The Regulator's Growing Role in Creating Successful Captive Insurance Companies

The growth of the captive insurance industry has primarily been driven by the many financial advantages the strategy offers. Yet another contributing factor to the concept's acceptance is frequently overlooked: the eagerness of regulators to capture the economic benefits associated with serving as a captive domicile.

It's common for industries to think of the regulators who oversee their activities as "traffic cops" whose primary job is to spot violations. The captive insurance marketplace is different. While the agencies and staff who oversee the establishment and operations of insurers work hard to protect the public, many also put significant effort into making their domiciles more attractive to other captives.

That cooperative attitude has become increasingly important given the growth in available captive domiciles. We're in a buyer's market for organizations hoping to establish or expand a captive.

What once involved just a handful of willing domiciles has evolved into a competitive marketplace with dozens of choices. Attracting more captives not only means growing the domicile's direct revenue but also creating a thriving industry for local professionals who support captives. Helping the domicile add high-income jobs boosts the regulators' stature.

For example, since Hawaii became a domicile in 1986, it has attracted a broad range of captives from companies throughout the United States and Asia, earning a reputation for cooperation and openness to new concepts. Among those are Japanese companies creating Hawaii-domiciled captives to reinsure liability risks.

Regulators haven't replaced attention to compliance with a focus on sales and marketing, but a growing number display an interest in innovation and an openness to new ideas. We see more regulators attending industry conferences and similar events, eager to build relationships with captive consultants and the other professionals who play roles in the strategy. The trust spawned by those relationships allows candid conversations about what the regulators prefer to see from applicants or whether they might be open to a slightly different approach. It's a kind of flexibility that's rare in traditional insurance and regulatory circles.

Captive consultants work with many organizations whose risk management needs are fairly straightforward. Then there are those clients who present unique challenges that call for nonstandard approaches. That's when relationships with regulators create value. Having one-on-one conversations during the preliminary stages allows both the consultant and regulator to consider program structures and brainstorm possible solutions. The conversation may begin with a rough framework for an innovative structure and an admission that they're still working to pin down the details. Receiving feedback and direction from the regulator enables consultants to shape a program that meets the client organization's objectives while satisfying the domicile's expectations.

That openness to new ideas is particularly important to captive consultants, who frequently work with companies facing complex or unique risks. It becomes even more important as the captive universe expands into new markets and utilizes innovative tools, such as parametric coverages. Using a captive for traditional lines, such as general liability and motor vehicle coverages, is typically fairly predictable and straightforward. Bringing a new structure or type of risk to a domicile involves greater complexity, and sometimes, more than a little bit of problem-solving. It's usually an educational process for all involved, built upon prudent analysis. Often, it involves looking at the structure through the regulator's eyes to better understand what will give them confidence in what is being proposed.

Trust-based relationships with regulators are crucial when attempting to address unique issues. A consultant might recommend that a regulator consider a transitional capitalization approach based on the downstream use of reinsurance to maintain capacity at prudent levels. If the regulator has extensive experience with the consultant and the proposal is backed by the analysis of the factors most important to the domicile, they're more likely to be open to the approach.

Regulators may even simplify normal processes. Suppose a group wants to issue a one-time premium credit to its members. In some domiciles, that could involve multiple steps, taking 90 or more days. A regulator in a cooperative domicile might give a faster go-ahead, requiring only a revised pro forma and an update to the business plan.

One more important aspect of the relationship between regulators and the captive industry is longevity. We've observed that the domiciles with the lowest turnover are typically the ones that thrive. It underscores the impact of the knowledge shared through those personal relationships. Conversations at industry functions can be remarkably productive for both sides.

Based on all indications, the captive insurance universe's robust growth is expected to continue for the foreseeable future. We're confident that a significant driver of that growth will be the flexibility and innovation offered by domiciles and the individuals who both represent and protect them.

The above information does not constitute advice. Always contact your insurance broker or trusted advisor for insurance-related questions.