States dust off the welcome mats to lure captive insurers to their domiciles

State lawmakers continue their drive to amend their states' captive insurance company laws, with roughly a dozen states either amending or considering changes in the past year.

Some of the changes are narrow.

In Vermont, lawmakers are considering a proposal to clarify that certain types of captives, such as sponsored and industrial insured captives that are not writing any business to enter a dormant status, exempting the captives from Vermont's minimum annual premium tax.

The legislation would also allow sponsored or industrial insured captives not doing any business to apply for dormant status.

Such a change, state captive regulators say, would increase the likelihood that the captives would remain in Vermont and, when ready and necessary, be reactivated quickly.

“The same logic applies as before: Keep the company here rather than have it dissolve,” said David Provost, Vermont's deputy commissioner of captive insurance in Montpelier.

Currently, though, only eight captives out of the state's nearly 590 captive insurers would qualify for the expanded exemption, regulators say.

On the other hand, legislation elsewhere calls for more significant changes.

In Alabama, legislation introduced in February would impose a $100,000 annual cap on the annual premium tax a captive could be assessed, exempt newly-formed captives from premium taxes for one year, give the state insurance commissioner discretion to set capitalization requirements for new captives and allow formation of risk retention groups.

The state's captive law is “badly in need of updating in some areas,” said Norman Chandler, president of the Alabama Captive Insurance Association in Montgomery, referring to the latest legislative effort.

In Tennessee, recently introduced legislation would provide a one-year premium tax exemption for captives that redomesticate in the state from non-U.S. domiciles.

“This is a way of encouraging companies to bring their captives to Tennessee,” said Kevin Doherty, president of the Tennessee Captive Insurance Association and a partner at law firm Nelson Mullins Riley & Scarborough L.L.P. in Nashville.

The measure also would clarify that the assets of any individual cell captive could not be seized as part of litigation against another cell.

“No protected cell has a duty to defend the rights and obligations of any other protected cell,” according to the legislation, S.B. 2402.

Regulators say fierce competition among states to attract and retain captives requires a frequent update to their captive laws laws in order to continue to attract new captives and keep existing ones.

“We really strive to be in a state of constant improvement in our laws, regulations and practices,” said Vermont's Mr. Provost.

Vermont has made numerous changes to its captive law in the nearly 35 years since the state passed its original captive statute.

Georgia is an example of how updating a captive law can make a difference quickly in attracting new captives.

The state licensed seven captives following last year's passage of legislation that slashed captive premium tax rates and capped the maximum premium tax captives can be assessed in a year at $100,000.

Under the new law, which went into effect last July, Georgia's captive tax rate was cut to 0.4% on the first $20 million in premiums and 0.3% on premiums above $20 million. That's a big change from prior law, which had captives paying the same 4.75% tax rate as commercial insurers.

Those changes “brought Georgia up to speed,” said Julie Boucher, Marsh captive solutions practice leader-Americas in Burlington, Vermont.

That reduction was a key factor in why The Coca-Cola Co. moved its South Carolina-domiciled captive, Red Re Inc., to Georgia late last year.

While Coca-Cola was very satisfied with South Carolina, “our home state of Georgia created far more favorable conditions for us by amending the state's captive insurance law. We took advantage of the reduced premium tax rates in our home state and gained some great efficiency,” said Laurie Solomon, Coca-Cola's director of global risk management in Atlanta.

In Montana, a public entity is in active discussions with regulators about setting up a captive in the state, said Steve Matthews, Montana's captive coordinator in Helena.

That discussion follows passage of legislation last year allowing public entities to set up captives in Montana.

Other state regulators say legislative changes also have led to big increase in the number of captives.

For example, Oklahoma, whose original captive statute was passed in 2004, didn't see significant growth in the number of captives until the law was revamped several years ago, such as by imposing a $100,000 premium tax cap, said James Mills, director of captive insurance with the Oklahoma Insurance Department in Tulsa.

Last year, Oklahoma had 73 captives, up from 47 in 2014 and just 10 in 2013.

But not every captive domicile is considering amending its captive law.

“We think our statute is very captive friendly,” said Janet Grace, captive program manager at the Connecticut Insurance Department in Hartford.