NASHVILLE, Tenn.—State officials and others are working to boost Tennessee's appeal as a captive insurance company domicile.

Following Colorado's lead, Tennessee in the late 1970s became the second U.S. state to pass legislation to allow employers and other organizations to set up captives.

But since reaching its peak of 16 captives in 1990, Tennessee has withered as a domicile for several reasons, including failure to update its law to compete with states, such as Vermont, that passed more attractive captives statutes. Observers also say Tennessee developed regulatory indifference to the captive industry.

Today, Tennessee has just four captives, making it one of the smallest U.S. domiciles.

“The market here never really took off,” said Julie McPeak, the new commissioner of the Tennessee Department of Commerce and Insurance in Nashville, Tenn., and a former executive director of the Kentucky Department of Insurance.

But Ms. McPeak and others are moving to enable Tennessee to attract captives. On the regulatory side, Ms. McPeak is looking at what can be done to streamline captive reporting requirements.

In addition, the Insurance Department intends to hire staff with captive expertise, she said.

On the legislative side, longtime captive and insurance attorney Kevin Doherty, a partner at Burr & Forman L.L.P. in Nashville, is drafting a measure to update the state's 1978 captive law, which he said he hopes will be backed by the state's new governor, Bill Haslam.

The measure will be modeled after captive laws in Vermont and South Carolina. Provisions in the draft bill, which backers hope will be introduced soon in the Tennessee Legislature, include allowing captives to write employee benefit risks and allowing organizations that have captives in other domiciles to set up branch captives in Tennessee. The measure also would allow the formation of cell captives and special-purpose captives, whose sponsors don't fall into traditional business categories.

With an updated law and the necessary regulatory support, Mr. Doherty said Tennessee could be a magnet for captives.

“We are right in the middle of the country and travel is easy from most parts of the country,” he said.

Ms. McPeak said with a more up-to-date captive statute, Tennessee could become a competitive player in the market with initial potential captive sponsors being public entities in the state as well as a host of industries, such as automobile parts manufacturers, that are based in Tennessee.

Ultimately, captive managers say, Tennessee will need a strong captive regulatory structure to thrive as a captive domicile.

“Having a captive law on the books is no guarantee of success,” said Nancy Gray, regional managing director at Aon Global Insurance Managers in Burlington, Vt.

To be successful, among other things, a domicile has to have a regulatory staff big enough and with sufficient expertise that it can act on captive applications within about a month, Ms. Gray said.

“You need regulatory commitment and understanding,” said Arthur Koritzinsky, a managing director with Marsh Inc.'s captive advisory practice in Norwalk, Conn.

Ms. McPeak pledged there will be “strong and consistent” captive regulation in Tennessee.