A bright future for captives

Utah’s prominence as a domicile reflects its commitment to create an environment that is favourable to captives of all sizes. The focus is on affordable, diverse and flexible solutions that protect any company’s dynamic business environment.

A key factor is that in lieu of state premium taxes, a flat annual fee is charged. “This has been a big selling point,” says Travis Wegkamp, captive director, Utah Insurance Department.

“The goal of our legislation is to promote economic growth in the state, and that’s partly why don’t have a premium tax—instead it’s a licence fee, renewable annually, of $5,000. The goal isn’t to fill the state coffers with premium taxes but instead to grow the economy with sustainable professional jobs.”

This means Utah is able to make regulators and legislators readily available with consistent, reasonable, and effective regulation, and offers easy access to quality, experienced service providers.

Utah is also one of the leading domiciles committed to continual technological advances. Currently all forms, documents, applications, and payments can be seamlessly submitted and/or uploaded online. This means it is able to process applications for a certificate of authority within 30 days. The average time the division takes to issue a certificate of authority is less than 60 days.

“We can turn requests around very quickly, and essentially we are paperless,” says Wegkamp. “We are trying to make things as simple as possible for everyone involved while helping with quick turnaround as well.”

Long-term commitment

Utah has made a longstanding commitment to the captives market: while some domiciles have lost funding and resources when the economy has taken a dip, Utah has a dedicated fund that is set apart and will always be available to service providers and owners that have captives in the state.

By offering a relatively low cost of entry—minimum capitalisation for a pure captive is $250,000—the domicile has become popular with some of the smaller captives, which are sometimes referred to as micro captives.

“The $250,000 minimum capitalisation, and the low $5,000 licence fee as opposed to the premium tax, have made us popular with those types of captives,” says Wegkamp. “We are happy to accept any legitimate insurance company that exists for the right reasons, no matter what size it is.”

Utah facts and figures

At year-end 2017, Utah’s total licensed captives stood at 481, with 60 new formations during that year. This compares to a pre-Protecting Americans from Tax Hikes (PATH) Act high around five years ago of 535 captives.

“Our largest sectors are healthcare, manufacturing, professional services and construction—although healthcare has the lead,” says Wegkamp.

Utah requires each company to submit a statement of economic benefit to the state of Utah, and for 2017 the direct monies spent in-state from captives were reported at just under $13 million, as compared to $21 million in 2015.

Total invested assets held by Utah financial institutions were reported at just over $500 million for 2017—down from a pre-PATH Act high of almost $900 million.

“Despite the decline, I have a positive outlook on the captive industry here in Utah and in the country,” says Wegkamp. “The positive effect of the PATH Act was that it gave us more direction and understanding of what a good captive is and how to be a solid one and move forward.”

Emerging opportunities

“The great thing about the captives industry is its ability to innovate and respond to what is going on in the market or in the general economy and to meet those emerging needs,” says Wegkamp. “At the same time, that can create a challenge to make sure it’s done properly, and that it’s an acceptable sort of risk.”

One emerging opportunity is the medicinal cannabis industry, but this also creates challenges.

“Its risks could be insured in a captive. This is difficult at the moment, however, because it is still a federal schedule 1 controlled substance, which causes some legal concerns. This means it’s been a slow road, but it is moving forward.

“A few years ago, none of the companies producing medical cannabis could get a bank account, and now that’s changing. At this point, it’s usually local banks or credit unions that are willing finally to do that. As the local financial institutions are opening their doors to these companies, that’s going to push the viability of using a captive to cover the risks.”

Wegkamp is also seeing opportunities in voluntary benefits, and in renters’ insurance for companies that manage properties such as condominiums and apartment buildings where tenants are required to have renters’ insurance.

“That is something we can do in a captive if it’s structured properly: the parent company issues those coverages to the tenants, and then they can set up a reimbursement programme between the management company and the captive.

“Other states are more relaxed and don’t need that structure—if it comes through an insurance company up front, they will let the captive assume the risk through that front, whereas Utah is a little more strict: it can only reinsure what they could otherwise insure directly, so they have to be a bit more creative with those reimbursement programmes.”

A bright future

Wegkamp sees growth ahead in the sector, as more niche industries become familiarised with the captives concept.

“I’ve heard it said a lot in the last five years that the Fortune 1000 companies have captives and that market space has been filled up. The trend now is to start marketing them to the smaller, mid-level sized companies and make them aware of captives, and then for us as domiciles to look into reduced capitalisation requirements to help get them involved in the industry.

“We are seeing phenomenal growth in Series LLC captives—we don’t have those approved as structures in Utah yet, but we are working on that, and other places such as Delaware have seen huge growth.

“That’s because managers have changed their approach and are marketing the captive insurance structure to smaller companies and showing them, even if they are on a smaller scale, that if they are organised properly and the management is fully committed to it, it can be a cost saving or even a profitable option for them to take.”

Travis Wegkamp is captive director at the Utah Captive Insurance Division. He can be contacted at: twegkamp@utah.gov