Steve Kinion of the Delaware Insurance Department talks to US Captive about the importance of personal interaction and a close-knit regulatory team to the success of the state’s captive development.
Can you tell us a little about your experience prior to becoming captive director?
My first experience of captive insurance dates back to 1996. I was working with the Oklahoma Insurance Department and we had enquiries about forming captive insurance companies for Native American tribes. After I left the Oklahoma Insurance Department in 1999, I continued in that area proposing captive insurance programmes to Native American tribes, while at the same time representing risk retention groups (RRGs) in private law practice with the law firm Zack Stamp in Springfield, Illinois. I represented captives and RRGs there from 1999 to 2009 and in 2009 I became captive director for Delaware.
How did this experience help in your present job?
It provided me with an understanding of the use of captives and RRGs. When I was representing private individuals, RRGs and risk purchase groups, many of them saw it as an alternative to becoming a commercial insurance company. And some did become commercial insurance companies later, as their business developed and they decided to leave the RRG model. For captives, it was primarily a risk transfer mechanism for private individuals—usually business owners—to cover gaps in the coverage they were receiving from commercial insurance companies.
I understand the insurance regulatory system as I was formerly a commercial insurance regulator—that’s also what I did for private practice—and I have extensive experience in dealing with the taxconcerns of insurance companies. I understand when the nondomiciliary states begin becoming interested in what captives and RRGs are doing in their state. That’s a significant advantage today as more states are looking into taxing captive insurers as a result of certain provisions of the Nonadmitted and Reinsurance Reform Act in the Dodd-Frank Wall Street Reform and Consumer Protection Act.
What skills make a strong regulator?
Listening and experience. You need to be very sensitive to developments in the marketplace and ask what are the needs of the captive insurance market. Of course, those needs vary—each captive owner has its own particular needs. Some are similar, but some are unique proposals. So I try to listen to all captive managers and ask what they are seeing in the market. Such an approach helps me react better to the market. As a regulator, you cannot be insular or ignore the outside world.
One advantage Delaware has is that we’re at almost every onshore conference and we are expanding offshore, so we try to interact with the industry as much as possible on a person-to-person basis. Typically this is done at conferences such as those of the Captive Insurance Companies Association, the global captive forum. Such events are a great opportunity to interact and I always look forward to them.
I try to combine listening with my many years of insurance experience and ask ‘what am I hearing?’ and ‘what does my experience tell me?’. I interpret things through the filter of my experience.
How important are communication and accessibility to the role of captive director?
Very. That’s part of the listening process. We operate an open door policy in Delaware and I invite captive managers to talk to me. Most captive managers I deal with are spread out across the US so it’s easier to interact over the phone or by email.
Is the role increasingly face-to-face with the captive community?
As a domicile grows like Delaware has, those opportunities certainly increase. I had a meeting this week with two captive managers to discuss new proposals. I always encourage face-to-face meetings, but they’re not necessary in Delaware.
To what issues should regulators be paying close attention in the present environment?
The most significant issue is the Dodd-Frank Act: the taxation of captive insurance companies as non-admitted insurers. Captive insurance companies now face being taxed in the state in which their owner resides. And the tax rate on this could be as much as 6 percent of gross premium. Captives will be paying a new tax they have never previously paid, and this may make them consider the commercial market again, or move their captive insurance company into a state that’s opposed to the new tax in order to take advantage of that state’s approach to Dodd-Frank.
Captive insurance is now falling under greater scrutiny. The National Association of Insurance Commissioners (NAIC) is taking a closer look at captives and the national press has been placing captives under the spotlight. That said, greater scrutiny can be good if you can highlight the benefits of legitimate captive programmes.
Healthcare may offer opportunities for captives. I spent seven years as chairman of the Oklahoma Health Insurance High Risk Pool and five years on the board of directors of the Illinois Comprehensive Health Insurance Plan. I am keenly aware of how health insurance operates and am always seeking to integrate captives and health coverage.
What plans do you have for the development of Delaware’s captive offering?
Delaware will continue to pioneer the use of the series limited liability company (LLC) captive. In 2009 Delaware became the first domicile to license the world’s first series LLC captive and is the only domicile on the globe where a series of either a Delaware statutory trust or LLC can be a captive. Similar to a cell structure, a series structure permits the ring-fencing of assets and liabilities. This ensures the certainty that the liabilities of one series will not affect the others. After observinghow the mutual fund industry uses series to separate different types of funds, the Delaware Insurance Department decided to make series available for captive insurance.
"We're at almost every onshore conference and we are expanding offshore, so we try to interact with the industry as much possible on a person-to-person basis."
For micro captives, the series LLC captive is sometimes referred to as a “captive on training wheels”. It allows a company or individual access into the captive insurance without having to post a large amount of capital or pay a minimum premium tax. The advantage to a series is its ease of formation and dissolution. Instead of creating a new legal entity, a series is created or dissolved by changing the business plan and series agreement. This reduces administrative costs making captive insurance far more palatable for the newcomer. In many cases, a captive owner will decide to move to the next level by converting their series into a pure or other form of captive. Of course, a series is also available for the large captive market. Since the recognition of a series as an individual taxpayer the series captive has become Delaware’s flagship product.
Where do you see the greatest opportunities for the sector?
We want Delaware to be the leading domicile for corporate and business law. Many businesses are Delaware corporations and if you form your captive in Delaware, from a corporate perspective, there’s nothing different you must do. You can hold your meetings in the same fashion; the by-laws are the same. There is no new learning process and so you won’t do things much differently, but at the same time there are real benefits.
Steve Kinion is director of captives at the Delaware Insurance Department. He can be contacted at: email@example.com
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