NASHVILLE, Tenn.—A major rewrite of Tennessee's captive law is aimed at reinvigorating the state as a captive insurance domicile, with some provisions expected to be particularly appealing to large Tennessee employers.

The bill passed unanimously May 21 by the Tennessee House and Senate would allow formation of protected cell captives, branch captives and special-purpose financial captives in Tennessee.

H.B. 2007 also would allow captives to provide workers compensation insurance to employers and affiliates that otherwise qualify with the state as self-insureds, and to write excess or stop-loss workers compensation coverage for employers not qualifying as self-insureds.

The workers comp provision should prove attractive to large employers able to qualify as self-insureds in Tennessee, said Gary Osborne, president of Montpelier, Vt.-based USA Risk Group Inc.

“You no longer need a front of any kind,” Mr. Osborne said. “It really does take workers comp into your own hands.”

While the provision isn't unique to Tennessee, it should prove attractive to large employers in the state such as automobile manufacturers, Mr. Osborne said. “We're interested,” he said. “We've got a couple of (companies) in Tennessee we think this could be very beneficial to.”

Les Boughner, executive vp and managing director of Willis Group Holdings P.L.C.'s North American captive practice in Burlington, Vt., was restrained in his assessment of the workers comp provision's likely impact. “There's already insurance legislation to the effect that you can become a qualified self-insurer,” he said. “I don't know if it's something revolutionary.”

“The other thing I think will be interesting to see is presumably you're going to have to capitalize the captive to support statutory limits,” Mr. Boughner said.

But, from a captive industry perspective, he welcomed the Tennessee legislation.

“We think first of all it's great because it's a clear indication of a vibrant captive industry,” Mr. Boughner said.

Gov. Bill Haslam included updating Tennessee's captive insurance law and revitalizing the state's captive domicile in his legislative package this spring.

“We really wanted it to be as good as any law in the country, and we think it is,” said Kevin M. Doherty, a partner at Nashville law firm Burr & Forman L.L.P. who wrote the first draft of the legislation.

With the revisions to Tennessee's captive law, there is “no need to go offshore or to another state, if you're a Tennessee business especially,” Mr. Doherty said. “And I would hope that people from outside Tennessee will choose Tennessee as a domicile.”

As part of revitalizing the domicile, Tennessee appears to be committed to building a captive regulatory staff. “It's important that you have somebody there that talks captives,” Mr. Osborne said.

An adequate infrastructure—of regulatory staff and captive service providers—is essential to a domicile's success, Mr. Boughner said. “You write all those new captives, then you've got to regulate them,” he said. “And you have to support them.”

The captive measure provides that premium taxes paid by Tennessee captive insurance companies be devoted to administering captive regulation in the state.

Julie Mix McPeak, commissioner of the Tennessee Department of Commerce and Insurance, has indicated that she intends to add staff dedicated to captive insurance regulation, Mr. Osborne said. “I understand they're looking to hire one or two dedicated people immediately,” he said.

“We are happy that Gov. Haslam's captive insurance legislation passed,” Ms. McPeak said in an email. “It will go a long way toward modernizing the law that Tennessee has used to regulate this segment of its insurance industry, and will help produce a strong, vibrant marketplace within the state.

“Now that the bill has passed, the work of implementing it gets under way,” Ms. McPeak said. “Our next step is to promulgate rules to fortify our regulatory framework to be able to accept applications from companies by July 1.”

The revisions to Tennessee's captive law were based largely on captive laws in Vermont and South Carolina, Mr. Osborne said, and the measure could make Tennessee, with South Carolina, a domicile of choice for companies in the South interested in forming captives. He noted that a number of Tennessee businesses have captives in Vermont or South Carolina.

Mr. Boughner said he doubted whether many Tennessee companies with captives elsewhere would return home. He said the Tennessee domicile's greatest appeal most likely will be for local businesses forming their first captive. “When you talk about switching domiciles, it doesn't happen very often,” he said.

Under Tennessee's revised captive law, the minimum capital and surplus for single-parent captives would be $250,000; for association, industrial insured and protected cell captives, $500,000; and for risk retention groups $1 million. The state's insurance commissioner may require additional capital and surplus based on the type and volume of business in the captive.

The minimum annual premium tax is set at $5,000 in the revised captive law with an annual maximum of $100,000. The annual maximum aggregate premium tax on protected cell companies would apply to each cell and not the protected cell captive as a whole.

Tennessee initially passed a captive law in 1978, following Colorado as the second U.S. state to allow captive formations. But as captives faded as a priority for the state, Tennessee lost ground to other U.S. domiciles such as Vermont. After reaching a peak of 16 captives in 1990, the domicile gradually withered until just four captives remained at the end of 2010.