CONTACT: Ted Cooke Debbie Jo Maust (623) (623) Report and Discussion Regarding Captive Domicile Review

Transcription

1 FAP Agenda Number 5. CONTACT: Ted Cooke Debbie Jo Maust (623) (623) MEETING DATE: September 18, 2014 AGENDA ITEM: Report and Discussion Regarding Captive Domicile Review RELEVANT POLICY, STATUTE OR GUIDING PRINCIPLE: 2011 CAWCD Integrated Strategic Plan Finance: Maintaining CAP's Financial Health PREVIOUS BOARD ACTION/ACTIVITY: The Finance Audit and Power Committee (FAP) receives periodic reports concerning Captive activities. At its September 19, 2013, meeting, the FAP requested the Captive Board to undertake a domicile review. ISSUE SUMMARY/DESCRIPTION: The Captive was formed in 2004 and Hawaii was originally chosen as the domicile of choice due to its mature captive regulatory and financial environment and competitive operational costs compared to other potential domiciles. The domicile review was undertaken at this ten-year anniversary to determine whether there was rationale for a change and whether sufficient benefit existed to justify the costs of changing domiciles. When the Captive was initially established and the domicile selected, the evaluation process considered numerous factors. The primary factors included the captive history in State, expertise of domicile's insurance department staff, regulatory environment and operational costs. The finalists were Arizona and Hawaii. Hawaii was ultimately selected because of its superiority. Arizona's captive insurance program was in its infancy, and Hawaii was a mature domicile and ranked higher on all the primary factors. The same primary factors are relevant today when reviewing domicile choices. A significant change in our Captive occurred in 2012 with the addition of health benefits. While Arizona has matured as a domicile, it is still in its infancy with respect to Health benefits. Hawaii has continued to expand and mature, and was able to add Health

2 coverage without issue. Arizona has expressed minimal knowledge of Health Benefits so would be lacking expertise in this area. Staff reviewed a number of other states for suitability as a domicile for CAP's captive, and concluded that the only viable choices were, once again, Arizona and Hawaii. Vermont could be considered if CAP was setting up a captive for the first time, but would offer no advantage for a costly relocation. Please see the table below. State Maturity Coverage limitations Other Oregon New 2012 Health insurance not allowed Texas New 2013 Texas based companies only - Anticipate expansion in future. Nevada 1999 Statute does not expressly limit, but a review of existing captives show no Health Benefits in coverages written, indicating no expertise in Health Benefit Vermont 1981 Similar in all respects to Hawaii. Largest US domicile & third largest worldwide. No advantage in costs or travel. After completing the initial review, staff requested Marsh to complete a more focused comparison of just Hawaii and Arizona. Marsh's report is attached to this brief. At this time, the primary advantages of Hawaii continue to be its experience and regulatory framework for captives, including healthcare. Arizona's primary advantage is its proximity. After reviewing the relevant factors, more fully described in the attachment to this brief, Hawaii was ranked as the superior domicile. Staff recommendation is to make no changes at this time. Attachment.

3 CAPTIVE DOMICILE REVIEW SEPTEMBER 9, 2014

4 CONTENTS 1. Introduction Domicile History 2 3. Objectives of CAWCD Insurance Company, Inc 3 4. Factors to Consider in Choosing a Domicile Regulatory Environment and Expertise Permitted Coverages Taxes on Premiums 8 8. Administrative Requirements and Operating Costs Conclusion 10 Exhibit MARSH MANAGEMENT SERVICES i

5 1 Introduction Captive insurance companies have long been an attractive alternative to traditional insurance and have become a staple in many corporate risk management programs. In the mid-1980s, during the hard commercial insurance market, the captive concept gained its momentum when some insurance coverages become unaffordable or unavailable. For years, there were only a handful of onshore captive domiciles. Ten years ago, the 4 U.S. states considered to be viable active captive domiciles were Vermont, Hawaii, South Carolina and Arizona. Today, the number of states having captive legislation approximates 37. Some believe in time, all 50 states will ultimately become captive domiciles. The task of choosing a domicile can be a daunting task. This review will focus on 2 domiciles Hawaii (current domicile) and Arizona (home state). In summary, this discussion will entail a review of the history of the domiciles, the objectives of CAWCD Insurance Company, Inc. ( CAWCD ), important factors to consider when choosing a domicile and highlights of the advantages and disadvantages of both domiciles. MARSH MANAGEMENT SERVICES 1

