Connecticut's Captive Insurance Model Could Offer Hope for California Homeowners

Even before the recent wildfires ravaged Southern California, the state's homeowners' insurance market was in a precarious position, with rising premiums and shrinking coverage options for property owners. 

But an innovative captive insurance program created to solve another homeowners' insurance challenge on the East Coast may offer a solution for this West Coast problem, according to Michael Maglaras, Principal of Michael Maglaras & Company, a captive insurance consulting firm, and superintendent of the Connecticut Foundation Solutions Indemnity Co., Inc. (CFSIC). 

The Connecticut Captive Model 

CFSIC was established to address a crisis involving pyrrhotite-infested concrete, which has compromised the foundations of thousands of homes in four states: Connecticut, Massachusetts, Vermont, and New Hampshire. Homeowners began noticing web-like cracks in their foundations beginning in 2005, but when they filed claims seeking coverage to replace them, insurers balked, asserting that no named peril was involved. Litigation ensued, and the Connecticut Supreme Court ultimately sided with the insurers in 2020. 

Meanwhile, then-Governor Dannel Malloy approached Mr. Maglaras about potentially using Connecticut's captive statute to address the crisis solely in Connecticut. A license was issued in 2018, and the captive was launched in 2019 with funding trickling in from a variety of sources over a multiyear period. 

Since its inception, CFSIC has taken in more than $200 million in revenue from the following sources.

• $150 million from the Connecticut Bond Commission
• $55,233,366 from the Health Homes Fund, a $12 assessment placed on all homeowners' insurance policies issued in the state

CFSIC anticipates receipt of an additional $50 million in Connecticut Bond allotment in two annual installments of $25 million each, as well as $55 million in Healthy Homes surcharge funds between now and June 30, 2030. 

To date, CFSIC has paid claims totaling $155,280,764, rationing payments as funds come in since booked unfunded claim liabilities carried on the captive's balance sheet exceed its assets at any fixed point in time, according to Mr. Maglaras. Although covered homeowners do not pay premiums to the captive, they are required to contribute about 8 percent of remediation costs, which average $164,000 per foundation. 

The program's success has largely been due to its careful financial management and the strategic use of what Mr. Maglaras calls "a public-private partnership." Since its inception, the captive has been under an expense cap of 10 percent of annual proceeds, but Mr. Maglaras has managed the entire company at just around 3.9 percent each year. This efficiency ensures that funds are directed primarily toward resolving homeowners' issues. 

A Potential Solution for California 

California's homeowners' insurance market is currently under immense pressure due to the increasing frequency and severity of wildfires. Many insurers are either raising premiums significantly or pulling out of high-risk areas altogether. This has left countless homeowners struggling to find affordable coverage. 

Mr. Maglaras sees potential for applying Connecticut's model to California's wildfire-driven insurance crisis. The flexibility of the captive insurance framework allows it to be tailored to address specific issues that the commercial market struggles to manage, he said. 

"If state government or federal government can't bring the expertise needed, we have it in the captive insurance marketplace," Mr. Maglaras explained. "We have the talent, particularly with respect to climate change issues." 

Key Lessons from Connecticut 

Mr. Maglaras highlighted how several aspects of Connecticut's success could be replicated in California. 

• Creating a public-private partnership. Connecticut's approach involved leveraging state funds alongside private-sector expertise. "Governor Malloy said, 'Let's take our money and your expertise and marry them to fix a very specific problem that the commercial market can't or won't address,'" Mr. Maglaras recalled. 
• Enforcing efficient resource allocation. The captive's expenses are capped at 10 percent of annual proceeds, with actual costs averaging just 3.9 percent. This efficiency ensures that funds are directed primarily toward resolving homeowners' issues. 
• Utilizing data-driven decision-making. "We have six terabytes of data on the pyrrhotite natural disaster," Mr. Maglaras stated. "Predictive algorithms enable us to project the future with pretty good accuracy.... If we can [apply] this here, we can apply it anywhere." 

A Blueprint for Climate Resilience 

California's wildfire crisis presents a complex challenge, but Mr. Maglaras believes the captive insurance model offers a scalable and adaptable solution. "What we've done here is groundbreaking, innovative, and cheap to administer," he said. "It's proven it can help people at the local level confront climate change and related problems." 

One of the key advantages of the captive model is its ability to adapt to evolving risks. As Mr. Maglaras pointed out, the same framework that addressed Connecticut's concrete crisis could be modified to handle wildfire-related risks in California. "The captive insurance model is incredibly versatile," he said. "It's a structure that other states can adopt to address their unique challenges, including alternatives to flood coverage.

"We've already been approached by legislators here in Connecticut to see if we can provide assistance to farmers who can no longer obtain or afford flood coverage," he said. "This model can expand to pandemic coverage, it can expand to business interruption coverage and flood coverage, and it can expand to help homeowners cover larger deductibles, which will now be required by insurers on homeowners' coverage on both coasts of America. I'm predicting a tremendous renaissance in the use of captives where public-private partnerships can help homeowners confront climate change and related problems."

Challenges and Considerations 

Implementing a similar program in California would require careful planning and cooperation between state officials and private-sector experts. Funding would be a critical factor, as would the establishment of clear guidelines for managing claims and liabilities. 

Mr. Maglaras emphasized the importance of transparency and accountability. "The public needs to see where the money is going and understand the scope of the problem," he said. "That's how you build trust, assure funding, and chart the program's success." 

For example, CFSIC was designed to provide transparency about the extent of the problem. "We didn't want to keep two sets of books—one for funded liabilities and another for applicants awaiting funding," he said. "We wanted state government to see the totality of the problem." 

This approach led to the insurance department's approval to recognize liabilities even without immediate funding, helping highlight the severity of the crisis. Despite these financial complexities, the program has always remained cash-positive.  

"If I physically had to shut this captive down today, I would have more cash on hand than contractual commitments to remediate foundations," Mr. Maglaras noted. 

Looking Ahead 

As California navigates its wildfire-driven insurance crisis, the lessons from Connecticut's foundation replacement program may provide a blueprint for resilience. The success of the captive insurance model in addressing complex, large-scale problems underscores its potential as a tool for tackling climate-related challenges, Mr. Maglaras believes. 

"This is about more than just insurance," he said. "It's about creating a system that helps people rebuild their lives and protect their futures. That's what we've done in Connecticut, and it's what California can do, too." 

"The story has yet to be written about the unique and novel ways that captives are now being used, and will be used in the future, not only to benefit businesses and balance sheets but to help individual human beings cope with what is beyond their control," Mr. Maglaras said.