Maryland Insurance Administration: No State Economic Benefit from Establishing Captive Industry

Finding no evidence that the state of Maryland would realize any actual economic benefit from becoming a domicile for captive insurers, the Maryland Insurance Administration (“MIA”) published a report today, January 2, 2014, in which it recommended against establishing a corresponding industry.

The MIA advised against moving forward with captive enabling legislation, ” . . . because there is little insurer demand for traditional captive insurers and because the industry has developed in ways that have caused considerable regulatory concern at the federal and state levels.”

To view the document, entitled “Report to Examine Methods to Establish and Properly Regulate a Captive Insurer Industry in the State of Maryland,” click here.

“To become a thriving captive domicile today,” the MIA explained, “a state must be willing to relax important regulatory safeguards.” 

According to the report, would-be captive insurers are attracted to domiciles with a high-risk appetite, and that demand few hurdles to formation, have low premium taxes and fees, have minimal solvency and capital requirements, and require little reporting.

If Maryland were to consider captive-related legislation, the MIA recommended prohibiting certain types of captives currently under scrutiny by the Internal Revenue Service and the National Association of Insurance Commissioners.  Any proposals should ensure that only legitimate insurance transactions would be permitted and that third-party claimants would not be put at risk, the MIA cautioned.

As part of the study used to create today’s report, the MIA examined:

• Regulation of captive insurance industries in other states, including the mechanisms for funding their regulatory models;
• The potential benefits of hosting a captive insurance industry in Maryland to different classes of policyholders, along with the associated costs of captive insurance compared with insurance procured through traditional insurance underwriting and brokerage;
• The impact on the State of Maryland and its domestic insurance industry, as well as the potential expansion of the insurance industry, and related professionals and their activities, and the effect of newly available captive insurance on existing traditional Maryland insurance underwriting and brokerage;
• The need for different or additional consumer protection and financial controls for customers of captive insurers, compared with customers of traditional Maryland insurers;
• The effectiveness, cost and long-term viability of alternative regulatory or market mechanisms addressing the same or similar markets that have been implemented or are being considered in other states; and
• Any additional matters the MIA considers relevant to assessing the possibility of establishing a Maryland captive insurance industry.

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