State pursues captive insurers as economic development tool

Captive insurers have become an attractive segment of the national insurance industry, and Missouri hopes to secure a piece of the pie.

A captive insurer is an insurance company formed to insure the risks of its parent while returning underwriting profit and investment income. Companies interested in forming captives are typically very large firms or those whose risks make them unattractive to the regular insurance market.

“Studies indicate that any company that pays more than $350,000 in insurance premium each year has the potential to benefit from forming a captive company,” said John Rehagen, captive insurance program manager for the Missouri Department of Insurance, Financial Institutions and Professional Registration.

In the past, captives typically were formed offshore in domiciles such as Bermuda or the Cayman Islands, where parent companies could avoid burdensome regulations and huge capital outlays. Internal Revenue Service scrutiny of offshore captives, however, is spurring many to eye domestic options, and a growing number of states are enacting captive-friendly regulations to woo this business back to U.S. shores.

Competitive advantage

South Carolina, for example, has aggressively pursued the captive market. Since enacting pro-captive legislation in 2000, licensed captives have grown from just two to 177.

Essentially, pro-captive legislation “allows individual companies or groups of employers to start an insurance company that services them and them only and do it with a lot less red tape, regulation and capital requirements,” said Randall Gammill, a partner at Connell Insurance Inc. in Branson.

According to the Missouri Department of Insurance, captive insurance companies could generate tax revenues of as much as $10 million in the next three years.

Gammill, who has two clients – one in the staffing industry and one in construction – who currently participate in offshore captives, said basing such insurers in the heartland might provide a competitive advantage.

“When you toss a 25-page contract in front of your client and ask them to send a check to Hamilton, Bermuda, they get a little spooked,” he said. “You have them read that 25-page contract and send a check to St. Louis, it’s probably going to be a little easier to absorb.”

Captive for life

While Missouri law allows captives for individual companies, industry groups and associations, it also allows something called a special purpose life reinsurance captive, or SPLRC.

SPLRCs are an industry response to higher reserve requirements enacted by National Association of Insurance Commissioners in 2000. Regulation 30, expressed in the industry as “XXX” and generally known as “Triple X,” required life insurers to increase their reserves on term-life policies in excess of economic reserves.

Life insurance companies that previously raised funds to meet capital requirements by reinsuring their business offshore can now do so by setting up SPLRCs. The SPLRC “collects the risk, securitizes it and sells it on the market. It’s like mortgages are packaged together and sold,” said Randall Stevenson, chief life and health actuary at the NAIC.

Securitization, while relatively new to the insurance industry, is likely the wave of the future, Stevenson said. Securitization was enabled by the Gramm-Leach-Bliley Act which overturned the Depression era Glass Steagall Act in 1999, eliminating the longstanding separation of securities, insurance and banks.

“As long as it’s done at a slow, measured pace and the regulatory expertise is there to make sure nothing goes haywire, it’s a good thing,” Stevenson said of the securitization trend. But there’s a lot of education that needs to happen in the meantime.

“Theoretically, it will improve the efficiency of the market, which will lower the price of insurance to consumers,” he added. “But until it gets to that point, it will create inefficiencies, and you will see some companies and some knowledgeable individuals probably make a very handsome profit.”

The Missouri DIFP is developing new systems to process premium tax returns and tax payments for captive insurance agencies, as the first tax returns must be filed on or before Feb. 1. A contract also will be negotiated with actuarial services to help the department evaluate applications for captive insurance companies.

All About Captives

• Missouri law allows captive insurance companies to form as stock insurers, nonprofit corporations or manager-managed limited liability companies.

• Special purpose life reinsurance captives may be organized as stock corporations, statutory close corporations, LLCs or other forms as approved by the director of insurance.

• License and renewal fees for all captives are $7,500 per year, which can be deducted from premium taxes paid to the state.

• Minimum capital and surplus requirements for captives vary by type. A single parent captive, also known as a “pure” captive, must maintain paid-in capital and surplus of at least $250,000. An industrial insured captive, owned by a group of companies within a single industry, must maintain at least $500,000 in capital and surplus.