The small state with big plans for captives

Located between Massachusetts, which does not have its own captive insurance regime, and New York—which does but is not seen as among the most attractive US states for captive formations—Connecticut is a state on a mission.

A relatively young domicile, it created its first captive insurance legislation in 2008, but did not really get going until 2014. It now has 17 captives, although that includes a number of captives for very large companies, including Stanley Black & Decker and Thomson Reuters.

“Our captives tend to be larger relative to other domiciles’ in terms of average written premium,” notes Stephen DiCenso, principal and consulting actuary at Milliman and president of the Connecticut Captive Insurance Association (CCIA).

The state is keen to grow its captives community in coming years. It has been attentive in listening to its captive owners, and those who make enquiries. It has worked hard to create a regime that is attractive for captive insurance.

The state is already home to a diverse insurance industry. DiCenso argues that a key advantage for the state as it courts new captives business is its “three-legged stool” insurance industry: it has vibrant markets in captive insurance, traditional insurance and insurtech.

“A captive can be sure it has access to a wide array of leading industry players when domiciling in Connecticut,” DiCenso says.

Michael Maglaras, principal of Michael Maglaras & Company and a 40-year veteran of the captive insurance industry, points to the state’s business-friendly and entrepreneurial approach to captives regulation, and the quality of the personnel managing regulation.

“Andrew Mais, the Connecticut commissioner, has a broad business background, and Janet Grace, the director of the captive insurance division at the State of Connecticut Insurance Department, and her team bring real-world problem-solving to their regulatory oversight,” he says.

Such advantages count for relatively little without an attractive regime of rules in place, and Connecticut has been working hard to ensure it is best in class in this department too.

Updated regime

Connecticut had hoped to update its regulatory regime for captives in the coming weeks, but while the senate bill made it out of committee with unanimous approval, the legislative session was halted due to COVID-19, meaning the rule changes will be delayed.

Proposed changes included introducing some flexibility around the amount of capital captives are required to hold, to make it more reflective of the risks being taken by individual captives, and provisions for branch captives.

Grace says the rules will make it easier for the regulator to ensure rules are proportionate and relevant on a case-by-case basis. This is particularly true when it comes to the capital rules.

“If a mid-market captive has to set aside $250,000 but is only running a deductible reimbursement policy, for example, that is a lot of money to set aside for a relatively low level of risk. The captive may not need that much capital,” she says.

DiCenso argues that the risk-based regulation framework that was proposed in the 2020 legislative session will push Connecticut forward as a domicile and mark the state out as increasingly unique in its approach.

“We are very excited about the collaborative efforts between the insurance department, our state legislative policymakers and the industry,” says Grace.

“We’ve had tremendous support from key members of the insurance committee on both sides of the aisle and legislative leadership on the proposed changes this year.

“They are very supportive of our efforts to modernise and improve our statutes and we look forward to passing and implementing these changes when the General Assembly returns from the current COVID-19 crisis.”

Please come home

Grace notes that Connecticut has far more captives than are actually domiciled in the state. “We would definitely like to see those that are offshore redomicile back to the US, but we understand it has to make economic sense for them to do that,” she says.

With many states reforming their tax regimes to make them attractive to businesses such as captives, Grace believes there is little reason for them still to be offshore. And, she argues, the incentive for them to relocate back to the US is stronger than ever now.

“Particularly in light of the COVID-19 crisis, people look at where companies are paying tax. The optics of having an offshore captive are not great,” she says.

CCIA believes the legislative amendments will increase the number of captives that make the move back to Connecticut.

“The amendments provide a positive incentive for captive insurance companies insuring risks in Connecticut but domiciled in other jurisdictions to return and open a new foreign branch captive insurance companies and begin paying premium taxes in the state,” says DiCenso.

He adds: “No matter when the state legislature reconvenes, we know have made significant and important progress on the legislation, and believe it will have a positive impact on the state. Given the developments of COVID-19, there now may be further reason for companies to manage captives locally.”

Maglaras describes Connecticut as “the most underrated domicile in the US”. It is home to many talented insurance professionals and enjoys a long history of hosting major admitted insurers.

“The future of captives is the future of collaboration between captives and the commercial market. The days of adversarial relationships are over; the days of close cooperation in a tightening capacity marketplace are now with us,” he says.

This will help Connecticut to blossom as a captive insurance domicile in the next five to seven years, he says.

“The state is uniquely positioned in terms of existing infrastructure and, just as important, in terms of geography. Its proximity to major capital markets in New York is a big plus, as is its high level of sophistication,” he explains.

But Grace insists that, while Connecticut welcomes growth in the captives sector, that is not its priority. “Connecticut is not about creating captives for the sake of the numbers, or as a revenue generator for the state budget,” she says.

The real focus, she adds, is on strengthening risk management among businesses in the state. “We want to ensure that businesses have the holistic risk management support they need, and recognise that captives are a useful risk management tool,” she says.

The state has been keen to promote the idea of captives as a risk management tool in recent weeks. In April it announced it was partnering with local accountancy firms, in a bid to raise the profile of captive insurance among businesses in the state.

Grace says: “We need to educate people so they are better informed about the coverage they have, and know what questions to ask their providers, because businesses don’t spend enough time identifying their risks. Mid-market businesses don’t spend enough time speaking with their brokers about this, the emphasis seems to be on getting quotes out there quickly.

“The work we are doing with the accountancy companies in Connecticut should help educate businesses. There are too many businesses to work with them all directly, but if we work with the service providers it is easier to reach them all.”

She points to the debate around business interruption as evidence that too many businesses had no idea about the gaps that existed in their coverage.

“Clearly people cannot be expected to buy insurance to specifically cover every possible event, but there are many risks that are not covered by most commercial policies,” Grace explains.