6 2 Domicile History Hawaii s captive law was enacted in At the time of CAWCD s licensure in 2003, Hawaii had approximately 122 licensed captives. By 2013, Hawaii s captive count has grown to 184 active licenses with over $15 billion reported in combined assets. Hawaii has licensed 279 captives since inception and is ranked fourth in the nation for largest captive domiciles and 11 th in the world based on the total number of active captive licenses. In 2003, Arizona s captive insurance program was in its infancy. Arizona enacted captive legislation laws in 2001 allowing for the formation of its first captive insurance companies on July 1, Within five years, Arizona had grown to 93 licensed captives and by 2013, 106 licensed captives. A significant factor in choosing an appropriate domicile includes a review of the experience and available infrastructure of the domicile and certainly these factors weighed heavily in CAWCD choosing Hawaii. As a prudent exercise and after celebrating the captive s 10-year anniversary, the directors of CAWCD requested a comparison between the domiciles be re-visited. MARSH MANAGEMENT SERVICES 2

7 3 Objectives of CAWCD Insurance Company, Inc. ( CAWCD ) Captive owners seek domiciles that will offer stable, predictable regulatory environment and support competitive financial benefits for insurance coverage to enable their businesses to customize their corporate risk management programs and control costs in a manner to best obtain their objectives. Therefore, before choosing a domicile, it is important to have a clear understanding of the parent s overall risk management objectives for their captive. CAWCD received its license to operate as a pure captive insurance company in the State of Hawaii on December 18, The primary objective in forming the captive was to provide stable insurance coverage for the parent company, Central Arizona Water Conservation District ( District ), by ensuring availability of appropriate coverage for lower layers of the District s program, controlling and managing the claims process, developing specific loss prevention/loss control services and stabilizing the changes in self-insured retention, perils covered and premium charges for the District. Today these objectives remain unchanged. CAWCD has streamlined the District s risk management administration and extended the District s risk management approach to provide flexible and proactive risk financing to the District s ongoing operations. MARSH MANAGEMENT SERVICES 3

8 4 Factors to Consider in Choosing a Domicile Although there are many factors to consider in choosing a domicile such as the availability and expertise of support services, minimum capital requirements, investment restrictions, permissible corporate structures and positive legislative activity within a domicile, we believe the primary factors to consider for CAWDC are as follows: - Regulatory Environment and Expertise - Permitted Coverages - Taxes on Premiums - Administrative Requirements and Operating Costs MARSH MANAGEMENT SERVICES 4

9 5 Regulatory Environment and Expertise A healthy regulatory environment is measured by a domicile s ability to strike a proper balance between allowing captive owners the necessary freedom to operate as needed and yet imposing prudent regulatory oversight. While unnecessary, burdensome regulation will cause captives to seek other domicile options, finding a regulator with significant captive knowledge and a pro-business approach to partnering with captive owners to build programs to benefit their companies is critical. Hawaii is one of the few captive jurisdictions with specialized, full-time staff who specialize in captive insurance regulation and development. The current staff of 12 professionals includes certified public accountants and certified financial examiners. Hawaii s recently appointed Deputy Insurance Commissioner and Captive Administrator, Sanford Saito, holds a Certified Financial Examiners designation. He has been with Hawaii s Captive Insurance Branch for 10 years contributing to the commitment and stability of Hawaii s captive industry. Previous to his appointment, Mr. Saito held the position in an acting capacity for a year and prior to that served as a captive insurance examiner. Arizona s captive dedicated staff of 3 consists of a Chief Analyst, Captive Analyst and Administrator. There is also an in-house attorney, Chief Compliance Officer and Assistant Director who work with captives on a part-time basis. Arizona s Department of Insurance Chief Analyst is Vincent Gosz. Mr. Gosz is a Certified MARSH MANAGEMENT SERVICES 5

