WHAT IS IT? Captive insurance entities are insurance companies that are wholly owned by those persons or entities they insure. Their primary purpose is to insure the risk of their owners/insureds. The insureds benefit from the excess underwriting profits of the entity. The entities are generally used by individuals or entities who are willing and able to put their own capital at risk and who wish to work outside of the regular commercial insurance marketplace. They can be a very effective tool in controlling risk and premium costs and also allow for more unique coverages tailored to the needs of those insured.
The first such entity was formed in Delaware in 1980. After updates to Delaware’s insurance laws, many more have formed – particularly in the last seven years. It has been the practice of the Delaware Insurance Department, since the formation of the Captive Insurance Bureau in 2009, to retain outside consultants and counsel to manage the Bureau and assist in the formation, retention and regulation of these entities. Currently, there are some calling for this work to be brought “in house” to the Department, with State personnel performing these functions.
WHO DOES IT HELP? When the Captive Insurance Bureau was formed in 2009, there were only 28 captive insurance entities domiciled in Delaware. Since that time, that number has risen to 1,060 (as of December 31, 2015). A substantial part of this success is the result of Delaware’s pioneering work in the area of “Series Captive Insurance Entities”, which are formed pursuant to Delaware’s Limited Liability Company Act.
A University of Delaware economic impact study, The Economic Contributions of the Captive Insurance Industry to the Delaware Economy, was recently conducted on behalf of the DOI by the University of Delaware’s Alfred Lerner College of Business & Economics’ Center for Applied Business & Economic Research (CABER). Breaking out the the program’s economic impact per $1,000 spent by the DOI for the captive industry, study found the following:
For every $1,000 spent, 1.95 jobs are created, $83,574 in income is generated, and $4,301 in taxes are collected. Captive program spending supports 950 jobs in finance and investment industry, 447 jobs in legal, accounting and professional support, and 209 retail jobs; and
The captive insurance program contributes nearly $360 million to Delaware’s annual gross domestic product. The captive program also directly and indirectly supports 2,537 Delaware jobs, creates almost $109 million in additional income, and generates over $5 million for the state in tax revenue, the report shows.
WHO DOES IT HURT? It is difficult to make the argument that the program “hurts” anyone. Proponents of dispensing with the current outside consultant argue that the management of the program could be done for less money using state employees within the Department of Insurance.
WHAT’S IN IT FOR OUR MEMBERS? Our members benefit from the additional tax revenue to the State of Delaware and from the economic impact that captive insurance entity formation has in Delaware. Every dollar in revenue to the State generated by this program is a dollar that does not need to be found via higher taxes or fees elsewhere.
THE CHAMBER’S VIEW We are fairly confident that the success of the program has been due in part to the expertise of outside consultants and counsel. Whatever fees paid to these professionals, provided that they are reasonable and consistent with industry practice, are small in comparison to the benefit to the State of Delaware. The practice of retaining outside expertise for the management of the Captive Insurance Bureau should continue under the next Insurance Commissioner.