Business Insurance

Captive Insurance

There was an interesting article on the front page of The New York Times, “Seeking Business, States Loosen Insurance Rules,” which discusses how companies who once had to travel to places like the Cayman Islands or Bermuda to do business in secret, can now travel to Vermont, Utah, South Carolina, Delaware and Hawaii. Why? These states are remaking themselves as destinations for the complex private insurance transactions that were once done exclusively offshore. Some 30 states have passed legislation to allow companies to set up captives, or special insurance subsidiaries, that provide insurance to their parent companies. Captive insurance is a regulated form of self-insurance that has been in use since the 1960’s.

So, what’s the upside?
• For the states, these insurance deals promote business travel and jobs for tax payers;
• For insurers, these subsidiaries offer ways to unlock some of the money that is tied up in reserves, making millions available for dividends, acquisitions, bonuses, etc.

The downside:
• States are offering a refuge from other states’ insurance rules;
• Public oversight – the new state laws make the audited financial statements of the captives confidential.

With the broadened definition of captives, there is concern that a shadow insurance industry is emerging with less regulation and more potential debt. While companies and states are reaping the benefits of the captives, some insurance regulators are concerned about devaluing the state’s financial security and oversight.