While several factors prompt captive insurance owners to redomicile their facilities, surplus lines regulations in the Dodd-Frank Wall Street Reform and Consumer Protection Act eventually could drive that activity inappropriately, captive experts warn.

There is no central repository of data on how often captives redomicile, but captive owners have not been moving their facilities in droves in recent years, observers say.

“I see (redomiciling) as slow and steady. Not too much has changed,” said John Lochner, a director at Towers Watson & Co. in Simsbury, Conn.

Nancy Gray, regional managing director-Americas with Aon Global Insurance Managers in Burlington, Vt., said 2011 was a slightly more active year.

David Provost, deputy commissioner of captive insurance for Vermont, the largest U.S. captive domicile, said there has been a slight increase in activity in recent years, but “no great wave of movement.”

As more states have become captive domiciles, however, captive owners have greater ability to relocate their facilities in their home states or nearby, cutting travel costs, experts say.

Nashville, Tenn.-based hospital chain HCA Corp., for example, acted quickly when it had that opportunity, said Joe Haase, vp of risk and insurance at HCA.

When Tennessee modernized its captive insurance law last year to bring it in line with other U.S. domiciles, the change appealed to HCA, which owns a Colorado-domiciled captive. Because of the premium tax savings HCA will realize, as well as the proximity of Tennessee regulators, HCA moved a workers compensation program to a new Tennessee-based captive, Park View Insurance Co., said Mr. Haase, who also is president of the captive.

Redomiciling “goes in cycles” and legislation can drive that activity, Ms. Gray said.

For example, mid-1980s tax code changes and the 2002 Sarbanes-Oxley Act prompted many U.S. owners of offshore captives to redomicile stateside, she said.

But observers are concerned that the biggest influence on where companies domicile their captives could be the U.S. surplus lines simplification law—the Nonadmitted and Reinsurance Reform Act that Congress rolled into Dodd-Frank.

Under the NRRA, only the home state of a company that purchases state-approved nonadmitted insurance through a surplus lines broker may collect taxes on the insurance premium. It also gives sole premium-taxing authority to the home state of a company that eschews a surplus lines broker and state-approved nonadmitted insurers and, instead, independently procures insurance from unapproved nonadmitted insurers.

The problem for captive owners is the NRRA does not explicitly exclude captives from its definition of nonadmitted insurers (see story, page 15). So experts are concerned that some states' insurance regulators will conclude that the law gives them the authority to tax captives as surplus lines insurers if the facilities are domiciled elsewhere.

“The way around it is to have captives based in the same state where the parent company is headquartered,” which could trigger significant redomiciling activity, said Jason Flaxbeard, incoming secretary/treasurer of the Captive Insurance Cos. Assn. and senior managing director for Beecher Carlson Insurance Services L.L.C. in Denver.

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Some states with new or modified captives laws—particularly Missouri, New Jersey and Tennessee—have reputations as domiciles that likely will rely on the NRRA to either impose nonadmitted insurance taxes on captive owners or encourage redomiciling.

Missouri insurance regulators consider captives that are owned by resident companies yet domiciled elsewhere as nonadmitted insurers, a Missouri Department of Insurance spokesman said.

New Jersey regulators have not decided how they will interpret the law, a New Jersey Department of Banking and Insurance spokesman said.

Tennessee Captive Director Michael A. Corbett said his state does not consider captives to be surplus lines insurers. But, he said, “the dust has not settled” on whether Tennessee will treat captive insurance as independently procured insurance if the captive is domiciled outside of Tennessee.

Mr. Haase said the Tennessee Department of Commerce and Insurance has not pressured HCA to redomicile its Colorado captive. Indeed, HCA pressured Tennessee's regulators to accelerate the approval of HCA's new captive so it could open as soon as the domicile's modified captive law allowed, he said.

In a white paper posted on CICA's website, www.cicaworld.com, attorneys with Washington-based law firm McIntyre & Lemon P.L.L.C. said the NRRA “raises a question of whether captive insurance could be covered” by a literal reading of the law. But the brief concludes that the NRRA does not apply to captives, based on the intent of the law's drafters and industry supporters, as well as the law's language when read in context.

Vermont's Mr. Provost agreed with that analysis, but he also said “some captive owners have always been subject to self-procurement taxes” depending on a state's law.

The Vermont Captive Insurance Assn. is examining whether to seek congressional clarification that the NRRA does not apply to captives.

VCIA President Richard Smith said the group also has to be careful about “unintended consequences” of any clarification

The next-best alternative is to educate captive owners about the issue, he said.