[Watch and read] Innovation and regulatory evolution
Stephen Taylor (pictured) of the Delaware Department of Insurance explains why he is so optimistic about the growth of his state as a captive domicile.
In the world of insurance, Delaware has emerged as a key player, particularly in the realm of captive insurance. The state has built a reputation as a leading domicile for captives.
According to Stephen Taylor, director of the Bureau of Captive and Financial Insurance Products at the Delaware Department of Insurance, Delaware’s captive insurance industry witnessed significant growth in 2023, a year marked by the addition of new captives and the expansion of existing ones.
Reflecting on the year, Taylor noted: “2023 was a great year for expanding the Delaware captive programme. We licensed 43 new captives during the year. Some of those new captives came from new market participants, which is exciting to see.” This growth was not just in numbers, but in the diversity and complexity of the captive programmes being established.
A key highlight of the year was the entry of major corporations into Delaware’s captives market, particularly those seeking side A directors and officers (D&O) coverage. This development was made possible by legislation passed in Delaware in 2022, which Taylor described as “exciting” and indicative of the state’s ability to attract large-scale, innovative captive programmes.
However, it wasn’t all smooth sailing. The market faced challenges, particularly from the increased scrutiny of micro-captives by the Internal Revenue Service (IRS). Taylor acknowledged the impact of this scrutiny, noting that it led to “a large number of our captives dissolving” which, despite the overall growth, resulted in a net loss in licensed captives.
The IRS’s focus on micro-captives, often seen as a tool for small businesses to manage risk, has complicated the landscape, raising concerns about the broader implications for the captive insurance sector.
“One of the key outcomes of this initiative has been the introduction of more flexible policies regarding capitalisation requirements.” Stephen Taylor
The driving forces behind captive insurance growth
The growth in Delaware’s captive insurance market is driven by several factors, most notably the rising costs and limitations of traditional commercial insurance. “Pricing in the commercial market has been a significant catalyst, pushing businesses to explore captive insurance as a more cost-effective and customisable solution,” Taylor said.
The need for specialised coverages, particularly in areas such as cyber risk, business interruption, and supply chain disruption, has led companies to seek out captive insurance solutions that can be tailored to their specific needs.
There has been a surge in demand for cyber insurance in particular. Taylor pointed out that businesses are increasingly interested in addressing gaps in coverage that have become more apparent in the wake of high-profile incidents, such as the CrowdStrike outage in July 2024. This event, which disrupted businesses worldwide, underscored the limitations of traditional insurance policies in covering cyber-related losses.
As Taylor noted, the financial impact of such incidents can be staggering, with only a small fraction of losses likely to be covered under existing policies. This gap in coverage has led many companies to consider captives to manage their cyber risk more effectively.
In addition to cyber insurance, other areas of growth include environmental, social, and corporate governance (ESG) issues, as well as coverage for cannabis-related businesses. ESG-related risks are becoming increasingly important as companies face growing pressure to address environmental and social responsibilities. Captives offer a flexible solution for companies looking to support the green economy, manage environmental cleanup costs, or navigate the complex regulatory landscape surrounding cannabis.
Regulatory innovations
To maintain its position as a leading domicile for captive insurance, Delaware has been proactive in updating its regulatory framework. Since his arrival in Delaware in September 2022, Taylor and his team have focused on what they term “Delaware Captives 2.0”, a series of regulatory and process improvements aimed at enhancing the state’s appeal to captive insurers.
“These efforts are part of a broader strategy to increase efficiencies, better calibrate and implement the appropriate regulatory oversight, greatly improve customer service and speed to market, and modernise our business processes,” Taylor said.
“One of the key outcomes of this initiative has been the introduction of more flexible policies regarding capitalisation requirements, including the allowance for brokerage accounts under certain circumstances.
“This change is particularly significant for smaller captives looking to grow and transition into more complex structures as their needs evolve, he explained.
Another important regulatory update has been the recalibration of required capital and surplus levels, which now place greater emphasis on a consulting actuary’s adverse case projections. This move aims to ensure that captives are better equipped to manage potential risks while also providing them with the flexibility to operate efficiently.
Delaware has streamlined its approval processes, reducing the time required for licence applications, business plan changes, and dividend distributions. This focus on speed to market is crucial in attracting new captives and retaining existing ones, as businesses increasingly seek jurisdictions that can offer quick and reliable regulatory services.
Why captives choose the First State
Delaware’s success as a captive insurance domicile is rooted in several key advantages that make it an attractive choice for businesses.
“One of the most significant factors is the state’s flexible and modern captive laws, which provide a level of flexibility that is unmatched by many other US domiciles,” said Taylor. These laws, coupled with Delaware’s corporate law framework, offer captives the predictability and stability they need to operate effectively.
Delaware’s legal environment is another major draw. The state’s courts are highly respected, and its legal community is well-versed in business law, offering captive insurers the assurance that their legal matters will be handled by experts. This expertise extends to the state’s regulatory approach, which Taylor described as “best in class”. Delaware’s regulators are knowledgeable about captives and adopt a collaborative, problem-solving approach that is tailored to the unique needs of self-insurance.
In addition to its legal and regulatory advantages, Delaware offers a business-friendly environment with easy access to major financial centres such as New York, Philadelphia, Boston, and Washington, DC. The state’s robust infrastructure of captive management companies, insurance professionals, law firms, and other service providers further enhances its appeal, providing businesses with the support they need to establish and grow their captive programmes.
Looking ahead
As we move further into 2024, the future of captive insurance in Delaware looks promising. Taylor is optimistic about the continued growth of the industry, driven by the need for captives to fill coverage gaps and provide more predictable pricing in an increasingly volatile insurance market. He specifically highlighted cyber insurance as an area poised for significant growth, given the rising frequency and impact of cyber incidents.
Taylor pointed to emerging areas of interest, such as captives supporting ESG initiatives and providing coverage for cannabis-related businesses. These sectors, while still in their infancy, represent potential new frontiers for captive insurance and could drive further innovation in the industry.
Taylor also raised an important point for the industry to consider: the potential for harmonising captive regulations across different domiciles. While still in the early stages of discussion, this idea could lead to a more unified and streamlined regulatory environment, making it easier for businesses to navigate the complexities of captive insurance.
Delaware’s captive insurance industry is thriving, thanks to a combination of regulatory innovation, a supportive business environment, and a commitment to meeting the evolving needs of businesses. As the state continues to build on its successes and explore new opportunities, it is well-positioned to remain a leading domicile for captives in the years to come.
With the continued efforts of Taylor and his team, Delaware will likely continue to attract a diverse range of captives, offering them the flexibility, expertise, and regulatory support they need to succeed.
Stephen Taylor is the director of the Bureau of Captive and Financial Insurance Products at the Delaware Department of Insurance. He can be contacted at: stephen.taylor@delaware.gov
Click here to read Captive International's US Focus 2024 publication.
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