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Captive law requires adjustment

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Decades after captive insurers became a widely utilized risk management tool, the captive industry continues to expand. One form of that expansion: Employers and their advisers are finding new ways for captives to be used to cover corporate exposures. For example, employers increasingly are expanding their captives to fund risks, such as cyber liability and medical stop-loss, that years ago would have been unheard of.

Another positive development is the interest of state lawmakers in passing legislation to allow the formation of captives in their states or improve existing captive laws.

Those actions clearly are bearing fruit. States such as North Carolina and Texas that have passed legislation during the last few years allowing captive formations have seen a surge of new captives.

Similarly, states such as Georgia and Tennessee that have updated their captive statutes are seeing a big spurt in captives being set up.

In addition, long-established domiciles including Vermont and Montana continue to fine-tune their laws to attract new captives as well as keep current ones.

Federal lawmakers are doing their part too. Last year, Congress passed legislation effective in 2017 that makes a long-overdue increase in the amount of premium income so-called microcaptives can generate and still be exempt from federal taxes.

As welcome as these and other legislative changes are, lawmakers need to make still others.

High on our list of needed and long-overdue changes involve multiple-owner captives, known as risk retention groups.

Under legislation passed nearly three decades ago, RRGs can be used to fund member-owners' casualty risks after meeting the licensing requirements of one state. Nearly 240 RRGs now operate and cover a wide range of casualty exposures for their policyholders.

Still, there is a glaring and totally unjustified exclusion in the federal law of one policyholder risk that RRGs can't cover: property.

That exclusion makes no sense to us. RRGs have been successfully used for decades to fund a broad range of casualty risks. We see no reason why RRGs are barred from providing property coverage.

We hope lawmakers take action soon to remove that unjustified exclusion.