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By DAVE LENCKUS, who has covered the captive insurance industry for more than two decades

Step into a meeting with a captive insurance regulator, and the personality behind the desk could be gregarious, firm or quiet. The conversation at first might be small talk, or it may turn immediately to reserving issues.

The captive industry has been finding out in four prominent U.S. domiciles since late last year and in a couple more leading domiciles since 2008. For various reasons, from retirements to private-sector opportunities, the face of regulation has changed recently in Vermont, Delaware, Utah, Nevada, Arizona and Hawaii. Those six domiciles are home to around 1,100 captives, about 70 percent of the U.S. total.

Some industry observers say a strong personality can drive captive regulation. Others contend that an individual's philosophy or experience influences them more.

What does a captive applicant or owner want in a regulator?

They "want to be impressed," said Julie S. Boucher, the Burlington, Vt.-based leader of the U.S. Captive Solutions practice for Marsh Inc. "A larger-than-life extrovert is wonderful, but it's not needed."

"I think personality plays a huge role," said Ann Wick, the Scottsdale, Ariz.-based president of captive manager Strategic Risk Solutions (Ariz.) Inc. Captive laws "are not just black and white," she said. They often are subject to interpretation, so captive owners have to assess "how open are (regulators) to brainstorming."

Therefore, a personality trait that captive applicants should look for in a regulator is whether he or she is "approachable," said Nancy Gray, the Burlington-based regional managing director, Americas, at Aon Global Insurance Managers.

Some regulators clearly have no appetite for captives that underwrite auto warranties, medical-malpractice liability, or catastrophe risks such as earthquake and windstorm, said Bruce J. Molnar, the Irvine, Calif.-based chief executive officer of captive manager Alta Holdings LLC.

Those regulators who will work with captive owners to establish such facilities have the confidence to do so, which is born of experience with those risks, Molnar said. So knowing regulators' personalities "is vital."

Another captive manager official, however, did not attribute regulators' varying risk appetites to their confidence or approachability. Instead, Jon Harkavy, the Washington-based vice president and general counsel for captive manager Risk Services LLC., likened those differences to the varying strike zones that baseball umpires adopt despite rules that establish a standard zone.

But other observers say different factors impact regulation more.

For example, a regulator's philosophy about government oversight is more important, asserted captive tax attorney Chaz Lavelle, a member of Greenebaum, Doll & McDonald in Louisville, Ky.

A domicile's growth is a function of the regulator's "dedication to being business friendly and user friendly," he said.

While personality plays a role, the "experience and knowledge they bring to captive regulation" are more important, Gray said.

Boucher agrees. Irrespective of personality, experience fosters a willingness to take greater chances, she said.

Regulators' experiences also can work against captive owners, said Jason Flaxbeard, the Denver-based senior managing partner at Beecher Carlson Insurance Services LLC. For example, he noted, a facility's financial problems changed the risk appetite of former Hawaii captive regulator Craig Watanabe, who entered the private sector in January 2009.

"Yes, it affected me," agreed Watanabe, referring to the failure of an auto warranty risk retention group in 2003. "We didn't do that anymore," he said, referring to licensing such facilities. Watanabe now is a vice president and the chief financial officer of DTRIC Insurance Co. Ltd. of Honolulu.

Each regulator "will have a point of view on the industry" based on experience, so understanding their background is important, said Robert "Skip" Myers, general counsel for the National Risk Retention Association and a partner with the law firm Morris Manning & Martin LLP in Washington.

"Probably, it's an amalgam" of personality, philosophy and experience that develops over time, said Dennis P. Harwick, the St. Petersburg, Fla.-based president of the Captive Insurance Cos. Association.

Len Crouse, who retired as Vermont's captive regulator in June 2008, was a perfect example, Harwick said. Crouse was "by the book" early as a captive regulator, Harwick said. But as Crouse became seasoned, he combined his financial background, his experience and his ability to measure up individuals.

In a well-established captive domicile, though, a regulator's personality, philosophy and experience might have little relevance. Vermont is an example, said Gray.

David Provost, deputy commissioner of captive insurance in Vermont and Crouse's successor, agreed. Observers routinely referred to Crouse as a "larger-than-life" personality who significantly influenced captive growth nationwide, but captive regulation has not changed appreciably since Crouse retired.

Whatever their impetus, most of the new regulators intend to make an imprint in their domiciles by promoting captive growth.

THE NEW CAPTIVE SHERIFFS

In Vermont, the largest U.S. domicile now approaching the 900 total licensed captives milestone, Provost, who has been with the Vermont Department of Banking, Insurance, Securities and Health Care Administration since 2001 and before then held positions with several captive managers, has a few regulatory "tweaks" planned this year to encourage further growth, he said.

For example, for life insurers seeking relief for their Triple-X reserves, Vermont is allowing special purpose captives for securitization transactions.

And, as in 2009, the domicile will attempt to make captive mergers and consolidations easier, so Vermont is more attractive to parent companies that are redomesticating, redomiciling and consolidating their facilities.

