Onward & Upward For U.S. Captive Domiciles, Regulators Say

He added, "Things seem to be going at a very sustainable pace; it might get hectic if the market really turns." But, he joked, "I absolutely, positively refuse to pontificate on when that turn might come."

Vermont licensed 33 new captives last year. In 2009, the state licensed 39 captives, at more than $16 billion in gross written premium, making it the domicile's sixth-biggest year. By contrast, in 2008, Vermont's formations were down to 16—half the number it licensed in 2007.

Mr. Provost observed that the wave of mergers and acquisitions has slowed down, and captive closures due to the recession have ended as well. 

"The end result is that we had a net increase of 12 captives in 2010, contrasted with flat net growth for the past several years," he said.

 Some of the companies in the class of 2010 include:  NBC Universal, PricewaterhouseCoopers LLP, Aetna, Procter & Gamble Co., Crowe Horwath LLP, Towers Watson & Co. and Nationwide Financial Services.

HAWAII: PHONING IT IN

The Aloha State picked up 12 licenses last year, the most since 2005, according to George W. Sumner III, captive insurance administrator and deputy commissioner, State of Hawaii Dept. of Commerce & Consumer Affairs Insurance Division—Captive Branch, in Honolulu.

In 2009, four were licensed. He said 2008 and 2009 were slow because of the down economy. In fact, 2009 was the only year for negative growth in Hawaii with eight lost, largely because construction was down in the building industry.

So far this year, he said 12 to 14 captives are in the pipeline. Two of those are commercial property companies wanting to do earthquake in their captive. While they have been self-insuring, Mr. Sumner said, they now will be doing it formally through a captive. Also in the pipeline is a medical malpractice risk retention group and a workers' compensation captive.

An interesting captive being discussed is coverage for a solar farm.

"When you have newer technology, the traditional insurers tend to overprice it, because they don't have the history of something like workers' comp," Mr. Sumner explained.

The company purchasing the solar energy wants a surety bond guaranteeing delivery of electricity. Exposure in this case, Mr. Sumner said, was $20 million, of which the captive would be used for a $5 million retention. The additional $15 million of reinsurance would be purchased through Lloyd's of London.

Another captive, he said, is for renters insurance that will be offered by a storage company. In this case, he said a fronting company would be used.

"So things are good. This is a lot of activity we're seeing," Mr. Sumner said, adding that he has planned a trip to the West Coast in April because of interest in captives in that area, especially California.

Other areas with players interested in forming in Hawaii are Atlanta, Texas and Louisiana, plus two local Hawaii companies.

Because the trend for companies is to find a domicile close by, for the convenience   of getting in and out quickly for their annual board meeting, Hawaii looked at its laws and decided to interpret them differently, Mr. Sumner said.

"Our law says you have to have an annual meeting in the state," he said, noting that Hawaii corporate law now holds that anyone calling in to the meeting is considered to be part of it. This was prompted by the amount of travel time required to get to Hawaii and by the bad economy.

"Response has been good," he said. While many still travel to Hawaii for their annual meeting, the virtual attendance is a popular option.

Another factor helping to drive interest in Hawaii and other established domiciles is that some of the newer domiciles are discovering the difficulties of regulating captives and RRGs, Mr. Sumner said.

Hawaii does about $7 billion in premiums a year, "so it's the big programs that are out here. A lot of [the state's attraction] is the infrastructure and that we have been able to add personnel at a bad time. We've added four employees," bringing the number of total staff to 10, he said.

"I was born and raised here, and for me it's great to be able to promote the island economy," Mr. Sumner said.

WASH., D.C.: MED MAL, HEALTH CARE REFORM BRING BUSINESS

Dana G. Sheppard, associate commissioner, Risk Finance Bureau, District of Columbia Dept. of Insurance, Securities and Banking, said that while D.C. is off to a slow start, he expects a good year.

"A number of people are making inquiries and setting up meetings, and several projects are in the pipeline," he said. So far no company has been licensed, "but that's not unusual for a first quarter; it's typically a little slow."

In 2010, D.C. licensed 15 companies, including risk retention groups, pure captives and association captives. In 2009, 19 captives were licensed.

As far as trends, traditional medical malpractice writers for doctors and hospitals are having trouble getting the rate increases they want in some states, Mr. Sheppard said. While the process is always slow, "they primarily are concerned with a few states where they can't get rate increases, so they are forming RRGs—then they don't have to deal with those states and the rate-filing process."

This situation prompted three formations last year—two for med mal. "And we met with a group this week; they are forming two, and another manager has two."

He speculated that by this summer, "we'll have four more. They are organized by traditional insurers, and the doctors will own them."

Mr. Sheppard added, "This is certainly a trend. Companies are tired of wrestling with a few states."

When politicians lobby the insurance department, he explained, they can stop insurers from raising rates. But rather than stop operating in the state, insurers now have a way around the rate-filing process.

Also last year, he noted a trend toward medical stop-loss captives for self-insured plans.

"There's a lot of interest in that because of health care reform. Businesses are trying to figure out if it's going to be more expensive, and if so, should they continue to buy coverage from a commercial carrier or should they self-insure some of the health insurance liabilities and start captives for stop-loss," he said.

Another scenario is organizations that are not providing benefits but which will be required to do so in 2014 or pay a penalty. Those companies, Mr. Sheppard said, "will need to decide whether to pay the penalty or set up a self-insurance program and a captive to pay the stop-loss as opposed to going to the commercial marketplace to buy it."

He believes this will be on the horizon in 2011 and 2012. "Maybe captives will play a small role, or maybe if somebody figures out how to do it, it will become the latest and greatest. We definitely see a lot of inquiries in that area," Mr. Sheppard said.

MONTANA: LEGISLATURE LOOKS TO LURE MORE CAPTIVES

Montana is looking for growth this year with new legislation to make forming a captive more attractive in the state.

Legislation to update its captive insurance law passed unanimously in the House Business and Labor Committee in February.

A hearing in the Senate Committee was held March 8, Steve Matthews, captive coordinator, Office of the Commissioner of Securities & Insurance, told NU. The Senate Business, Labor, and Economic Affairs Committee took executive action immediately following the hearing, and that bill also passed unanimously, he said. Next it will go for the full Senate vote.

Mr. Matthews explained that the bill, HB 419, adds incorporated-cell captives; reduces capitalization required for association captives from $750,000 to $500,000; and includes a special-purpose captive, allowing for consideration of a captive where criteria isn't established. "This gives a little more flexibility," he said.

The legislation also would change the due date of the annual report for pure captives from March 1 to April 1. RRGs, however, are still required to report on March 1.

The Montana Captive Insurance Association said it will provide a full report on legislative developments and other topics at its upcoming Spring Summit event, scheduled for March 30 in Helena, Mont.