Carving out a niche in the captive insurance market

Foreign insurtechs have formed captives in Connecticut as a gateway to expand their business and access to the US market.

More US insurtechs and managing general agents are forming captives to take off layers of risks, connect insureds, insurers and reinsurers, and investors, and accelerate insurtech product adoptions by commercial carriers. Innovative captive options to facilitate insurance-linked security products using “parametric solutions”, “smart contracts” and “blockchains” can improve insurance efficiency for businesses that suffer catastrophic losses.

Commercial carriers form captives and provide services for their clients to cover certain risks or improve capital efficiency. Some specialty legacy companies form captives for books of insurance business or legacy losses they acquire or reinsure.

To manage the consequences of cyber attacks and smooth financial impact, some businesses form captives to self-insure cyber risk and use specialty servicing companies to guide their loss prevention, control, and disaster management activities.

Certain businesses, both domestic and international, encounter capacity challenges, prompting them to leverage captives for managing retained risks and enhancing negotiation capabilities with fronting companies, reinsurers, and investors to secure additional capacity.

Meanwhile, some commercial carriers, constrained by the impact of disasters in regions such as Florida or California, opt to cease writing certain lines of coverage. In response, insurtechs are increasingly establishing captives to streamline self-insurance and reinsurance solutions for clientele situated in these high-risk areas.

The COVID-19 pandemic led to many new business services. Certain types of contractual liabilities can’t be covered by commercial carriers, and owners have been forming captives to reduce the uncertainty of the frequency and severity of the losses.

Legislative changes

Risk management and captive operations drive our ongoing legislative changes with our risk-based regulatory approach. We therefore updated our captive laws in 2022 and 2023.

For example, our new laws reduce the minimum capital for almost all types of captives as we believe that some captive owners with great risk profiles do not need to maintain so much minimum capital. Also, pure captives or branches that have good corporate governance and clean independent audited reports may not need regular exams.

Our new laws allow the waiver of the exams if they qualify. These changes can save captive owners and captive managers time, capital, fees, and energy.

Businesses face increasing insurance cost challenges. We charge low fees and use our internal resources for reviews and approvals to save captives and owners time and costs. Except for a one-time $800 application fee and $375 annual licensing fee, we charge no business change request fees, no feasibility study review fees, no examination fees for pure captives and no director and officer change filing fees. Connecticut also allows a $7,500 tax credit.

Captives need quick approval in response to commercial market changes. Therefore, they need approachable, efficient, knowledgeable, and collaborative regulators with high standards for their short and long-term success. As the insurance capital of the world, Connecticut has more experienced regulators than other states and is led by a supportive insurance commissioner.

With a comprehensive team of regulators dedicated to meeting the evolving demands of captives, Connecticut maintains an optimal staffing balance, preventing unnecessary financial burdens on captives and their owners. Notably, the recent allocation of funding in Connecticut’s latest budget for one additional staff member to boost our captive division underscores our commitment to support the industry’s growing needs.

Technology opens new avenues

As the world is experiencing revolutionary technological changes, commercial insurance companies can’t respond as quickly as new technology products drive change. For example, insurance companies may not be able to give underwriting credits for insureds’ adoption of risk mitigation technology, and certain new risks associated with using the new technology are not insured by the commercial market. These areas are being covered more and more by captives.

Businesses are facing more uncertainty in frequency and severity of the evolving risks and retained losses. For new risks, it takes commercial carriers time to capitalise writings and develop new forms, and new data may not be available for modelling or pricing. Parametric policies are being issued by captives to cover the gaps in coverage and capacity.

Parametric solutions may not transfer all risks but can give insureds more certainty and predictability, speedy recovery of financial impact and options to choose for different limits they can buy. Parametric solution agreements using trigger events with third party modelling and smart contracts are transparent and efficient with cost savings. All parties are connected by blockchain data-sharing networks. They know what they are signing for, and any payments made once indexes are triggered. This also provides opportunities for investors to take calculated risks that can’t be insured by the commercial market.

Why Connecticut?

Looking at the road ahead, it is important for decision-makers to fully understand the potential of maximising captive solutions. This involves periodic review of their captive coverages and domicile selections in the best interests of prospective as well as existing owners. Choosing a domicile with quality infrastructure and flexible regulatory services with low fees can ensure long-term success and sustainability.

As a relatively new domicile, Connecticut has made tremendous progress to gain stakeholders’ support across the state. We collaborate with Connecticut Insurance and Financial Services, the MetroHartford Alliance, Connecticut Captive Insurance Association, the National Network of Accountants, InsurTech Hartford, AdvanceCT and the Connecticut Department of Economic and Community Development.

Our “Reimagining Business Insurance” initiative educates and communicates with captives, owners, service providers and other stakeholders through social media, seminars, and webinars on what Connecticut can offer, and we listen carefully to business needs.

Connecticut was ranked #1 globally in captive formation increases for the last three consecutive years and won three Captive Domicile of the Year awards in 2022 and 2023.

At the heart of the world’s insurance hub, Connecticut cultivates a unique ecosystem, intertwining insurtech and hedge fund centres. With relentless momentum, the state fuels economic growth, champions innovation, and draws in top talent and businesses, boasting over 1,000 flourishing companies.

With updated pro-captive laws, committed regulators, prime location and highly competitive fees and tax credits, Connecticut has the ideal structure to fuel continued re-domestications and new formations of captives by local and global businesses alike.

Governor Ned Lamont’s drive for public-private partnerships combined with the support of Insurance Department Commissioner Andrew Mais (NAIC President 2024) underscores the state’s efforts to utilise captives to fill commercial coverage gaps and address insurance capacity shortage issues.

Connecticut extends a warm invitation to businesses with existing captives to consider returning home, offering the advantage of avoiding federal scrutiny, tax consequences, global minimum tax progress concerns and high regulatory fees.

Efficient and effective enterprise risk management should be the goal for any captive. Selecting a domicile state equipped with laws, experienced and responsible regulators, and service providers with low fees and tax credits ensures a robust captive structure capable of accommodating evolving coverage needs, ultimately reducing insurance costs and maximizing owner benefits.