Tom Wang
5 August 2016Law & regulation

Here to help

Companies considering forming a captive should engage with regulators much earlier to ensure they fully understand the complexities of running an insurance company, grasp all the regulatory requirements and utilise the right structure for the risks they are looking to manage. The initial question they should ask is: Do I want to run an insurance company?

As the captives regulator in New Jersey and now Missouri, I have seen too many companies approach the regulator very late in the process of forming a captive. By then, certain decisions will have been made that are often too late to reverse without considerable cost and delay.

Regulators may have advice on a better way of structuring transactions. With the information presently in the marketplace, companies should carefully consider where they plan to locate their captive, then engage with the regulator early and seek their advice. This should be done in conjunction with understanding the goals they are trying to achieve with the captive and determining the long-term costs and risks of operating that captive.

"Missouri’s captives laws offer several options for businesses and are specifically designed to minimise the need for mandated regulation and oversight."

I believe it is essential that they should articulate this to the regulator at an early stage in the process. With this information, the regulator can assess whether that company is truly ready to run an insurance company and fully understands the implications of that. The regulator can guide them through the formation stage in compliance with the statutes. If the company is considering insuring a risk that is unusual or unique, then the regulator can advise on the possible financing structure.

Unfortunately, meeting the regulator has been traditionally seen as the final step in the process of forming a captive. In some cases, after the meeting takes place they may realise that the structure they were considering is not the best approach for them. Maybe they have been talked into a particular structure by a captive manager with a different agenda. A regulator can and will provide information necessary to make the best decision.

Uppermost in thoughts of potential captive owner is the cost of formation and implementation of the captive. The costs of setting up a captive are not insignificant and are often greater than companies expect when they first start exploring the concept. The formation cost can run from $50,000 to $100,000, not including the statutorily required capital and surplus.

There can be considerable variance based on the legal and practical structure of a captive. Much of the cost is dependent on the goals of the company for the captive and the type of risk it wants to transfer. For instance, a company may wish to insure its workers’ compensation risk. However, in Missouri, as in most US captive domiciles, statutorily required workers’ compensation may not be underwritten directly through the captive. It will have to contract with a fronting carrier. The captive will incur additional costs through the reinsurance premium. Although most captive managers are aware of statutory provisions, early communication with the regulator will aid in monetary decisions.

The operational structure of a captive insurance company can present a formidable impediment to the potential captive owner. The envisioned structure of the captive as a risk financing tool may not seemingly fit in the domicile’s legislative framework. Early discussions with the regulator can facilitate the decision of whether there is a fit or concessions can be made.

Equally important, a company must choose all its advisers with care, including the captive manager, attorney, accountant and an actuary to help run the company. The domicile website may or may not have a listing of service providers that have registered with it. The regulator can provide information about people and firms he or she has worked with.

However, the provider should be someone to whom you can relate—someone you think understands your business and who you can understand. Remember it’s your business, it’s your risk. As best as you can, understand the ins and outs of your risk. In terms of the captive manager, it is vital they have insurance knowledge, insurance financing understanding and contacts with other insurance professionals.

Where to locate

After these considerations the potential captive owner has affirmatively answered the above question: I am ready to run an insurance company. The next hurdle is where this company will be formed and domicile. Even after communicating with a regulator, the decision may remain open as to the legal location of the captive.

When choosing a domicile, the potential captive owner should take into account a number of factors. First, consider the captive owner’s home state. If that state has captives legislation and an operational captives programme, it may be a natural fit. However, the statutory scheme of the home state must accommodate the type of captive the owner envisions.

Some other factors to consider are self-procurement taxation, the perception of offshore domiciles versus onshore and the reputation of the domicile.

The owner should further consider whether the regulator is readily accessible; whether the regulator understands the business and the purpose envisioned for the captive; and whether the owner understands the regulator’s views toward the solvency and liquidity of the captive. Most important, the owner, prospective captive directors and the service providers must feel comfortable with the regulator.

The owner or service providers should ask the regulator a number of questions to determine the ongoing cost of operating a captive, such as application fees and certificate renewal fees, estimated examinations cost and other charges that may not be readily apparent to a newcomer. Also ask about the experience of the individual regulators working in a domicile. Working with experienced individuals can make the regulatory process smoother and it is more likely they will be able to offer advice and guidance.

Potential captive owners should gather enough information to make a well informed decision on not only how to form a captive but also who should assist in its operation and the domicile in which it is best to locate. A captive should be viewed as a long-term strategic risk management tool. Ultimately, it is the owner’s liabilities that are being managed through the captive and the owner should be fully engaged in decision-making and not simply rely upon the captive manager.

The Missouri offer

As the regulator for Missouri, I can truly say we offer an exceptional domicile. Missouri has done much in recent years to ensure it has a strong offering for captive owners. My staff and I are readily accessible and will respond quickly. All costs are always indicated up front and because we use internal resources the costs of examination are very low.

We will work closely with companies to accomplish their goals for their captive. Additionally, if a company is located in or near Missouri, it means they can keep their captive close to home. If you are not located in or around Missouri, there are daily non-stop flights between our two major metropolitan areas and most cities across the country. In most cases, there’s no need for connecting flights and all-day travel for a simple meeting with our staff or with your captive company management.

Missouri’s captives laws offer several options for businesses and are specifically designed to minimise the need for mandated regulation and oversight. The department has the experience and flexibility to provide the level of regulation needed for nearly any situation. The department also has significant experience and expertise relating to reinsurance.

We are here to help. With offices in St. Louis, Kansas City and Jefferson City, we’ll meet where it’s most convenient to you, or we will travel to your office. In any event, we are always just a phone call away.

John Talley is the captives programme manager at the Division of Insurance Company Regulation, Missouri Department of Insurance, Financial Institutions and Professional Registration. He can be contacted at: