight years.
This background enables Kinion to understand insurance from the executive level. He is also a judge advocate in the US Army Reserve, holding the rank of lieutenant colonel.
He began his work with captive insurance in 1995. He leads the captive bureau and is active within the NAIC. Kinion serves on internal department task forces created by Commissioner Stewart, including the derivatives task force. He chairs the task force on insurers taking loans from the FHLB system. He actively participates in the NAIC’s captive subgroup, and is leading the effort to rewrite the relevant portion of the NAIC’s risk retention and purchasing group handbook.
Delaware, regulation, Steve Kinion