- Regulator, 0% premium tax, and approach to third party risk appealing to large tech
- Many captive service providers have offices and employees in the State
- Potential changes to dormancy, capitalisation and fees due date in the works
The appeal of a business-friendly regulator and 0% premium tax are some reasons why Arizona continues to be an attractive domestic domicile option within the United States.
The Arizona Department of Insurance and Financial Institutions licensed 17 new captives in 2023, compared to 14 in 2022, taking its year-end total to 176.
The activity in Arizona translates to a net increase of 14 captives with the latest annual captive premium totalling $11.96bn, a 13.7% increase from the 2022 figure.
The regulatory environment and premium tax benefits have resulted in the State becoming a hot bed for captives owned by behemoth technology companies.
Apple and Microsoft are two of several large technology firms with captives domiciled in the State.
Large technology companies are also attracted to the jurisdiction because of its auspicious legislation when it comes to writing third-party risk, with a number of technology companies taking advantage of this.
“Arizona understands big companies, they understand that third-party business is all connected business as well,” Jason Flaxbeard, senior managing director at Beecher Carlson, told Captive Intelligence.
“The laws allow businesses to write connected business, which is terrific, and that is what is attracting these big companies.
“They understand what big companies want. It’s a light touch domicile, and because it’s a light touch domicile, big companies like it.”
However, it is not just large technology companies with captives domiciled in Arizona, with the State housing captives from a wide variety of industries.
Finance, health care, retail trade, energy, utilities, real estate and transportation are some of industries with captives domiciled in Arizona.
“When I look at the Arizona statistics from an industry perspective, the largest captive category is finance and insurance, which is really the largest section of an industry overall and that’s certainly consistent with our Marsh book overall,” Allan Smith, client service leader at Marsh Captive Solutions, said.
Smith, also a board member at the Arizona Captive Insurance Association (AzCIA), said the second largest industry is healthcare, while the third is tied between construction and manufacturing.
“While there’s certainly some jumbo tech and others that have recognised the value of Arizona, I wouldn’t say there has been a big drive just because of tech,” he told Captive Intelligence.
The majority of captives domiciled in Arizona are pure captives, but the State also has industry group captives, agency captives, association captives and protected cells.
“Domestic Risk Retention Groups are also regulated by the captive insurance division,” said Victoria Fimea, chief captive analyst at the Arizona Department of Insurance and Financial Institutions.
Fimea noted that the Department is currently witnessing large amounts of property insurance being placed into captives.
“It’s a very hard market, so we have some captives that are moving forward with just property, which we may not have seen two or three years ago,” she told Captive Intelligence.
Fimea said she was also seeing a fair number of captives writing general liability, professional liability, and some cyber, “so it is still a blend of various coverages”.
Most of Arizona’s captives are owned by corporations based outside of Arizona.
“This speaks to our captive statute and what we’re able to attract to Arizona,” Fimea added.
“If we look at our economy, Arizona is not a headquarters economy, so there are many companies that come to the greater Phoenix area and open regional headquarters, or they might have a plant facility, but they’re not headquartered here.
“We have captives whose owners are from all over the United States, and we have some captives where the ultimate parent is a corporate entity located outside of the US.”
Fimea said one thing that speaks to the strength of the captive industry in Arizona is the number of captive service providers with offices in the State.
“The captive industry in Arizona is not just board members flying in, staying at a hotel, having their board meeting and going to dinner, but we have people who live and work in the greater Phoenix area that support and continue to grow our captive industry,” she said.
Premium tax
Not having a premium tax means Arizona makes understandable economic sense for captives to domicile in the jurisdiction, particularly those very large firms with significant premium.
Instead of receiving revenue from premium tax, the State focuses on the financial benefits of having numerous large captives domiciled in the jurisdiction.
“Arizona recognises these ancillary benefits and has decided to approach it this way, acknowledging the broader economic benefits beyond just premium tax revenue,” Anjanette Fowler, managing director at PNC, and board member at the AzCIA.
“They’re coming to Arizona to have their meetings and are utilising in-State service providers.”
