Redomestications and Home State Moves Benefit Some US Captive Domiciles

Balance board with a green cube marked with a plus sign on the left and a red cube marked with a minus sign on the right

February 25, 2019 |

Balance board with a green cube marked with a plus sign on the left and a red cube marked with a minus sign on the right

While many US states, amid such factors as a continued soft commercial market and merged companies with captives consolidating their captives, saw little, if any, growth in 2018 in the number of captive insurance companies as the closure of captives exceeded newly licensed captives, there were some notable exceptions.

In Missouri, for example, the 10 new captives that were licensed in 2018 were more than double the 4 captives that were closed, while in Alabama, Georgia, and Texas, formations also topped closures.

There are several reasons why new captive formations topped closures in those and other states, say captive experts who spoke at a February 19 captive discussion webinar sponsored by captive manager Strategic Risk Solutions.

One reason has been a trend in the last 5 years or so of parents moving their captives from offshore to domestic domiciles, said Brady Young, Strategic Risk Solutions president and CEO in Concord, Massachusetts.

Another trend is companies moving their captives to states where the parents are based, Mr. Young said.

States that were hardly on the captive map a few years ago "have gained momentum largely due to home state moves," he said.

At the same time, a growing number of captives are adding medical stop loss as one of the risks they are covering. "Medical stop loss is a hot area," Mr. Young said, adding that 80 Strategic Risk Solutions clients now use captives to fund medical stop loss, either through their own captives or through group captives.

"Medical stop loss remains a very strong and growing portion of the group captive space" and captives in general, said Colin Robinson, a director in Strategic Risk Solutions' Cayman Islands office.

Still, there have been some developments that have not been positive for employers considering funding employee benefit risks through their captives.

On the negative side, Mr. Young said, has been the US Department of Labor (DOL) suspension last year of a DOL regulatory procedure that employers have long used to try to win quick DOL approval of their plans to fund employee benefits through their captive insurance companies.

More than 2 dozen employers have won, including such well-known companies as Archer-Daniels Midland Co., Dow Corning Co., and Google Inc.—using the expedited process (ExPro)—DOL approval to fund their benefit risks, often life insurance and long-term disability coverages, through their captives.

But last year, the DOL suspended ExPro to review ExPro requirements, such as one requiring employers to enhance their benefit programs.

The issue DOL has had is trying figure out how much enhancement is necessary, Mr. Young said.

In another captive-related development, the one type of captive authorized under federal law—risk retention groups (RRGs)—is shrinking. RRGs are captives Congress first authorized under legislation passed in 1981. Under the 1981 law, RRGs could do business in any state after meeting the licensing requirements of just one state. RRGs, though, only could write product liability and completed operations coverage for member-owners.

Then, in 1986, Congress expanded, amid widespread big rate hikes in the traditional market, the 1981 law to allow RRGs to write all casualty coverages, except workers compensation. Following that congressional action, for many years the number of RRGs increased annually. As recently as 2012, 261 RRGs were licensed. But by the end of 2018, the number of RRGs fell to 219, according to the Risk Retention Reporter, a monthly newsletter.

With soft conditions for many lines of coverage available in the commercial market, RRG organizers are saying, "maybe we don't need to stay in business," because members don't have coverage problems anymore, Mr. Young noted.

Still, even with the decline in the number of RRGs, remaining RRGs often are in very good financial shape. "We have seen some attrition over the last 5 years or so," but those remaining are very strong, said Andrew Marson, a Strategic Risk Solutions director in the SRS Scottsdale, Arizona, office.

Also on the plus side, captive insurance company failures have been tiny. "My perception is that very few captives have failed," Mr. Young said, adding that it is "amazing" how few captives have failed in the last 20 years "considering the thousands and thousands of captives out there."

Reasons for the lack of failures, Mr. Young noted, include strong regulatory scrutiny, independent financial audits, and, in the case of captives that use commercial insurers—known as fronts—to issue policies, the fronts serve as "another set of eyes" to help ensure that captives have sufficient assets to meet their liabilities.

While captive growth has been flat in recent years, that should not overshadow how captives have become an integral part of risk management programs.

Indeed, Mr. Young notes that there are now roughly 7,000 captives, and if cell captives are counted, the number is close to 10,000 around the world. "It is a mature industry," he said.

Still, Mr. Young added, "People are always amazed that there are that many captives out there."

February 25, 2019