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T H E E S S E N T I A L G U I D E T O A L T E R N AT I V E R I S K T R A N S F E R
MAY 2015
RACETOTHETOP
US
statesenhancingcaptivelegislationtobeatoffcompetition

2. 17May 2015
captivereview.com
LEGISLATION | FEATURE
T
he rise of American states pro-
viding a friendly environment
for captive insurance vehicles
has long been discussed and an
inevitable knock-on effect is now
taking place.
Established captive domiciles, particu-
larly stateside, looking to enhance their
statutes and remain relevant to business
needs is nothing new, but legislative activ-
ity has been noticeably more high-profile
in the early months of 2015.
The Nonadmitted and Reinsurance
Reform Act (NRRA) gives states previously
uninterested in facilitating captive insurers
a strengthened weapon to exercise – the
self-procurement tax.
While the self-procurement tax has
long been available to large business states
such as California, Texas and New York to
increase tax revenue, the NRRA has beefed
up their ability to recoup it from those
large businesses utilising an out-of-state
captive in established jurisdictions such as
Vermont or South Carolina.
A short analysis of ongoing legislative
developments in Texas and Illinois illus-
trates this point.
The Lone Star State took a dual approach
to this and it seems, for now at least, that
everyone ends up winning.
While the 4.85% self-procurement tax is
being enforced, the June 2013 captive stat-
ute allowed Texas to license its first 12 cap-
tives in 2014. Texas businesses can dodge
the 4.85% premium tax by re-domiciling in
the home state.
In Illinois, there has been no such joined
up thinking and the state is left with a 3.5%
self-procurement tax in legislative limbo
and businesses face uncertainty.
Crucially, there also appears to be no
plans to bring forward legislation that
would welcome captives to be licensed in
Illinois.
Legislative action
The Texas case is relevant since Senate Bill
667 and House Bill 1700 have to date been
met with unanimous approval within the
state’s legislature and proposes to further
enhance the captive statute passed in 2013.
The proposals – adding the ability to
issue dividends to equity holders as well as
With increasing numbers of domiciles vying for captive business, competition is driving
legislators to enhance their statutes and regulatory oversight
Written by
Richard Cutcher
RACETOTHETOP

3. 18May 2015
captivereview.com
FEATURE | LEGISLATION
policyholders, allowing captive participa-
tion in approved risk pools and achieving
credit for reinsurance – are essentially
designed to correct oversights in the origi-
nal Act.
“Within the legislature there is a much
greater understanding of captives and that
has been really positive because we don’t
have to explain what a captive is or how
these changes benefit Texas,” Josh Magden,
president of the Texas Captive Insurance
Association (TxCIA), tells Captive Review.
It is fair to assume that now Texas is com-
fortablewiththecaptivestatuteandbuoyed
by the confidence provided by firms such
as telecommunications giant AT&T moving
their insurance vehicles “back home”, leg-
islators and the Department of Insur-
ance are happy to go further.
The ability to participate in risk
pools is important to allow compa-
nies without a sufficient number of
brother/sister affiliates to achieve the
required risk shifting and distribution.
Receiving credit for reinsurance
when reinsuring to an affiliate should
also help those firms that already own
and want to continue utilising an out-
of-state or offshore captive.
“That is important because Texas
is a natural place for pure captive
owners so you are going to see a lot of
companies that want to start a new captive
but also want to continue on with another
captive for various reasons,” Magden adds.
Of all the states to establish new captive
statute in the past five years, Texas is viewed
as the most intriguing case and possibly the
most disruptive considering the large num-
ber of Fortune 500 companies in its back-
yard. While the legislative proposals are not
ground-breaking or particularly innovative,
it should prompt Texas businesses to con-
sider more seriously whether a move “back
home” is a worthwhile exercise.
Consolidation
If we view Texas as the mature pre-teen
in America’s growing family of domiciles,
then Tennessee could stake a claim to be
the most confident and ambitious of its
adolescents.
