Fenhua Liu, assistant deputy commissioner of captive insurance for Connecticut, explains why many businesses in the sector are making the Constitution State their home
Connecticut has established itself as one of the premier locations for the captive insurance industry in recent years.
With more than 1,500 insurance companies writing over $42 billion in premiums, Connecticut is the number one location for insurers in North America and one of the foremost insurance centres in the world.
It is also home to more than 400 private funds managing over $750 billion domiciled in the state, and the third-largest global centre for hedge funds.
The Constitution State is also home to a range of professional services. But a strong and supportive financial services ecosystem is not the only reason many captive insurers are choosing Connecticut as their base.
An attractive regulatory and tax domicile
Before initial captive legislation was passed in 2008, some Connecticut-based businesses had formed captives in another domicile.
But after changing its captive statutes to meet the needs of captive owners, many started to return.
The landmark legislation provided many incentives for captives to return before 1 July 2023 to avoid federal scrutiny, to save fees and travel costs, and to benefit from favourable state taxes for captive owners.
New captives legislation in 2022 lowering the minimum capital and surplus requirements, the waiving of examination for pure captives and their branches, and a three-year look-back tax amnesty for Connecticut businesses that own captives are examples of how the state is working with the industry.
The state insurance department has modernised the captive application process and considerably shortened the turnaround for all requests. Those concerned by high regulatory fees they might encounter for setting up a new office or branch should also be assured as captives pay negligible fees for licensing and formation.
And we don’t foresee any other fees. Furthermore, the insurance commissioner has the appropriate discretion to regulate captives according to their risk profiles. Connecticut’s tax laws are also favourable for captives.
Unlike other states, Connecticut has a cap on maximum taxation and offers tax credits to captives. Firms pay annual state premium taxes at a sliding scale with rates no greater than 0.38% for direct writing and 0.214% for reinsurance, with a first-year tax credit of $7,500 and a maximum aggregate tax of $200,000.
“The Connecticut Insurance Department has a workforce with unparalleled depth and expertise in commercial insurance and captive regulations,” says P.J. Cimini, Esq., president of the Connecticut Captive Insurance Association.
An exceptional growth year
There has been an increase in the number of licences granted by the state for both new captive formations and re-domestication from other states, adding 30 new names in the past two-and-a-half years.
Last year alone, Connecticut licensed 11 captives, including two formed by German and Israeli insurtechs. As of 2022, Connecticut had 45 captives, including 29 pure captives, 11 sponsored captives, two risk retention groups and three special purpose vehicle captives.
“This was the third exceptional growth year for Connecticut-domiciled captives as businesses leveraged them to strengthen their insurance coverage, fill gaps and reduce risk,” says Andrew N. Mais, Connecticut’s Insurance Department Commissioner and president-elect of the National Association of Insurance Commissioners.
“Connecticut has everything a captive insurer needs to succeed: a convenient location, thriving ecosystem, modern captive laws, low fees, insurance innovation and responsive, experienced regulators.”
Commissioner Mais says record growth reflected a growing awareness of the cost efficiency and high value that being a captive domiciled in Connecticut can provide.
Establishing Connecticut as a domicile of choice for captives has been achieved in large part due to the concerted efforts of the state insurance department and various other stakeholders, such as Connecticut Insurance and Financial Services, the National Network of Accountants, the Connecticut Captive Insurance Association, AdvanceCT, InsurTech Hartford and the Department of Economic and Community Development.
Along with captive service providers and captive owners, the Connecticut Insurance Department and its partners have helped to expand its reputation as a top captive domicile.
The National Network of Accountants’ outreach and education initiative called ‘Reimagining Business Insurance’ has also tremendously helped attract new captives to Connecticut, including 12 formed by out-of-state companies.
Global recognition
Connecticut’s reputation as an innovative domicile for captive insurers is continuing to grow.
In 2020 and 2021, in its World Domicile Update, Captive Review recognised Connecticut as the fastest-growing captive domicile. It was also named captive domicile of the year for domiciles with written premiums of less than $5 billion.
This May, the InsurTech Hartford Symposium 2023 will host captive insurance sessions targeting all businesses, including insurtechs, investors, managing general agents, fronting carriers and reinsurers.
As we continue to suffer from the impact of the Covid-19 pandemic, many evolving issues will necessitate more flexible regulations to nurture innovative captive solutions to respond to these challenges. And that’s where Connecticut can help.
