Connecticut Updates Captive Insurance Law

Connecticut is updating its captive insurance law to provide more flexibility for established captive cells and allow captives to accept and transfer risk using parametrics. The legislation also provides tax benefits for owners of dormant captives.

Connecticut Governor Ned Lamont has signed Public Act 23-15 into law. The legislation, which will become effective on October 1, 2023, includes provisions:

• Allowing captives to accept and transfer risks through parametric contracts. This approach offers businesses coverage for unique and hard-to-place risks. Parametric insurance contracts offer certainty for planning purposes as they will pay out a predetermined amount based on the intensity or occurrence of a specific event. This concept provides businesses with a more efficient and customized method to mitigate risks that are uncommon or challenging to insure through the traditional commercial market.
• Granting greater flexibility to sponsored captive protected cells, enabling them to establish separate accounts to effectively address businesses’ specific insurance needs. This solution aligns with the unique risk management needs of cell participants, while ensuring the protection of assets and liabilities within each account.
• Providing benefits for owners of captives that have stopped doing business. Captives that have no remaining liabilities can apply for a certificate of dormancy, resulting in exemption from paying Connecticut’s minimum premium tax. This exemption not only reduces the financial burden during inactive periods but also allows captives to be easily reactivated when market conditions or insurance needs change.

The U.S. captive insurance market continued to generate profits and surplus gains in 2021 while outperforming the commercial market, according to an AM Best report. The Best’s Special Report, “U.S. Captive Insurance: Stepping in Amid Capacity and Pricing Challenges,” shows AM Best-rated U.S. captives reported a pretax operating income of $1.0 billion, down from the $1.1 billion reported in 2021.

The number of U.S. captives continues to rise, although the growth of captive formations was tempered by the pandemic, as well as ongoing scrutiny from the IRS and greater regulatory and reporting requirements.

For 2022, Connecticut ranked 13th among states that license them with 57, according to the Insurance Information Institute.

Topics Connecticut