MAKE IT BIG. in the. New Captive Domiciles Are Ready to. by Karrie Hyatt. April 2014 The Self-Insurer

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1 New Captive Domiciles Are Ready to MAKE IT BIG in the Captive Sector by Karrie Hyatt 16 April 2014 The Self-Insurer Self-Insurers Publishing Corp. All rights reserved.

2 T he captive insurance industry has seen an uptick in U.S.-based domiciles in recent years at least 36 states now have legislation that allows for the formation of captive insurance companies. Since 2011, eight states have either passed captive legislation or revised their existing laws to create a more regulatory friendly environment for captive insurers. Captive insurance is still a relatively new type of insurance company and is still in the processes of carving out its niches in the financial market. Some states were early adopters of captive law and begin to operate as domiciles in the late 1970s. Throughout the 1980s and 1990s, the industry continued to grow and by the end of 1999, there were 18 states that were legal domiciles to captive companies. However, since 2000, that number has doubled with 18 more states enacting captive law. In the early part of the 2000s, many states passed captive legislation in response to the hard market affecting the insurance industry. However, the current extended soft market did not slow new states from wanting to become captive domiciles. Nine states have enacted captive law since 2007 after the market turned soft. The newer domiciles saw the success of states such as South Carolina, Montana, and the District of Columbia states that adopted captive law in the early 2000s and wanted to bring that business to their own states. Since 2011, eight states have either enacted captive legislation or improved their existing law to make it more favorable. Two of those states, Tennessee and Florida, had captive law on the books since 1978 and 1982, respectively. Oklahoma and Connecticut both enacted captive law in the early 2000s, but revised their laws in the last two years. New Jersey, rth Carolina, Oregon, and Texas have all passed captive legislation for the first time. While both Florida and Oregon enacted new captive legislation in 2012, neither domicile has done much to act on the law. Florida s original captive law was enacted in 1982 and the most recent update was passed by the legislature to try to make the state more competitive, as well as to create jobs within the state. However, without a dedicated captive office within the state s insurance department and without a captive association to educate the business community, the state has not received much interest in establishing new captives. Oregon passed its captive law in early 2012, followed by the formation of the Oregon Captive Insurance Association, but has yet to license any captives. According to Todd Hennelly, president of the association and president of Pacific Captive Managers LLC, Oregon looks to establish domestic captives during 2014 and then grow from that base in future years. The Oregon captive law was based on the law enacted in Utah, which has proved very successful. Oregon is seeking to build a captive insurance sector with the intention of keeping Oregon businesses competitive and to allow the Oregon Insurance Division to keep up with the evolution of the captive industry. The domicile s modest intentions are to minimize the frictional costs of both establishing and maintaining a captive in Oregon and to be very competitive with most other states. While Florida and Oregon have been slow to get in the game, New Jersey, Connecticut, and Tennessee all got off to a quick start. New Jersey s law was enacted in February 2011 and was aided considerably by the founding of a captive trade STATES WITH NEW OR REVISED CAPTIVE LAW SINCE 2008 Captive Domiciles Captive Law. of Captives Dedicated Captive Insurance Office State Captive Association Connecticut July 2012 (Previous law enacted 2008) 4 April 2012 (Previous law enacted 1982) Unknown February June April 2013 (Previous law enacted 2004) 11 (7 since v. 2013) March June 2011 (Previous law enacted 1978) 30 captives, 48 cell captives June Florida New Jersey rth Carolina Oklahoma Oregon Tennessee Texas Self-Insurers Publishing Corp. All rights reserved. The Self-Insurer April

3 18 April 2014 The Self-Insurer Self-Insurers Publishing Corp. All rights reserved.

4 association in 2010 soon after the law passed in the legislature. The state s Offi ce of Captive Insurance, headed by John M. Talley, J.D., is focusing on developing captives based on New Jersey businesses. The department s approach is to be open and responsive to the needs of the business community, including being committed to approving new captive applications in approximately 30 days and redomestications within 10 to 15 business days, said Talley. The state currently has 16 licensed captives with several applications pending. Talley continued, We are presently working on amendments to the captive statute to keep us competitive in the captive market. We are anticipating a total of captives domiciled in New Jersey by the end of Connecticut originally passed captive law in 2008, but did not pursue the business right away. However, with the aid of a trade association, the Connecticut Captive Insurance Association, formed in 2011, a revised bill was passed through the state s legislature and the state seriously began pursuing captive insurance business. With the new legislation the Connecticut Insurance Department, already the second largest insurance regulatory department in the U.S., opened a captive division with four dedicated staff members. John C. Thomson, the insurance program manager for captive insurance, said that Connecticut s goals are to Facilitate growth and evolution of captive insurance in the state of Connecticut while maintaining sound regulation. There are no fi nancial or licensing targets. He emphasized that Connecticut is approaching its new captive section with Principals Based Regulation and will grow based on the larger captive segments with a focus on Connecticut-based companies and fi nancial institutions. The state currently has four licensed captives. Tennessee is by far the most established of captive domiciles on this list. Its original captive law was enacted in 1978 with several years of steady captive growth following. With a change in the state government, during the 1990s and 2000s the domicile was left to languish without much direction. However, since the revised law was passed in 2011, the state has seen a comeback in its captive sector. Supported by the very active Tennessee Captive Insurance Association, formed in 2011, and with strong support from both the governor and insurance commissioner, the state now domiciles 30 captives and 48 cell captive companies. According to Michael A. Corbett, director of the state s captive insurance division, Insurance Commissioner Julie Mix McPeak must be given full credit for seeing the great potential that a vibrant captive domicile could bring to the development of employment and investment in the state. Would you climb a mountain without a guide? Healthcare is complicated. As a risk management expert, Berkley Accident and Health can guide you in the right direction. Our creative, nimble approach to risk, backed by the strength of a Fortune 500 company, gives us a unique perspective. Count on Berkley to show you the way. Stop Loss Group Captives Managed Care Specialty Accident Berkley Accident and Health is the U.S.-based accident and health operating entity of the W.R. Berkley Corporation Member Companies. Coverages are underwritten by StarNet Insurance Company and/or Berkley Life and Health Insurance Company, both member companies of W.R. Berkley Corporation, and both A+ rated by A.M. Best Berkley Accident and Health BAH AD Self-Insurers Publishing Corp. All rights reserved. The Self-Insurer April

