Connecticut Is Capturing Captive Insurers

As a globally recognized capital of the insurance industry, Connecticut has had a complicated relationship with the industry segment of captive insurers. Recent legislative initiatives, however, have demonstrated the interest of state government in promoting the development of a domestic captive industry, which is growing in importance.

Typically, captives are formed by large companies that have sufficient magnitude of risk to justify the capitalization of a captive insurer that can offer the tax benefits of insurance through deductibility of premium payments while achieving the economies and control of self-insurance. Excess loss cover can be purchased from traditional insurance or reinsurance companies in order to manage the exposure. As the captive is typically managed by a professional captive manager, the additional burden on management of the sponsoring company is limited.

Connecticut first began to carve out a place in the captive market in 2008, with the enactment of Section 38a-91aa et seq. of the Connecticut General Statutes, authorizing the formation of captive insurance companies effective Jan. 1, 2009. That modest effort did not, however, generate any interest, and the favored domiciliary jurisdictions for captives continued to be Vermont, Delaware, Nevada and Bermuda. Since the adoption of the Connecticut captive statute, amendments were made in 2012 and in 2014. These amendments have created the environment for a nascent captive industry.

One of Connecticut's selling points, of course, is its widely recognized reputation for excellence in insurance regulation. The Connecticut Insurance Department (CID) has staffed up to be able to handle new and future captives with a consistency of regulatory competence known throughout the industry and among peer regulators.

The 2012 amendments increased the permitted types of captives to also include sponsored, branch and special-purpose financial captives. (Sponsored captives are formed and operated by one or more sponsors approved by the CID and fund their liability to each participant insured through protected cells with segregated assets. Branch captives are alien captives licensed to transact business in Connecticut through a business unit with a principal place of business located in the state. Finally, special-purpose financial captives are reinsurance captives that fund their obligations through insurance securitizations.) The 2012 amendments also expanded the types of coverage that may be insured through Connecticut-domiciled captives and established a credit of $7,500 against first-year insurance premium taxes.

Effective Oct. 1, 2014, the second set of amendments was made to the state's captive law by Public Act No. 14-6. These significant revisions reflected the state's effort by the governor's office, the CID and the Legislature to attract more captives, and to respond to suggestions that came out of the experience of the first Connecticut captive organizations.

The act cleared the way for several very important changes that will make it easier to move existing captives to Connecticut, and more attractive to organize a Connecticut captive.

Taken together, these amendments make Connecticut a much more attractive domicile for captive insurers, and demonstrate the willingness of the CID and the Legislature to act on suggestions for refinement and improvement from the business and legal community.

Theodore P. Augustinos is a partner in the Hartford, CT, office of Edwards Wildman Palmer, which serves as general counsel to the Connecticut Captive Insurance Association. This article is condensed from a longer version that appeared in the Connecticut Law Tribune, a sister publication of this newsletter.

As a globally recognized capital of the insurance industry, Connecticut has had a complicated relationship with the industry segment of captive insurers. Recent legislative initiatives, however, have demonstrated the interest of state government in promoting the development of a domestic captive industry, which is growing in importance.

Typically, captives are formed by large companies that have sufficient magnitude of risk to justify the capitalization of a captive insurer that can offer the tax benefits of insurance through deductibility of premium payments while achieving the economies and control of self-insurance. Excess loss cover can be purchased from traditional insurance or reinsurance companies in order to manage the exposure. As the captive is typically managed by a professional captive manager, the additional burden on management of the sponsoring company is limited.

Connecticut first began to carve out a place in the captive market in 2008, with the enactment of Section 38a-91aa et seq. of the Connecticut General Statutes, authorizing the formation of captive insurance companies effective Jan. 1, 2009. That modest effort did not, however, generate any interest, and the favored domiciliary jurisdictions for captives continued to be Vermont, Delaware, Nevada and Bermuda. Since the adoption of the Connecticut captive statute, amendments were made in 2012 and in 2014. These amendments have created the environment for a nascent captive industry.

One of Connecticut's selling points, of course, is its widely recognized reputation for excellence in insurance regulation. The Connecticut Insurance Department (CID) has staffed up to be able to handle new and future captives with a consistency of regulatory competence known throughout the industry and among peer regulators.

The 2012 amendments increased the permitted types of captives to also include sponsored, branch and special-purpose financial captives. (Sponsored captives are formed and operated by one or more sponsors approved by the CID and fund their liability to each participant insured through protected cells with segregated assets. Branch captives are alien captives licensed to transact business in Connecticut through a business unit with a principal place of business located in the state. Finally, special-purpose financial captives are reinsurance captives that fund their obligations through insurance securitizations.) The 2012 amendments also expanded the types of coverage that may be insured through Connecticut-domiciled captives and established a credit of $7,500 against first-year insurance premium taxes.

Effective Oct. 1, 2014, the second set of amendments was made to the state's captive law by Public Act No. 14-6. These significant revisions reflected the state's effort by the governor's office, the CID and the Legislature to attract more captives, and to respond to suggestions that came out of the experience of the first Connecticut captive organizations.

The act cleared the way for several very important changes that will make it easier to move existing captives to Connecticut, and more attractive to organize a Connecticut captive.

Taken together, these amendments make Connecticut a much more attractive domicile for captive insurers, and demonstrate the willingness of the CID and the Legislature to act on suggestions for refinement and improvement from the business and legal community.

Theodore P. Augustinos is a partner in the Hartford, CT, office of Edwards Wildman Palmer, which serves as general counsel to the Connecticut Captive Insurance Association. This article is condensed from a longer version that appeared in the Connecticut Law Tribune, a sister publication of this newsletter.