November 27, 2017

CT woos captive insurers, but economic impact unclear

HBJ Photo | Matt Pilon
HBJ Photo | Matt Pilon
Mary Glassman said the Capitol Region Education Council has helped its member towns and school districts save $3 million this year by forming a captive insurance company, which provides stop-loss insurance for health insurance claims.

It's been about five years since Connecticut changed its laws with the hope that it could build up an industry of so-called captive insurers, and so far, it appears to be working.

Since 2012, 15 captives — which are insurers formed by companies to insure their own risks — have moved to or been established in the state, according to the Connecticut Insurance Department.

Connecticut's captive owners pay about $375 million in gross written premiums, which is more than 1 percent of all insurance premiums written in the state.

Having a captive move to Connecticut isn't typically much more than a paper transaction. Many don't have a brick-and-mortar presence or hire employees.

But captives have created work for Connecticut actuaries, financial management firms, accountants, underwriters and others. The industry has also made modest contributions to the state budget through premium tax payments.

Last fiscal year, Connecticut's 15 captives paid just over $573,000 in state premium taxes, according to data provided by the Department of Revenue Services. That's up from $128,000 in 2015.

"Since 2015 we've more than doubled the number of captives we have here in Connecticut," Insurance Commissioner Katharine Wade told an industry audience this month in Hartford, adding that captives are a "major focus."

One of the major developments during the last two years was Charter Communications' decision to move or "redomicile" its captive insurer to Connecticut from New York in late 2016. The captive, Spectrum Communications Indemnity, is the largest in the state with $157 million in premiums during its first year here.

Companies are using captives here to insure a variety of risks, including property damage and workplace and customer injuries, said Janet Grace, program manager for the Insurance Department's captive unit.

Other captives provide companies with medical malpractice, professional liability or medical stop-loss coverage, with some cyber liability and terrorism insurance sprinkled in.

It's tougher to know the economic impact of captives. So far, the state hasn't attempted to formally measure it.

"They use a lot of service providers in the market and that's one of the reasons Connecticut is attractive to these companies, because we have dominance in insurance here," Grace said. "Have [service providers] set themselves up to support the captive insurers alone? Not necessarily yet."

As the industry grows and matures, that may happen, she added.

CREC’s captive

Among the organizations that have formed captive insurers in recent years is the Capitol Region Education Council, which operates Greater Hartford's magnet and special service schools and provides myriad other programs to municipalities and schools.

In 2016, CREC formed a captive called CT Prime, which provides stop-loss insurance on health benefits for nearly 10,000 employees in 14 Greater Hartford towns and school districts. Those towns and districts self-insure their own health benefits. They previously purchased stop-loss coverage individually from the commercial market to cover unexpectedly high claims.

However, premiums for that stop-loss coverage were fairly volatile year to year for some towns, which pushed CREC to form its own captive insurer, said Mary Glassman, manager of CREC's Office for Regional Efficiencies.

Now, CREC's captive purchases the stop-loss policy from the reinsurance market on behalf of its members, using its greater bargaining power to access more competitive premiums than any one town or district could get on its own.

In all, the 14 towns and districts have saved a total of $3 million in premiums compared to what they were paying before CT Prime was created, Glassman said.

"The overall experience has been a good one," said Glassman, who is the former First Selectman of Simsbury,

That experience includes positive interactions with state regulators, who offer a list of approved captive vendors. To oversee CT Prime, CREC hired Marsh Captive Solutions, which has Hartford and Norwalk offices.

CT Prime is analyzing its first year of claims experience. Premiums could go up or down in the future, depending on claims activity.

"The theory is over time, you will build up reserves from years of good claim experience … and that will reduce premiums," Glassman said.

In addition, being part-owners of an insurance company already has towns looking at how to better control claims, she said.

For example, CREC just solicited employee assistance program providers to help it manage behavioral health claims.

"I think it has the towns and schools thinking differently," she said.

Incentives evolve

To spur the captive market, Connecticut legislators five years ago authorized a one-time captive insurer premium tax credit of $7,500, which can slash tax bills and cover licensing fees.

Connecticut also originally set its minimum capital requirement for captives at $250,000 (some must have more in the bank, depending on size and other factors) to be competitive with Vermont — which was the first state to domicile captives decades ago and today has approximately 1,100 captive insurers.

"Vermont, being the first to market, got some first-mover advantage," Grace said.

Connecticut lawmakers lowered that threshold this year to $225,000.

"That puts us at the lowest minimum cap requirement of any state," Grace said. "It was designed to send a signal."

The industry appreciates the incentives, said Stephen DiCenso, a principal and consulting actuary with Milliman in Windsor and president of the Connecticut Captive Insurance Association.

"They've listened," DiCenso said of state lawmakers. "The new legislation this year is evidence of that."

DiCenso's association pushed for separate legislation this year that would have doubled the premium tax credit. It ultimately didn't pass.

"We continue to try to modify and distinguish and create new competitive advantages," he said.

While incentives are nice, DiCenso said captives also value their relationship with state regulators.

"In my view, the key considerations come down to: 'Do you have a regulatory jurisdiction that understands captive insurance, will work with you, and you'll be able to create a company that allows you to manage your risks in as efficient a way as possible but also in a way that is sound and financially viable?' " he said.

The state Insurance Department has encouraged the industry and been a cheerleader for its growth, but Grace said it takes regulation of insurers seriously.

The agency reviews captives' financial statements, requires them to justify their premiums actuarially, analyzes their specific structures in order to set capital thresholds and examines each company at least every five years.

"They file a lot of information with us," Grace said.

Future growth

Much has changed since Vermont got into the captive game more than 30 years ago.

The IRS, for example, has made changes that makes it easier for smaller companies to form captives.

There's no technical threshold, but Grace said that a company paying in the neighborhood of $500,000 a year in premiums would be the right size to form its own captive.

More states have also started to cater their regulations and laws to captive insurers, which means it will be tougher to notch big wins in Connecticut, Grace said. Plus, Vermont is the king of Fortune 500 captives, and that's not likely to change any time soon.

"We don't necessarily expect large growth in super big companies," she said. "We sort of see that market as saturated."

"The focus should be on the middle market in Connecticut," she said.

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