5 Pursuing a goal to be the best in class of captive domiciles, the state is focused on reaching critical mass. At the 200 captive level, Tennessee will clearly be a mainstream domicile worthy of consideration by anyone considering forming, redomesticating, or expanding its captive, said Corbett. Tennessee is also committed providing the long-term commitment that captive owners and service provider s favor. Corbett added, Captives traditionally provide a mechanism for companies to control risk. At its essence controlling risk means that people go home safe at night. Any captive that comes to Tennessee that meets the spirit of this test will have the full support of the Tennessee Captive Section. In 2013, three states enacted new captive legislation or revised their existing captive law, and all three states saw new captive trade associations open their doors. Oklahoma, rth Carolina, and Texas all jumped into the captive market in 2013 and all three are off to a strong start. Oklahoma previously enacted captive law in Only licensing a few captives over the decade, they revised their law last year to reduce the tax rate for new companies. The updated captive law can provide a provisional license for new companies prior to the review of the application, requires no in-state annual board meeting, allows for the coverage of workers compensation risks, and has very competitive capital and surplus requirements. The Oklahoma Captive Insurance Association was established about the same time as the law was passed to help foster the new efforts. The state has licensed seven captives since vember 2013 for a total of 11 captives altogether. James A. Mills, the director of Workers Compensation and Captive Insurance office for the Oklahoma Insurance Department, is eager to see the domicile actively pursue new captives within the state, as well as beyond the borders. He continued, saying that Our law enables us to act quickly while allowing flexibility to meet the unique needs of each captive. Over the next few years, we intend to expand on our successes in other areas with national outreach and involvement to develop a nationallycompetitive captive insurance division. rth Carolina jumped into the captive sector in June of last year and now has four captives three pure captives and one protected cell captive. The enacted legislation is a state of the art captive law that allows for low operation costs for captive insurance companies, said Debra M. Walker, director of Captive Insurance. According to Walker, the law distinguishes itself by requiring no fees, no mandatory department of insurance examinations, reasonable and flexible capital requirements, and competitive tax rates. For the upcoming year, rth Carolina s goal is to educate businesses, accountants, attorneys, actuaries, trade organizations, associations, and others about the rth Carolina captive program and how this program may be a useful tool in meeting their insurance needs or the needs of their clients. In the next five years, Walker continued, the goals of the state s captive program will be to demonstrate our consistent, pro-business approach to regulation and our commitment to the captive program, and grow the rth Carolina-domiciled captive industry. Texas s captive law is simple it allows only for pure captives. However, that is not keeping the newest captive domicile from thinking big. Jim Arnold, the Texas Captive Insurance Association s executive director, believes that there are a lot of opportunities in the state for both new captives and companies looking to redomicile. Arnold explained that the state comes in second in terms of the number of Fortune 500 companies, many of those with existing captives, and one of the stated goals of the new legislation was to be amenable to large Texas companies with offshore captives. The law was written to make it easy and reasonable for companies to redomicile. With no captives under their belt at this time, the captive association and the insurance department are looking to get the regulations in order so as to not have any hindrances to any company wanting to domicile or redomicile, and then to pitch to other large companies, said Arnold. The Texas legislature meets every other year, so captive proponents are using 2014 to license captives and build up experience so that when the legislature is back in session in 2015 they can work towards expanding the law. According to Arnold, the state s goal is to be one of the top five captive markets in the U.S. by the end of five years. We realize that we are late to the game, but there is a lot of opportunity in our state. It s an ambitious goal, but Texans are known for thinking big. n Karrie Hyatt is a freelance writer who has been involved in the captive industry for nearly ten years. More information about her work can be found at: www. karriehyatt.com. 20 April 2014 The Self-Insurer Self-Insurers Publishing Corp. All rights reserved.