10 Public Accountant. Prior to joining the Department in March 2013, Mr. Gosz held key financial and regulatory compliance roles in the insurance industry, including several years with a multi-line multi-state property and casualty insurer and a leading medical professional liability insurer. MARSH MANAGEMENT SERVICES 6

11 6 Permitted Coverages Captives are used to mitigate exposure to a wide range of risks and can provide any type of insurance, as long as the laws of the state in which it is domiciled allow the business to be underwritten. In a recent conversation with a staff member of the Arizona Department of Insurance, Deborah Jo Maust was informed that health benefits are not permitted coverages in Arizona. In her further discussion with the Chief Analyst, Mr. Gosz affirmed that Arizona law would probably allow it, but he admitted having limited knowledge of health benefits within a captive. Because the health benefits program comprises the majority portion of CAWCD s premiums, Ms. Maust requested verification that health benefits coverage is a permitted coverage in Arizona. The Marsh Management Services Arizona office has opined that Arizona statute does indeed allow health benefits in captives, with at least one captive currently doing so. MARSH MANAGEMENT SERVICES 7

12 7 Taxes on Premiums Hawaii has a premium tax of.25% on the first $25M in premium with no premium taxes on reinsurance premiums. Arizona does not impose a premium tax, however, does assess a $5,500 annual certificate of authority renewal fee. In 2013, CAWCD premium taxes in Hawaii amounted to $18,683 on approximately $7.5 million in premiums. In addition to premium taxes, recent events have brought the issue of Direct Placement or Self Procurement Taxes ( SPT ) to the attention of captive owners. There are varying opinions as to the applicability of SPT as it applies to captive insurance companies with a majority of captive owners not currently remitting SPT. MARSH MANAGEMENT SERVICES 8

13 8 Administrative Requirements and Operating Costs It is important to consider the administrative costs and operating costs of the domicile in light of meeting the captive s long term objectives. Examinations - Hawaii requires regulatory captive examinations of pure captives at least once every 5 years. Some captive owners welcome regular examinations to provide an indication of good corporate oversight of their captives. CAWCD paid approximately $2,250 in Hawaii examination fees on its initial examination. In Arizona, there are no routine regulatory examinations but a limited scope or full scope examination can be conducted at the discretion of the Arizona Department of Insurance. Annual License Fee Hawaii s pure captives incur an annual license fee of $300 and as indicated earlier Arizona s annual license fee is $5,500. Annual Meetings Both Hawaii and Arizona require that at least one annual meeting be held by the captive s board of directors. Although Hawaii corporate law does not require physical attendance for these meetings, CAWCD board members have followed the accepted practice of attending physically in order to reinforce the objective of conducting CAWCD s insurance and other business in the state of domicile. If CAWCD was domiciled in its home state of Arizona, there would be no travel costs. MARSH MANAGEMENT SERVICES 9

14 9 Conclusion The foregoing discussion highlights just a few of the differences within the domiciles. A more detailed comparison can be found on the attached exhibit. The pros and cons involved with any domicile decision must take into consideration all factors needed to achieve the long-term success of the captive including the domicile s regulatory environment and expertise, permitted coverages, taxes on premiums, and administrative requirements and operating costs. MARSH MANAGEMENT SERVICES 10

