Self-Insuring Worker s Compensation through a Tennessee Captive

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1 Self-Insuring Worker s Compensation through a Tennessee Captive Presented by Keith Fawcett, CPCU, ARe Brentwood Reinsurance Intermediaries, Inc. Norman Chandler, CPA, CPCU Taylor Chandler, LLC

2 New options for self-insurers Improved captive law signed into law by Governor Bill Haslam in June 2011 includes a new option for Workers Compensation selfinsurers: (a) (8) a captive insurance company may only issue policies of workers compensation insurance to an insured or affiliate who otherwise qualifies and maintains its qualifications as a self-insured under this title. Tennessee is one of the few states that allows employers to write their own WC policy directly through a captive.

3 Who qualifies? Any employer who qualifies and maintains its qualifications as a self-insured Self insurance qualification includes Minimum of $350,000 WC premium in Tennessee Minimum security of $500,000 Actuarial opinion on self-insured feasibility Excess insurance (specific and aggregate) Three years of loss runs & experience mods Three years of audited financial statements

4 Financial qualifications Self-insured employer must have Positive working capital Positive net worth $500 for the non-refundable application fee Captives will have similar requirements Application fee is $675

5 The need for qualification Self-insurers and captives are not covered by the State Guaranty Fund, a mechanism established to protect policyholders from the effects of insolvent insurers. The State has to establish security that will cover the unpaid claims liabilities of self-insured entities should they default on their claims obligations. The guaranty fund has limitations on the size of employers who qualify for assistance in the event of an insurers bankruptcy. The guarantee fund does not provide complete protection to larger organizations.

6 What type of captive? Pure or Single Parent Captive Insurance Company means any insurance company that insures risks of its parent and affiliated companies or a controlled unaffiliated business or businesses may be incorporated as a stock insurer with its capital divided into shares and held by the stockholders, as a nonprofit corporation with one (1) or more members, or as a manager-managed limited liability company.

7 Advantages of a captive versus self-insurance Potential costs savings premium tax Flexibility Other lines of business Ability to partner with fronting carrier to cover other states Direct access to reinsurance markets No requirement to provide audited financial statement of parent organization

8 Disadvantages of a captive versus self-insurance Slightly higher administration costs Captive manager fees Audits State examinations Possible limitations on reinsurance Limits Aggregate

9 Key decision points Premium size Administrative costs Can it be included in an existing captive Does it provide a solution beyond WC Tax treatment

10 Federal Income Tax If taxed as an insurance company, the captive may deduct future claims payments, also known as case reserves. Depending on the premium volume, the captive may qualify as a small insurance company and be taxed only on its investment income.

11 Taxation issues State premium taxes Self-Insurance 4.4% of guaranteed cost premium using a 1.35 Loss Cost Multiplier (LCM) Captive 0.4% of the captive premium using the rates filed with the DCI. Subject to a minimum of $5,000 and a maximum of $100,000

12 What s different? Captive must have a minimum of $250,000 unimpaired paid-in capital and surplus Must have an approved captive manager Must submit a report of financial condition on a GAAP basis due by March 15th Will be audited every three years by the TDCI but may be extended to five years by the commissioner subject to an independent auditors report

13 Operational Costs Expense Self-insured Captive Difference Claims & TPA Same Same Loss Control Same Same Excess (Re)Insurance Estimated Tennessee Guaranteed Cost Premium: $2,000,000 Same Same Probably Collateral Cost Same Same Actuarial $8,000 $14,000 Annual rate filing Captive manager $25,000 Legal $3,000 $8,000 first year Premium Tax $88,000 $8,000 Financial Audit $20,000 $10,000 Entire org / Captive State Audit $3,500 $10k every 3 years Total $116,000 $63,500 ($52,500)

14 Where to begin Business plan Determine surety/funding requirements Hire captive manager Form captive Arrange reinsurance Submit to State for approval

15 The Business Plan Actuarial projection of expected retained losses Estimate of reserve liability for claims assumed from a self-insured program (if applicable) Breakdown of operational costs Selection of vendors including actuary, accountant, captive manager Reinsurance terms including limit, retention and reinsurer(s) Loss control plan with associated costs

16 Assumption of prior liabilities A self-insurer with prior liabilities would assume those liabilities in the new captive insurance company Evidence of appropriate funding will be required by the State The consolidation of the self-insured program would allow the employer to provide surety once rather than for two separate programs There may be tax benefits on the self-insured reserves Excess insurance should be assigned to the captive

17 Premium calculation The captive insurance company would calculate a Loss Cost Multiplier (LCM) using published NCCI loss costs. This calculation would be part of the business plan supported by the prospective actuarial loss projection The LCM is a factor calculated to compare the sum of the projected claims plus estimated expenses against the loss cost calculated using published loss cost factors applied to the projected payroll by class The premium is calculated by applying the filed rates to the projected payrolls and is audited at the end of each policy year. Premium tax is applied to this premium Captive would submit data to NCCI for an experience mod

18 The right decision? Initial considerations include The size of the premium What are the tax benefits? Additional costs if no existing captive If you have an existing captive move it to TN Does the captive advance overall risk management goals of the owner?

19 Any questions? Keith Fawcett, BrentRe Norman Chandler, Taylor Chandler