CAPTIVE REPORT: COLORADO, COLORADO LAW SPELLS OUT CAPTIVE REQUIREMENTS

DENVER-Companies can form both single-parent and group captives in Colorado to write insurance and reinsurance covering the risks, hazards and liabilities of their parent company and affiliated entities.

Changes to Colorado's captive law in 1994 permit captives to write employee benefits coverage. However, captives that write employee benefits must provide the minimum mandated coverage that commercial insurers provide under Colorado law.

The 1994 captive law reform also eliminated the "industrial insured" classification under which some group captives, like risk retention groups, had been established.

Under the new law, captive insurers can be formed either as single-parent or as group captives. Risk retention groups now may be formed either as group captives or as commercial insurance companies.

Initial capitalization requirements also were lessened so that both single-parent and group captives need only $500,000-including $300,000 in capital and $200,000 in surplus-before they can begin underwriting.

The 1994 captive law also simplifies premium tax payment requirements for captives that report their earnings on a fiscal-year basis.

Under the previous law, captive insurers operating on a fiscal-year basis were required to file their financial reports on a calendar-year basis so the Division of Insurance could calculate premium tax liability.

Captives that use a fiscal-year reporting method now can pay the minimum $5,000 premium tax at the end of the calendar year, with the balance due 60 days after the end of the captives' fiscal year.

Several other changes were made in 1994:

Captive owners no longer need to maintain joint deposits with the commissioner.

Because owners could get to those funds only by physically going to the bank with an Insurance Department official, the approach effectively restricted owners' access to captive funds. Captives now establish joint custody accounts that require only the captive owner's and the commissioner's signature for withdrawals.

Captives that are managed by captive management companies are no longer required to purchase their own fidelity bonds if the captives are covered under their managers' fidelity bond.

Unchanged provisions in the law:

The tax imposed on captives is the greater of $5,000 or 0.5% of the first $25 million in direct premiums written, plus 0.25% of the next $50 million and 0.1% of premiums exceeding $75 million. Captives that write reinsurance pay 0.25% of the first $20 million in assumed reinsurance premiums, plus 0.1% of each dollar thereafter.

Home offices must be located in Colorado, and all books, records and claims-handling documents must be maintained in the state.

Single-owner captives may make loans to their owners as long as they maintain the minimum capital and surplus levels.

Captive insurers must pay an initial application fee of $200 and an annual $300 fee.

The commissioner may require that a captive retain independent outside insurance examiners to supplement the division's evaluation in organizing a captive or for annual financial examinations of existing captives. All expenses related to the outside examiner must be paid by the captive.

For more information about forming a captive in Colorado, contact Jack Ehnes, Commissioner, Colorado Division of Insurance, 1560 Broadway, Suite 850, Denver, Colo. 80202; 303-894-7499, ext. 305.