Connecticut seeks to stay competitive with captive insurance

BY JUSTIN MCGOWN jmcgown@westfairinc.com

On June 23, Gov. Ned Lamont signed Public Act 23-15 into law. The legislation, which becomes effective on Oct. 1, is designed to bolster the state’s captive insurance company sector.

Captive insurance companies are a form of self-insurance where a business or other entity sets up an insurance company solely to handle the company’s needs and runs it as a wholly owned subsidiary. This option has become increasingly popular in recent years because captive companies can be well-suited to handling risks that might be unusual or particular to only a narrow set of businesses. Also, premiums paid to a captive insurer can generate tax savings.

According to the National Association of Insurance Companies, 90% of Fortune 500 companies have a captive subsidiary providing at least some of their insurance needs. Presently, many of these companies are domiciled in places where they can take advantage of low taxes, leading to overseas registration or in states like Vermont which is currently the leading domicile for captive insurance.

However, only 29 states and the District of Columbia currently serve as captive domiciles – and Connecticut, despite its history with the insurance industry, was tied with Georgia for 13th place with 57 captives in 2022. Vermont leads the U.S. with 639 captives, nor far behind Bermuda and the Cayman Islands with more than 650 each.

“Connecticut is definitely the insurance capital of the world,” said Fenhua Liu, division director with the Connecticut Insurance Department. “We are very proud of that. We have all the expertise, all the experienced people, all the resources here in Connecticut. But cap- tive insurance is different from traditional insurance.”

Liu said other domiciles can attract captive companies with very low or no taxes, but that often comes paired with high fees. Thanks to Connecticut’s updated rules, she added, the state should be able to offer a competitive tax rate with tax credits or waivers while keeping the low fees associated with licensing and running a captive company.

The biggest changes resulting from PA 23-15, according to Liu, are the elimination of a minimum premium tax for dormant captives and allowing the use of parametric products.

“Captives can leverage para- metric products to transfer risks out of the captive or sales of risks to private or public investors,” Liu said, referring to captives with a single or multiple owners. “We call that ‘parametric solutions’ — if they match or meet certain criteria, they can get paid immediately without proof of loss or obligation to indemnify so they reduce the underwriting and claims adjustment process.”

A sharp cut to the cost of establishing a captive company in Connecticut may also help establish the state as a domicile destination.

Connecticut stands to gain from the increased revenues from becoming a popular domicile for captive insur- ance companies, which is a growing section of the insurance industry. Small and medium businesses within the state will be able to establish and administer their insurance captives closer to home while drawing on the state’s deep well of insurance talent.

Liu expects a reduction in overall costs and increased transparency that can make risk financing more efficient. This is particularly important to small companies that may be dealing with unique or unusual risks not covered by typical forms of insurance.

“Often, commercial carriers do not have enough capacity to provide the availability or afford insurance products for risk management,” Liu said. “Sometimes they do offer them but they’re very expensive, things like climate change, ESG risks, cybercrime, floods, all of these things have driven insurance companies to start restricting their terms and conditions because it’s too risky. That’s why captive exists, to fill those gaps.”