Since the passage of the first captive law in the District of Columbia in 2000, DC has become one of the premier captive domiciles in the United States. In 2006, the captive law was significantly enhanced by the enactment of protected cell legislation. DC was the first domicile in the nation to have an incorporated cell capability, which has proven to be very popular. The DC Council recently passed the Captive Insurance Company Amendment Act of 2014 (“2014 Amendments”), which was designed to streamline the chartering, licensing and operation of DC domiciled captives.
One of the most attractive aspects of the DC Captive law is its protected cell regime. However, the minimum capitalization requirements have proven to be an unnecessary burden. The 2014 Amendments grant the Commissioner the authority to reduce or eliminate the minimum capital requirement for both the cells and the “core” (the cell representing the protected cell company), so long as the capital is adequate for the “type, volume and nature of insurance that is transacted.…” This decision is placed entirely within the discretion of the Commissioner, and means that, going forward, no cell will be required to have excess capital.
A second problem addressed by the 2014 Amendments is the concern about the accessibility of captive information to the public under the DC Freedom of Information Act (“DC FOIA”). The new law provides an express exception from DC FOIA for business information, financial pro formas, contracts and other captive documents. This information will not be subject to discovery or subpoena in a civil suit. However, it can be shared with other regulators and the NAIC so long as those authorities are willing to maintain the confidentiality of the information.
The third significant improvement to the law is that the Commissioner will have the discretionary authority to waive the requirement that a captive be examined at least once every five years under the following conditions: (a) the captive has filed unqualified audited financial statements since its last examination; (b) the Commissioner finds that the audited statements demonstrate that the captive has sufficient surplus to satisfy all of this obligations to its policyholders and creditors; (c) the captive is in compliance with all applicable DC laws and regulations; and (d) the captive is not a risk retention group (“RRG”). This latter requirement is due to the multi-state nature of RRGs. The value of an examination for a single parent captive, or really any captive that only covers first party risk, has long been subject to question when qualified auditors have already examined the captive each year and signed off on the bona fides of its financial activity. The cost of the examination of a single parent captive seemed unreasonable in this context.
The 2014 Amendments made a few other changes to improve efficiency. The Unfair Claims Practices and Claims Settlements Act were made applicable to DC – domiciled RRGs, these RRGs will also be required to file quarterly statements (which had been required by the Department of Insurance, Securities and Banking previously), and all references to “segregated accounts” were removed from the law to avoid confusion.
In sum, the DC captive law has been improved by addressing three problematic areas: minimum capitalization for cells, the protection of confidential information, and the burden of unnecessary and sometimes excessively expensive financial examinations. These are significant changes and should help DC maintain its position as one of the most efficient and responsive captive domiciles in the United States.