To the south in Delaware, Steve Kinion, who has a regulatory, insurance industry, legal and military background, became the director of Delaware's Bureau of Captives & Financial Insurance Products on Aug. 1, 2009.

Aon's Gray said Kinion has adopted more of a "team approach" compared with Delaware's previous director, who "was the face of the domicile."

Kinion pointed out that the director's staff was expanded from two to seven after he took office as the insurance department strengthens its commitment to captive growth. To promote that growth, Delaware will encourage employee benefits captives and facilities that would cover business-interruption losses after a terrorism attack.

In addition, because insurers that are members of the Federal Home Loan Bank System have access to federal funds for various uses, including economic development, Kinion is exploring the development of captive insurers that could access the system. He said he expects to see many applications for these types of captives this year.

The department in late January licensed the world's first serial captive insurer, and it has applications for two more, according to Kinion. Like a cell captive, a serial captive allows different businesses to corral their liabilities and assets. Unlike a cell, however, a serial captive is subject to a single minimum premium tax, is administered by a single manager and has only one board of directors.

Kinion noted that Delaware is the only U.S. captive domicile that allows serial captives, which is an initiative of Insurance Commissioner Karen Weldin Stewart.

Out west in Utah, Captive Insurance Director Ross Elliott's captive management experience will help him be "creative and open-minded" as a regulator, according to Wick of Strategic Risk. Elliott was appointed last August. Before the insurance department recruited him, he was Alta Holding's vice president for Utah operations.

Elliott said that, although former regulator Donnie Spann spent his career in insurance regulation, the two "professionally and personally" have a similar eye for detail. He said his "challenge" will be to attract group captives and risk retention groups. In addition, Utah is vying for larger parent companies.

The captive division this year also will sort through the state's captive law for inconsistencies so the legislature can rectify them in 2011, Elliott said.

In Nevada, Michael Lynch assumed his captive regulator duties as deputy commissioner last August. He previously was a state government lobbyist for 780 company clients involved in real estate development, construction and insurance. He lobbied on issues including workers' compensation and group-health insurance.

Lynch foresees expanding his predecessor's efforts to promote Nevada as a captive domicile.

He also is expanding efforts to assist captive owners. He plans to guide them in developing a facility that, from its earliest planning stages, is in compliance with the state's captive law so problems do not arise during the application process. He also wants to help captives remain in compliance rather than wait to discover problems during a triennial examination.

Expanded authority will help him achieve those goals, he said. Unlike his predecessor, Lynch also oversees the state insurance department's corporate and financial reporting, or financial examinations, division, which he plans to tap to assist captive owners.

Risk Service's Harkavy said that, although Lynch will have to work through "a learning curve," he is knowledgeable, and regulation in the state has been "pretty seamless" so far.

In Arizona, as in Delaware, regulation is "more of a committee format," according to Gray.

The critical difference is that budget-challenged Arizona cannot afford to replace former regulator Rod Morris, who left in February 2008. Stephanie Lefkowski, the department's soft-spoken chief analyst, has been handling those duties. But Insurance Director Christina Urias typically runs important meetings. And Lefkowski's immediate supervisor, Assistant Director of Financial Affairs Steve Ferguson, usually attends meetings too.

Wick described Lefkowski as "very accessible and very responsive." But because of staffing shortages, Lefkowski seems pressed for time, Wick said.

Lefkowski, who has a financial background, conceded that her workload prevents her from developing the marketing expertise that Morris had. However, she noted, Arizona over the last two years has attracted some Fortune 500 companies.

Wick did compliment Arizona's regulators for the educational conference they produced in January 2009 on the problems they were encountering with regulatory filings.

The biggest change in the domicile is a recent general insurance code revision that now requires all insurers to submit their actuaries' recommended reserving range.

In Hawaii, George W. Sumner III, a former banking executive who developed investment strategies for captives, became the Aloha State's deputy commissioner and captive insurance administrator last October.

Wick described Sumner as "fairly outgoing"--more so than Watanabe--and "good on marketing." Until he is comfortable with the technical side of regulation, as his predecessor was, he can rely on his staff for technical expertise, she said.

Sumner said that he recently earned a designation in captive accounting from the International Center for Captive Insurance Education.

Sumner also said he plans to be "as open as possible to ideas and accommodating where we can."

For example, the captive law provision requiring captive owners to hold annual meetings in the state will be interpreted to allow--as the state's separate corporation law directly permits--captive owners to call into their annual meetings.

In addition, proposed administrative rule changes under review would "make it easier to do business, without jeopardizing solvency," Sumner said. If a captive is taking less risk than planned in its business plan, for instance, the rules currently require the owner to amend the plan.

"We're looking to change that," he said.

Risk Services' Harkavy asserted that even though captive laws and regulations are very similar nationwide, captive owners and applicants have to understand the differences--which sometimes are only nuanced--among the domiciles and their regulators.

"It's always a matter of different horses for different courses," he said.

In any case, Michael Mead, president of Chicago-based captive company consultant MR Mead & Co., observed about most captive insurance regulators: "It takes a unique personality to want to work that hard for so little money."

March 1, 2010

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