Like in Texas, the Tennessee legislation is
at an advanced stage and is expected to be
passed. The state has ambitious plans and is
driven on by the solid reputation of captive
regulator Michael Corbett and the active
Tennessee Captive Insurance Association
(TCIA). Headline features of Senate Bill 80
include the allowance for captives to pro-
vide excess or stop-loss workers’ compen-
sation coverage to companies not qualified
to be self-insured and changes to the tax
thresholds for cell captives.
On cell company taxation, the aggre-
gate maximum ceiling of $200,000 will be
removed with it being calculated on $5,000
per cell for every one above 10. The maxi-
mum payable tax for cell captives up to 10
cells will remain at $100,000.
There are a number of further technical
amendments in the Bill, including added
flexibility on the requirement for captive
board meetings to take place in Tennessee
and the management structure of limited
liability companies.
Kevin Doherty, president of the TCIA,
tells Captive Review it has been the Depart-
ment of Commerce and Insurance that
has taken the lead on the workers’ com-
pensation amendments, while the TCIA
are working to help businesses bring their
captives home.
“We like to think that the Tennessee law
provides all of the same advantages that any
offshore domicile would,” Doherty says.
“The reality is if you have a captive any-
where in the world, if it is successful and
has been operating for a while, then it is
difficult to move it and there is always a
cost involved in moving it.”
The state does retain a branch captive
option, which allows offshore entities to
establish a branch in Tennessee and trans-
fer business over time or write new risks
through it.
“There hasn’t been a lot of movements
from offshore yet – maybe a handful,”
Doherty adds. “But I do think over time, as
long as we keep our law at the cutting edge,
when people have the opportunity to move
their captive to Tennessee it will happen.”
Of all the pieces of legislation being pro-
posed across the States, however, it is possi-
bly Vermont’s Senate Bill 98 – the country’s
largest domicile – that most catches the eye.
There are two important elements to
the Vermont legislation – permitting the
use of marketable securities to fulfil min-
imum capital requirements and bringing
cell company regulation into line with
standards set by the National Association of
Insurance Commissioners (NAIC).
The latter move shows Vermont is will-
ing to align with other states and perceived
“best practice”, while it is also lowering the
capital demand on cell companies from
$500,000 to $250,000.
The marketable securities development is
significant as it could be viewed as something
of a trailblazing move.
It is the kind of flexibility that may
give Vermont an added edge in attract-
ing (or keeping) those captive own-
ers keen to make their entities work
harder on investments.
“Itwassuggestedbyoneofourmem-
bers that a broader approach to how
capitalisheldbeconsideredandwhenI
took that to Dave Provost he looked at it
and felt his department had the capac-
ity to regulate it,” Rich Smith, president
oftheVermontCaptiveInsuranceAsso-
ciation (VCIA), tells Captive Review.
Publicly, the various ‘captive states’
and associations are reluctant to attack
emerging domiciles or question the benefit
of having so many onshore options availa-
ble to business owners.
Allusions are made in favour of the need
for consistent and robust regulatory over-
sight, but states such as North Carolina, Con-
necticut, Nevada and Missouri are increas-
ingly challenging the original status quo.
Delaware and Utah are now both well
established in their respective specialties,
while Tennessee is growing fast, has a solid
reputation for sensible regulation and
would appear to have no plans to stand still.
Meanwhile Georgia, not a traditional
home for captives, made significant
changes to its captive law in April and
South Dakota, which had 12 active captives
at the end of 2014, has already moved to
allow agency captives this year.
The fact Vermont is responding with a
relatively innovative move is a sure sign
the competition among domiciles is being
taken seriously. Industry stakeholders
often discuss the need for states to avoid a
race to the bottom, but it is apparent a race
to the top has begun.
“The reality is if you have
a captive anywhere in the
world, if it is successful
and has been operating for
a while, then it is difficult
to move it”
Kevin Doherty