However, the lack of money received by the Department through premium taxes does limit the budget it has to spend on items such as staffing.
“That’s part of the trade-off when trying to be business friendly, you make do with a little bit with less,” Smith said.
Flaxbeard said that if anything slightly worries him about Arizona long term, “then it’s at some point the jurisdiction not having enough money to regulate to the best of its ability due to the lack of funds coming into the regulator from premium tax and service fees”.
Regulator
Despite the resource concern, captives are attracted to the State by its business-friendly regulator which is willing to work with companies constructively on captive utilisation.
“A lot of the big companies like to go their own way and they’ve got a strong plan in terms of how they want to use their captive and they generally want a partnership with regulators that allows them growth and innovation,” Flaxbeard added.
Flaxbeard said the way he thinks about it, “because it’s kind of a self-monitoring state, is that they give a lot of power to the owner of the captive”.
He noted that the captive manager is empowered to act as a de facto regulator in partnership with the State.
“Any changes in the captive business plan, potential solvency issues, changes in policies, etc., all come through us, through to the regulator,” he said.
“We’re doing a lot of policing for the regulator as well, which we’re happy to do because it’s a good domicile.”
Fimea said the Department is always willing to listen to an applicant when they have questions.
“If a question is unique, then we can vet the question through leadership at the Department,” she said. “We are always willing to listen to questions.”
Kristen Peed, head of corporate risk at Arizona captive owner Sequoia, said that overall, she has been really satisfied with the responses that she has received from the regulator.
“I think it helps that we have a Strategic Risk Solutions office there as well, and Anjanette Fowler is also located in Phoenix, so we are also able to access our investment manager right there on site,” Peed said.
She highlighted that Sequoia has an office location in Tempe, making it convenient for the company to set up its captive in Arizona and have its board meetings in the State.
“The other thing that we contemplated was the tax treatment of captives in Arizona, and that was appealing to our leadership,” she said.
Sequoia currently only includes its worker’s compensation deductible in the captive for Sequoia One, which is the company’s PEO operations.
“We have 1000 or so clients and their worksite employees are covered by this,” she explained.
“We’re looking at other opportunities for placing risk in this captive or a new one, such as medical stop loss for clients, and occupational accident coverage for clients’ gig workers.”
Captive statute changes
Arizona is looking at making changes to its captive Statute to allow captives to register as dormant, as well as reducing its minimum capitalisation requirements for captives that are not single parent.
“Our statute as well as our regulations have remained largely the same for many years,” Fimea said.
“One of the issues we are looking at now that we’ve grown and have more captives domiciling here in Arizona, is whether to allow dormancy.
“We may also look at whether we should adjust the statutory minimum capitalisation for captives other than pure captives.”
Peed said it’s going to be interesting to see how Arizona may begin to model its legislation to more closely mirror the “gold standard” of Vermont.
“We see Connecticut following suit of Vermont and doing certain things like bringing down capital requirements for core facilities, whereas Arizona still requires $500,000 for the core capital, which is high,” she said.
“Connecticut’s is only $75,000 and it’s going to be incumbent upon Arizona to stay abreast of what the regulatory environment is in other captive States if they want to continue to attract companies to set up shop there.”
Smith said the State is trying to be proactive and recognising that captives can be a good alternative risk financing strategy, not just for very large companies.
“The goal is to update the statutes to help attract companies of different sizes to this tool,” he said.
Arizona is also exploring the possibility of changing the date when captive fees are due to be paid to the Department of Insurance and Financial Institutions.
“Right now, it’s due 90 days after the end of a captive fiscal year, but we may move that due date for all captives to a specific date in the fall,” Fimea said.
“The reason for this potential change is the State’s fiscal year, and how long we must use the renewal fees to support the captive insurance division.”
Fowler said coordination of the fee date is something that has been discussed at the AzCIA board level numerous times.
“The goal is to help with budgeting and timing,” she explained. “Organisations have gotten used to the current timing, but it can limit the Department’s budget and expense management.”
“This issue is still up in the air, but I don’t think anyone is opposing it.”