15 Domicile Analysis Domicile Comparison Domicile Hawaii Arizona Number of Captives Applicable Law Regulatory Body Permitted Business Solvency Requirements Hawaii Revised Statutes, Title 24, Chapter 431, Article 19 (Enacted on May 1986) Captive insurance Branch within the insurance Division of the Department of Commerce & Consumer Affairs Direct Insurance - All commercial lines Reinsurance - Any line of insurance, upon approval of the insurance commissioner. Minimum capital and surplus is determined on a case-by-case basis. Minimum Capital Class 1 - Pure Captive (assumed business only): $100,000; Class 2 - Pure Captive (direct and assumed business) : $250,000; Class 3 - Risk Retention Group and Association: $500,000; Class 4 - Protected Cell Captive: $500,000; Class 5 - Reinsurance or Excess Insurance Company: As determined by insurance commissioner Arizona Revised Statutes and other applicable parts of Title 20 Arizona Department of Insurance Direct Insurance All commercial lines Employment practices liability risk permitted effective September 26, 2008 Reinsurance Any line of insurance upon approval of the insurance commissioner Minimum capital and surplus is determined on a case-by-case basis. Pure Captive: $250,000; Group Captive: $500,000; Agency Captive: $500,000; Protected Cell Captive: $500,000; Reciprocals: $500,000; Pure or Group Reinsurers: one-half of the above indicated amounts Premium Tax Investment Restrictions Intercompany Loans Direct insurance premium is subject to tax of:.25% ($0 - $25mm);.15% ($25 - $50mm);.05% ($50 - $250mm); 0% thereafter. Reinsurance premiums assumed and premium previously taxed in another jurisdiction are not subject to premium tax. No minimum, maximum premium tax is $200,000. Funds must be invested in accordance with regulations governing all Hawaii insurers, except that captives (other than RRG's) may obtain approval from the insurance commissioner in accordance with a strategic investment policy. Captive may make a loan to its parent or affiliates, subject to the Commissioner s approval. No premium tax, direct or assumed Group, agency, and protected cell captives must comply with the investment requirements prescribed in Chapter 3, Article 2 of Title 20. A pure captive insurer is not subject to restrictions on allowable investments; but an investment policy must be on file. Only pure captive insurer may make loan to its parent or affiliates, subject to the Director s approval. MARSH September 10,

16 Domicile Analysis Domicile Comparison, cont d Domicile Hawaii Arizona Reserve Requirements Actuarial opinion on reserves required annually Actuarial opinion on reserves required annually with automatic waiver for captives meeting certain conditions (small company exemption or hardship waiver). Audit Requirements Within 6 months, captive insurer s financial statements shall be audited annually by an independent certified public accountant. Not later than 90 days after the end of the captive insurer's fiscal year, captive insurer shall submit its financial condition that is verified by oath of two of its executive officers and that is supplemented by additional information as required by the director. GAAP is acceptable unless the Director requires SAP. Within 6 months, captive insurer's financial statements shall be audited by an independent certified public accountant unless the director determines that an audit is not necessary. Captives meeting certain conditions receive an automatic waiver (less than $1.0 million in direct premium written and less than 1,000 policyholders). Annual License Fee Regulatory Examinations Annual License Fee: Class 1 or 2 Pure Captive: $300 Class 3 Risk Retention Group and Association: $500 Class 4 or 5 Protected Cell Captive and Reinsurance or Excess Insurance Company: $1,000 Regulatory examinations are conducted once every 5 years, (the first exam for risk retention groups captives be conducted no later than 3 years after formation). The Insurance Commissioner, however, retains authority to examine a captive as often as deemed appropriate. Annual License Fee: $5,500 Regulatory examinations are conducted once every 5 years for risk retention groups only. No routine regulatory examinations for pure captives, but a limited scope or full scope examination can be conducted. MARSH September 10,

17 Domicile Analysis Domicile Comparison, cont d Domicile Hawaii Arizona Local Office Requirements Principal office in Hawaii; use of local management company and lawyer advised; books and records must be kept in Hawaii. Maintain principal place of business in Arizona. A captive insurer shall engage a manager who is a resident of this state. The captive manager shall maintain the books and records of the captive insurer's business, transactions and affairs at a location that is in this state and that is accessible to the Director. The captive manager shall promptly notify the director of any failure of the captive insurer to comply with this article. Requirements for Physical Meeting in Domicile One meeting annually; can be teleconference The director may require a captive insurer to discharge a captive manager for failure to substantively fulfill the captive manager's duties under this article. One meeting annually MARSH September 10, 2014

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