President of CCIA
CCIA’s Thomas Hodson explains the state’s captive insurance vision...
Can you give an overview of the captive industry in a national context?
The captive industry is growing on a national and a worldwide basis. Captives were historically a vehicle used only by large, Fortune 500-type companies to manage risk. This was due, in part, to the novelty of the captive structure itself and, in part, because of the cost involved in organising and maintaining a captive. The novelty is wearing off and the cost of setting up and maintaining a captive is going down. Captives are becoming a more mainstream risk management tool, used by companies large and small.
As a result, I think the future of the captive industry is very bright. It used to be that the number of captive formations rose as the broader insurance market tightened; rates went up and availability of coverage went down. In these cyclical fluctuations, companies would look to alternatives ways to manage risk, like captives. This is not the case any more, as companies are increasingly looking to captives to not only manage the insurance market’s effect on premium and coverage, but also to stabilise the structure of their insurance programme, as a whole, and allow companies to more effectively utilise their financial capital.
Are the state’s captives in keeping with these national trends?
Yes, I would say they are. For example, in January of this year Connecticut licensed the captive for Frontier Communications, a national telecommunications company headquartered in the state. Frontier is using its captive to stabilise its overall operating cost—allowing it to reinvest the savings in other areas, in particular its human capital. The company recently announced a programme to hire veterans and the long-term unemployed. When a company’s cost of managing risk goes down, it frees up capital allowing it to reinvest in growing its business. I think the Frontier example demonstrates that captive programmes are not just insurance vehicles, but that they add additional value to companies as a whole.
What about the local competition for Connecticut?
We don’t view our captive initiative as competing with other states. When I first got into the captive industry 18 years ago, clients would ask me where they should domicile their captive. I used to reply by asking them whether they preferred to golf or to ski, as Bermuda and Vermont were the only options available at that time. Now, in the US alone there are over 35 states that have captive legislation, about half of which are relatively active and about 10 or 12 are very active.
It is becoming a geographic question first of all, as to whether or not a company’s home state has captive legislation and, if not, whether there is a state close by that does. Then, it becomes a question of whether or not the state has the tools to help companies get the most out of their captive programme. I believe Connecticut has significant advantages over other domiciles.
Connecticut has been known as the ‘insurance capital’ of the US for over 200 years. This is important to captives because, as a result of this designation, insurance-based intellectual capital is a resource that is abundant in Connecticut.
In light of its prominence as an insurance hub, Connecticut has more captive service providers, including actuaries, accountants, tax professionals, lawyers, captive managers, fronting carriers and reinsurance companies, than in any other state—and I would argue almost any other domicile in the world. Connecticut has more insurance jobs per capita than any other state in the country. In short, Connecticut is known for insurance—which is important when looking for a captive domicile.
What are the downsides to establishing a captive in Connecticut?
It would be hard to identify a downside to having your captive in Connecticut. As I mentioned, the state has a deeper and broader service sector than any other domicile, and it is a convenient location at the crossroads of the northeastern US. I read recently that 13 percent of the US population lives within a 200-mile radius of Hartford, Connecticut, so we are right in the heart of major metropolitan areas, including New York, Philadelphia, Boston, Providence and Springfield. Someone recently described Connecticut as ‘the thinking man’s domicile’, purely because of the insurance-based intellectual capital that we have in abundance in our state.
What is Connecticut doing to attract new clients?
First of all, we are trying to get the message out that Connecticut is a strong, viable domicile for captives. It is about informing and educating the market. Once industry professionals learn about what Connecticut has to offer as a domicile, they are quick to accept it as a serious domicile contender.
Secondly, we are focused on educating companies about the benefits of captive insurance. On 17 September 2014, we will be hosing our third annual symposium on captive insurance and, each year, it has been gaining industry interest.
In designing the agenda for each symposium, we make our content a little bit different; we try to raise the bar. For example, at last year’s symposium our insurance commissioner led a discussion on risk capital and how to build additional value in a captive programme. It was a huge success. Our focus is on helping companies more fully utilise their captive and more effectively deploy their capital. After the event last year I received a comment from a well-respected industry veteran who said that in just two years, our symposium has become a ‘must-attend’ event in the captive industry—and that is a real compliment. It appears that our approach to educating the marketplace is working.
In terms of how Connecticut regulates captives, the approach that the insurance department now uses is different than most states. The focus is not on trying to license as many captives as possible. Connecticut is, instead, looking to help companies better use their captives as a strategic tool, rather than just an insurance or tax vehicle. If companies are more effectively using their captive, then they are able to deploy your capital to other initiatives, such as growing the business. This leads to a more valuable captive programme.
What the Connecticut insurance department is introducing is a more ‘principals based’ approach to regulating captives, rather than strictly a ‘rules based’ approach. Instead of simply regulating a captive programme solely to ensure solvency, the ‘principals based’ approach focuses on ensuring the stability and sustainability of the captive programme. This is not to say that specific rules do not apply. The laws and regulations do provide certain financial requirements and compliance standards.
However, ‘principals based’ regulation recognises that every company is different, and each company has different goals for their captive programme.
This new approach allows for a balanced regulatory process, recognising both the needs of the insurance regulators and the strategic objectives of the captive’s owners— which is very powerful.
This approach to regulating captives is new and it will be interesting to learn more as it is rolled out.
