US states have been applying the finishing touches to their captive insurance regimes, making themselves as attractive as possible to eligible captive owners who are considering where to base their captive. The most desirable captive owners have considerable leverage in negotiating special treatment from state regulators, argues Michael Mead of M.R. Mead and Company.
Several states have pushed forward changes to their captive insurance laws, this past fall, and in most of the proposed legislation, these have been accepted into law. Vermont, Alabama, Georgia, Utah, Montana, Tennessee and Nevada were among the states looking to reform their captive insurance regulation regimes to make them more attractive to owners, and there were probably others who didn’t capture many headlines.
Were there any monumental, revolutionary changes that will make captives owners drop everything and immediately buy a plane ticket, so that they can take advantage of this emergent captive-launching opportunity? No.
“If the regulator sees the benefits and wants the deal, the deal will happen, regardless of the regulations or the service provider.”
Several states added so-called dormancy regulations, under which a captive which is writing little or no business can choose to put its licence into dormancy with a smaller amount of capital and lower fees and taxes. This change appears to favour the states and service providers who keep the fees paid by their clients to keep the captive alive, as opposed to captive owners who either need a captive for current risk management purposes, or don’t really need one for risk management and don’t care if it goes away.
More specifically, Vermont adapted its captive insurance regulations to allow captive state examinations to occur in a five-year period as opposed to three years. This feature occurs in some other domiciles, and while it certainly helps captives, it also materially helps the state regulatory staff and third-party service providers. New audit and accounting rules make these exams much more time-consuming and labour-intensive.
With no prejudice or favour, Vermont and the Vermont Captive Insurance Association (VCIA) are the leading US state and industry association, respectively, for captive insurance. They lead the pack in terms of activity, law change suggestions and industry dialogue—with the captives community and beyond. There are many reasons for this, not least the length of time it has been in this business.
Vermont enjoys wide industry support in all aspects of captives. The VCIA is not the only industry association that receives wide support, or that has shown a willingness to innovate. However, no other state that can make such claims has been doing it as long as Vermont. This does not make Vermont the best, necessarily, but it is certainly among the best.
Other states with strong reputations have also been adapting their rules. Tennessee has added an interesting new feature, which may have been driven by a big money client, enabling captives to receive premiums and make claim payments in a foreign currency. This was declared a cutting-edge change, and perhaps it is, although it is likely to be useful to a relatively limited number of captives.
Montana added a provision that a captive may, upon approval by the state auditor, use a non-Montana bank if it is a member of the Federal Reserve. Reducing the favour shown to local banks will help many clients who have long-held, extensive banking relationships back home—which may not be Montana.
In North Carolina the state captive association and others pushed for a provision that any foreign captive re-domiciling to North Carolina would earn an exemption from state premium taxes. This did not pass through the legislature but will be re-submitted. The initiative is viewed as a very strong competitive push from a domicile that is already considered among the most reputable captive insurance domiciles in the US. It is therefore likely to pass in due course, even if the legislature hates to see a revenue drop of any kind.
While the respective industry associations in the various states will present these changes as innovative or unprecedented, most were designed to make their state’s regulations align with their competitors or satisfy the needs of their constituents and captive industry associations.
Who’s in charge?
Almost every state has a captive insurance company association, many of which were formed by service providers who saw an opportunity to fill a need. Some are very active in the captive industry, while others are focused on the needs of their own clients. Some work with their state legislatures and insurance departments to raise revenues through taxes, fees, jobs and travel and entertainment.
In my years of management, having spent time working with many domiciles and regulators, one question has always risen above all others: who is in charge? The answer to that question, of course, is the person running the programme for the state. The state captive insurance regulator can always find a way to license a captive that is seen as good for the domicile. Ultimately, it doesn’t matter what its exposures, claims, size and distribution look like, if the state wants that captive to register within that domicile.
The associations can clamour for change, and often do, on behalf of their clientele. New regulations can be hashed out, submitted, pushed, pulled and re-hashed. Ultimately, however, a captive owner that wants to establish a captive in a particular domicile can show up at the regulator’s door.
Once the benefits to the domicile have been established, the regulator is likely to agree and find a way to get the deal done. There are no laws or regulations anywhere that cannot be tweaked by a savvy regulator. I have been in meetings with many of those people, and if the regulator sees the benefits and wants the deal, the deal will happen, regardless of the regulations or the service provider.
If a large blue-chip corporate were to propose a full unknown-risk cyber captive in one of the big captive jurisdictions, the regulator and the industry association would find a way to make it happen.
This then leads to the question: who is in charge in some of these smaller domiciles, such as Georgia, Alabama and South Carolina? Why are they not attending industry conferences, such as Captive Insurance Companies Association, Self Insurers Insurance Association or National Risk Retention Association?
Do the local associations not want any attention drawn from their efforts? Do the legislatures not see the benefits of spending some promotional money for new tax revenues? The regulators need only look at what is happening in the Cayman Islands, Bermuda or European conferences to see the potential benefits.
Michael Mead is president of M.R. Mead and Company. He can be contacted at: email@example.com
Michael Mead, M.R. Mead and Company, Domiciles, Vermont Captive Insurance Association, VCIA