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Broad Appeal

By Dick Goff

Copyright© Captive and ART Review, all rights reserved. Reprinted from the DC Issue, with Permission.

The District of Columbia (DC) captive domicile has not grown simply on its reputation as being the domicile of choice for risk retention groups (RRGs). In my experience RRGs and other captives have located in DC because the state offers an outstanding regulatory environment, an industry infrastructure that is unparalleled and, one other important factor, DC is the capital of the US and the seat of federal insurance legislative and regulatory dynamics.

Here is some evidence for my disagreement with the proposition that DC and RRG are synonymous acronyms: RRGs and other captives are well balanced in DC. At the last count there were 34 RRGs of a total of 64 licensed captives. One thing to bear in mind is that both the DC domicile and the RRG structure are fairly recent developments. The growth of RRGs nationally has peaked since DC began licensing captives in 2001, so RRGs should form a greater proportion of total captives in DC than in older domiciles.

Second, DC has gained a reputation for offering an efficient application and review process that RRGs can rely on for consistency. The Department of Insurance, Securities and Banking (DISB) is known in the industry and by other regulators as being tough but fair.

Third, while many domestic domiciles have closed their doors to RRGs in the mistaken notion that they are a disagreeable sub-species of captive, DC welcomes them and has the acumen to test applicants’ business plans and capitalization along with their support by qualified professional teams.

DC has an enviable reputation for its continually-evolving captive legal legislation that is characterized as both creative and protective of the public interest.

Recently DC modified its captive enabling legislation to allow for segregated cells not only in straight captives but also within RRGs. DC is the only domicile that allows segregated cells to be incorporated as C corporations or LLCs. The cells are able to become captives and captives can become cells easily- yet another unique, forward-thinking feature of DC’s regulations.

While RRGs may only be formed within a domestic US domicile, DC will allow an RRG’s first layer of reinsurance to be provided by an offshore-domiciled captive. Further, the DC domicile is flexible and open-minded in scenarios that enable an RRG to secure reinsurance offshore so that its capital and surplus is not negatively impacted.

Swift action

A good example of DC’s responsiveness in solving unique coverage problems is provided by Med Star, a Maryland-based nonprofit hospital group with medical centers in Maryland and DC, including Washington Medical Center, which is recognized as a world-class teaching hospital.

Last year a group of MedStar’s DC-based non-staff neurosurgeons came to MedStar management with the announcement that they would cease to practice in DC because of the difficult medical malpractice insurance market. Up to that point, MedStar had covered only employed staff physicians and other professional for medical malpractice through its Bermuda-domiciled captive.

MedStar applied in DC for an RRG license to physicians with privileges at its hospitals. Within two weeks DC approved the application and issued the license for MedStar Liability Limited Insurance, an RRG. Not only was the problem solved for MedStar’s hospitals and consulting neurosurgeons and other specialists, but also for the many patients of DC and surrounding states who used MedStar facilities.

The approval process took just two weeks. Ten business days from application, through review and onto approval. It was not because DC cut any corners, but because it is staffed by competent professionals who understand the urgencies of businesses and professions.

Modified Captive Law

An example of DC regulatory integrity should help to end any question about its ability to handle a difficult situation.
A managing general agent and program administrator from another state came to DC to apply for an RRG license. It had a solid, sound business plan to form an RRG for independent taxi owners that were having difficulty obtaining liability insurance in several states. The application was approved and the RRG license was issued.

Within two months of the RRG writing its first policy, the state where its insured members resided found reason to oppose its operation. That state’s insurance commissioner filed a formal complaint with the commissioner of the DC DISB.

DC followed a meticulous regulatory process in investigating the complaint. It required a fully-fledged audit of the RRG’s total operations, including marketing activities, adherence to underwriting guidelines, rates and policyholder services. This fledging company then found itself in the middle of a $60,000 audit.

The result was that the RRG fully cooperated and sailed through the audit with flying colors. The DC commissioner was able to respond to the complaining insurance commissioner’s accusations with hard evidence of a clean record for the company. That was an expensive experience for the RRG, but on reflection its managers agreed that the process was as fair as it was tough, and left it able to operate full speed ahead in the future.

The DC captive domicile was a vision of then-commissioner Larry Mirel, who intended to build the captive community as one way to make the District a global financial center. Mirel left that post last year and was ably replaced by Tom Hampton, who is providing vigorous leadership for DC in venues that include the National Association of Insurance Commissioners and the debate over federal application of last year’s Government Accountability Office report on RRGs.

Mirel, parenthetically, now is a partner in the DC law firm Wiley Rein & Fielding, and serves as counsel to the American Risk Retention Coalition, so he is still involved in strengthening the position of RRGs in DC and beyond.

Keeping Up-To-Date

Part of the vision applied by Mirel and Hampton has been to continually update captive enabling legislation to meet the needs of the industry and the broader capital markets.

An example of advanced financial thinking is DC’s proposed expansion of regulations to allow for securitization that will allow captives to become viable vehicles for capital market investment.

Simply stated, securitization would allow captives to offer their portfolio of risk via investment bankers to the world capital markets. This could provide an influx of capital as well as dilution of the captive’s risk. At this time there is only one other US domicile that enables securitization but not as broadly based as DC envisions and certainly more restrictive in use.

Other future initiatives are currently in DC’s legislative pipeline and will further reinforce the District’s image as the leading, most forward-thinking captive domicile. Many of the past and future improvements in its captive laws are the result of DISB’s ongoing partnership with DC’s captive trade association, the Captive Insurance Council of the District of Columbia (DICDC).

CICDC’s relationship with DISB is based on mutual commitments of both organizations’ leaders, including DISB commissioner Tom Hampton and director of the Risk Finance Bureau Dana Sheppard.

DC has all the factors in place to sustain vigorous growth in its roster of captive insurance companies in every structure, and certainly including new RRGs.

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