Tuesday, March 28, 2023

Cannabis captives a big opportunity, pending further legalisation

  • US domiciles open to licensing cannabis captives, but await further state and/or federal legalisation
  • States report strong start to 2023 licensing activity
  • Hard insurance market, particularly in property, driving new formations

Captive regulators in the United States canvassed by Captive Intelligence at the 2023 CICA International Conference discussed the potential for licensing cannabis captives, as well as the impact of the hard market, new legislation and the 831(b) tax election.

Some form of medical marijuana is now legal in 37 states, while 21 states have legalised recreational marijuana use. The product, however, remains illegal at the federal level, which makes banking and insurance procurement challenging.

For some US domiciles, such as Vermont, while marijuana remains a Schedule I substance under the Controlled Substances Act they will not entertain licensing captives insuring such businesses, but others are more open minded if it has been legalised in their own state.

Although most regulators speaking to this publication were situated in States that had not yet legalised cannabis for recreational use, the majority had still received interest.

Cannabis use in South Carolina is currently illegal, but Joe McDonald, director of captives at the State’s Department of Insurance, said opportunities for captives insuring cannabis business are certainly there, “we’re well aware of that”.

“As soon as either the State or the federal government open it up, South Carolina is primed and ready [to review captive applications],” McDonald told Captive Intelligence.

On Tuesday, 7 March Oklahoma residents voted against legalising cannabis for recreational use in the State despite a boom in marijuana business since it was made legal for medicinal purposes in 2018.

Steve Kinion, Oklahoma’s captive director, noted that the State was a bit of an outlier as it had not yet seen much interest from the cannabis sector.

“No one from the cannabis sector has called me yet and said: ‘Hey, we want to form a captive.’”

Daniel Clements, assistant director of captive insurance at the State of Tennessee, said that there is a cannabis bill currently working its way through the State legislature.

“But we’ve had a good amount of interest from companies coming to us and seeing if we could license those captives,” Clements told Captive Intelligence.

2023 captive growth

It has been a strong start to the year for new captive formations in the United States.

McDonald noted that he expected five new captives to be licensed in South Carolina by the end of the first quarter of 2023. The State had licensed 27 new captives in 2022.

“That being said, South Carolina doesn’t chase numbers,” he added. “We really focus on the quality of the captives we’re trying to attract, but we’re already ahead of the pace from last year.”

Clements said Tennessee had seen strong activity around cell captives in early 2023. The State had 411 active cells at 2022 year-end.

“And fingers crossed, we’re expecting to see a good amount more this year,” he added.

Kinion revealed that Oklahoma has already licensed 3 captives for 2023. “So, I think we’re off to a good start there.”

Sandy Bigglestone, deputy commissioner for captive insurance at the Vermont Department of Financial Regulation, said the State had started the year with five new captives and in recent weeks received six more applications.

“It’s feeling like a going to be a very exciting year for us again,” she said in an upcoming episode of the Global Captive Podcast.


An increasing variety of lines are being written through captives, with captive utilisation also being spread across an array of industries.

Lori Gorman, deputy commissioner of North Carolina’s Captive Insurance Company Division, highlighted that the State had recently seen an uptick in captives writing medical-stop-loss, tenant liability and various cybersecurity coverages.

Sam Komo, Missouri’s captive insurance program manager, said the State had licensed a captive writing warranty insurance for the first time.

“And we weren’t sure how to structure that, so it took us a little while to do, but now we have figured it out, there’s a possibility for more,” he said.

Kinion said that Oklahoma has seen a lot of captive activity around oil and gas companies, as this is a key area of industry in the state. “That’s certainly an area we’ve seen interest in.”

Commercial market

The majority of regulators said the key reason for the increasing utilisation of captives in the United States was the continued hard market for commercial cover.

The hardening market has led to rising rates, limited reinsurance capacity, and more restrictive terms, which has fuelled greater interest in captives.

“We’re finding that captive prospects are talking about the challenges that they’re experiencing in the commercial marketplace on a pretty regular basis,” Bigglestone said.

A number of regulators indicated increasing property rates as a particularly pertinent issue for companies trying to get cover in the traditional market.

“The hardening market in the property sector is making traditional insurance less available and more costly to obtain,” Gorman said.

Kinion said: “Property is the biggest problem”.

RIMS president Jennifer Santiago recently highlighted property as a challenging area for risk managers in an interview released on the Global Captive Podcast.

Writing cyber through a captive is an avenue companies are beginning to explore as a result of rising rates and tightening terms and conditions.

However, Kinion noted that although there has been a lot of discussion around this subject, it is not something he has commonly seen enacted.

“I hear a lot of chatter [about cyber] at these kinds of conferences, but at the moment, I don’t see that being translated into actual captive insurance policy,” he said.

Changes to the captive statute

A number of states have made changes to their captive statutes in order to make their domiciles more attractive.

Gorman noted that North Carolina has pledged to extend its premium tax holiday for two years after redomestication.

The State is also working on specific tax changes that aim to encourage more risk retention groups to domicile in North Carolina.

Clements said Tennessee has recommended a few adjustments to some of its administrative rules to make things a “little easier for the industry”.

“But I think things are pretty well founded at this point, or legislation is in a place that is comparable and competitive to the rest of the industry,” Clements added.

South Carolina has introduced a clean-up bill following feedback from service providers and the local captive association, which McDonald said aims to clarify the intent of existing language in the current statute, and “provide even more autonomy to us as regulators and also to owners and service providers”.

“For example, with sponsored cells, we are reducing capital requirements and offering more flexibility on annual statements and reports,” McDonald added.

831(b) captives

Despite continued scrutiny of 831(b) captives from the Internal Revenue Service (IRS), most regulators noted that although there had been closures, they have not seen large numbers exiting the captive space.

They also said it is unclear whether the closures were specifically because of IRS scrutiny or due to other reasons.

“It’s not been a huge impact on our numbers at all,” McDonald said.

Komo noted that Missouri has not seen a big push from 831(b)’s feeling a need to get out of the industry.

“They feel that they’re operating as they should regardless of that, so we haven’t seen a big jump out of that area,” he said.

“We don’t do anything differently for them that we don’t do for everybody else.”

Clements said the state is still seeing 831(b) formations coming through Tennessee, despite the scrutiny.

“We tend not to focus too much on the federal tax elections that the companies make,” he said.

“Anybody that’s a captive with us, is operating as an insurance company,” Clements added. “So, they have the potential of making and losing money.

“We’re comfortable they’re doing what they’re supposed to be doing, and we have no problem saying that they are operating as an insurance company regardless of if they are an 831(b).”