Dennis P Harwick, president of the Captive Insurance Companies Association, offers his perspective on a decade of the captive insurance industry within the US.
As US Captive celebrates its 10th anniversary with this issue, I have been asked to offer a 10-year retrospective on the US captive insurance industry—which dovetails nicely with the fact that in January 2015, I celebrated my 10th anniversary as president of the Captive Insurance Companies Association (CICA) and now have the honour of writing the Foreword to US Captive for the 10th time!
Ten years ago I wrote: “States that established themselves early as domiciles for captive insurance companies—such as Vermont and Hawaii—are being challenged by a more recent group of domiciles—such as Arizona, Nevada, South Carolina, Montana and the District of Columbia—with even more states pursuing the enabling legislation to authorise the formation of captives.”
Who would have predicted that 10 years later we would have around 38 states with the enabling legislation for captives? Or that those states would include Texas, Florida, and Ohio?
Although counting captives is notoriously difficult because of the varying ways that domiciles report, by my reckoning, the number of captives in the US has increased from approximately 1,000 at the close of 2003 to approximately 2,600 at the close of 2013 (final numbers for 2014 are not yet available). By any measure, the growth of captives in the US—both by the number of captive domiciles and by the number of individual captives—has been dramatic.
What is even more amazing is that this has happened despite the fact that the last five or six years have been a soft market. In one of my early Forewords, I noted: “There was a time when companies and organisations turned to captives and risk retention groups only when a ‘hard market’ in the commercial insurance industry left them with few options. Many experts said that captives would last only until the commercial market softened.”
Well, guess what? They were wrong! Even in a soft market, there have been hundreds of additional captives joining the US captive industry. One of the hallmarks of the captive industry has always been its willingness to be creative and flexible in addressing the risk management needs of potential captive owners.
"When asked what makes a good domicile, my answer is always the same: good regulators."
In addition, captive managers and captive regulators have designed and approved more flexible vehicles for utilising captives—ranging from the behemoth XXX/AXXX life insurance/annuity reinsurance vehicles to the micro-captives utilising the 831(b) tax election. At the same time, protected cell and serial captive vehicles have increased the number of options for captive owners.
No retrospective of the last 10 years would be complete without a discussion of the increase in the number of captive domiciles. There have always been more domiciles than many people realised because there are a number of states that have captive-enabling legislation on the books, but who have licensed few, if any, captives.
It surprises many people to learn that Colorado was the first state to authorise the formation of captives (although only a few captives are licensed in Colorado today). Do you think of Kansas, South Dakota, and Arkansas as captive jurisdictions? They’ve had the enabling legislation for more than a decade, but each has only a few captives.
Some states passed captive legislation as an economic development tool. Others passed the legislation because they wanted to lure large companies headquartered in that state to bring their captives ‘home’. Some states jumped into the captive arena, then lost interest for financial or political reasons.
When asked what makes a good domicile, my answer is always the same: good regulators. Some states have made the investment in training their existing commercial insurance regulators to understand captives. Others have sought captive expertise from outside their borders. The bottom line is that the best jurisdiction for a captive owner is a state that has made the commitment to developing a knowledgeable captive regulator, along with the necessary availability of captive service providers.
Despite the growth in captive domiciles, the most dramatic change in the captive industry over the past 10 years has been the expansion of regulatory oversight of the captive industry. Ten years ago, about the only person a captive owner or manager had to pay attention to was their home state’s captive regulator. The Internal Revenue Service was an occasional concern, but that was mostly on the grander issue of whether captive insurance companies were real insurance companies for federal income tax purposes.
The National Association of Insurance Commissions (NAIC), the Federal Insurance Office (FIO), the International Association of Insurance Supervisors (IAIS), the Organization for Economic Cooperation and Development (OECD), or even the European Union (think Solvency II), were not a big concern. My, how times have changed.
Today, some—or all—of the players listed above have to be considered. Captive insurance regulation is now part of an interconnected world. Some of this increased scrutiny comes from the financial crisis of 2008/2009—even though the insurance industry in general (and captives in particular) weathered that storm virtually unscathed.
Why this increased scrutiny? I see several forces at work. First, there is a perception by many insurance regulators that captives have been unregulated or under-regulated—ignoring the fact that every captive is fully regulated by its domicile and captives have a much better solvency record than do their commercial insurance company brethren.
Second, the inevitable response of most regulators is to call for a more uniform (one size fits all) and a more easily administered regulatory template. All of this ignores one of the great observations about captives: when you’ve seen one captive, you’ve seen one captive!
In April I had the honour of organising a session at the 2015 RIMS Conference called The Future Sustainability of Captives in a Regulatory World. The panel’s conclusions were simple:
- Increased regulation is not going away;
- Increased scrutiny is the sign of a maturing industry; and
- Despite increased regulation and scrutiny, captives still constitute the most creative, flexible, and economic way for sophisticated risk managers to address increasingly complex risk management scenarios and insurance coverage challenges.
Just imagine what the US captive industry will be like when the commercial insurance market hardens again. Captives have not only survived the challenges of the past 10 years, they have thrived. And there is every reason to believe that the next 10 years will be even better.
Welcome to the world of captives.
Dennis P Harwick, president
Captive Insurance Companies Association
Captive Insurance Companies Association, Dennis P Harwick, North America