Expert Commentary

Stay Tuned into Your Captive Regulators

The regulation of a captive is one of the key ingredients for its success. Therefore, the selection of the original domicile and keeping up with that domicile's regulators and legislators is vital. Not all domiciles or regulators are created equal.

January 2011

All insurance is regulated at the state level based on the McCarran Ferguson Act. While there is a demonstrable pattern of federal erosion in that fact it is still true for our purposes. The point of the regulation is to protect the public from the failure or wrongful acts of a particular insurer.

Captives are by law exempt or excepted from many insurance regulations because they are not generally exposed to the public. Being owned by their “insured” so to speak it is felt that their actions are guided by their own best interests and harm only themselves.

None of the above is new, but as with the rest of the world, things continue to evolve and a note of observation may be in order.

Consider the Economics and Politics

The greatest factor in play today in the regulation of captives is the ongoing budget crises of many domiciles. With reduced revenues, it has become difficult, if not impossible, to properly staff departments and to find suitably qualified employees. Compounding the difficulty is the regular change in the political environment through the electoral cycle. One party and its adherents go out, and another comes in. The Director of Insurance is replaced and so replaces the head of captives. The legislature changes, and the captive proponents/opponents change. The prudent captive owner stays informed and considers his/her alternatives.

Of course, the choice of domicile at the outset is serious business and should be driven by the goals and objectives of the captive and its owners. Domicile selection must include a review of the domicile's laws in regard to captives and any court cases or rulings that disclose the true climate. Meetings with regulators are generally required, and it is here that the captive owner gets a feel for what to expect in regulation. Does the regulator follow the statutes and codes of the domicile or does she/he see themselves as the final arbiter and judge on what goes in captives? Are they driven by whim or regulation? All of this needs to be learned.

It is tempting upon receiving one's license to push the regulator and affairs of the domicile to the back burner. In today's climate, that could be fatal. Events affecting captives are happening too quickly. Despite the competition and budgetary woes, new domiciles enter the market frequently. Now we see New Jersey and Tennessee (the original captive domicile) have gotten back in the game after decades of absence.

Certainly, jobs and revenues are behind these moves and not the high-minded motive of improving the world of risk finance. Creating jobs and revenues are good things and should be encouraged. Establishing new domiciles can also be a good thing if done well and for proper reasons. To think that millions in revenues and dozens of jobs will materialize is political wishing and hoping, and not attached to the reality of the captive world.

Get To Know Your Regulator

The captive owner and its advisers must find ways to keep the regulation of their captive(s) in an appropriately successful mode. Knowing the regulator is the first step. One meeting a year is probably not enough to keep your issues in mind. Seeing regulators at conferences helps, as does becoming involved in the local domicile association, if there is one operating in your state.

The important thing is to make certain that your voice, and that of your captive, is heard. You are a major taxpayer, and the regulators will want to hear from you. Don't be shy. This can be done with frequent contact with the regulator but you should also consider the regulators' bosses. Does your captive regulator report to the Director of Insurance? Do you know this person? Are they elected or appointed to office? What is their political agenda, if any?

Who in the legislature is a champion of captives? Who is an opponent? Consider organizing a fundraising event for them. Even if you don't vote in the same location as your domicile, you can make contributions. Use such tactics to build influence so that your voice is heard at the appropriate levels.

If there is a local domicile association, consider joining it and becoming active. Few of these groups are overstocked with volunteers. In some cases, the association does little, but in other jurisdictions, it may be considered an important business development arm of the Department of Insurance. Join, sign up, and show up. The regulators and legislators will notice.

Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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