Revised Tennessee Captive Insurance Act: A New Beginning

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1 Revised Tennessee Captive Insurance Act: A New Beginning Self-Insurance Institute of America, Inc. 32 nd Annual National Educational Conference & Expo October 1-3, 2012 Indianapolis, IN Kevin M. Doherty President The Revised Tennessee Captive Insurance Act (H.B. 2007/S.B. 1540, the Revised Act ) passed unanimously in both houses of Tennessee General Assembly on May 21, 2011 Governor Haslam signed the Revised Act into law on June 10, 2011 The Revised Act is Codified in T.C.A. Sections et seq. 1

Doherty President The Revised Tennessee Captive Insurance Act (H.B.

2 Pure captive insurance company - any company that insures risks of its parent, affiliated companies, or controlled unaffiliated business; Association captive insurance company - any company that insures risks of the member organizations of an association, affiliated companies, or the association itself; Industrial Insured Captive Insurance Company - any company that insures the industrial insureds that comprise its industrial insured group, affiliated companies, and controlled unaffiliated business; Industrial insured means an insured: (A) Who procures insurance by using a full-time employee acting as an insurance manager or buyer; (B) Whose aggregate annual premiums for insurance on all risks total at least $25,000; and (C) Who has at least twenty-five (25) full-time employees. 2

insureds that comprise its industrial insured group, affiliated companies, and controlled unaffiliated business; Industrial insured means an insured: (A) Who procures insurance by using a full-time

3 Protected cell captive insurance company means any captive: (A) In which the minimum capital and surplus are provided by one (1) or more protected cell companies; (B) That is formed or licensed under this chapter; (C) That insures the risks of separate participants through participant contracts; and (D) That funds its liability to each participant through one (1) or more protected cells and segregates the assets of each protected cell from the assets of other protected cells and from the assets of the protected cell captive insurance company's general account. Incorporated cell captive insurance company means a protected cell captive insurance company that is established as a corporation or other legal entity separate from its incorporated cells that are also organized as separate legal entities. Can also utilize Series LLC law here in place of a corporation. 3

segregates the assets of each protected cell from the assets of other protected cells and from the assets of the protected cell captive insurance company's general account.

4 Branch captive insurance company means any alien captive insurance company licensed by the Commissioner to transact insurance in this state through a business unit with a principal place of business in this state. A branch captive insurance company is a pure captive insurance company with respect to operations in this state, unless otherwise permitted by the Commissioner. Branch captives are permitted for ERISA/employee benefits, as well as any other insurance or reinsurance permitted under this chapter. SPFC or special purpose financial captive means a captive created for the limited purpose of entering into SPFC contracts and insurance securitization transactions. The creation of SPFCs is intended to achieve greater efficiencies in structuring and executing insurance securitizations, to diversify and broaden sources of capital for insurers, to facilitate access for many insurers to insurance securitization and capital markets financing technology, and to further the economic development and expand the interest of this state through its captive insurance program. 4

Branch captives are permitted for ERISA/employee benefits, as well as any other insurance or reinsurance permitted under this chapter.

5 SPFC contract means a contract between the SPFC and the counterparty pursuant to which the SPFC agrees to provide insurance or reinsurance protection to the counterparty for risks associated with the counterparty's insurance or reinsurance business; SPFCs may provide insurance or reinsurance to a counterparty (which may be unaffiliated), including with respect to securitization transactions, subject to the discretion of the Commissioner. Risk Retention Group - means a captive insurance company organized under the laws of this state pursuant to the Liability Risk Retention Act of 1986, as amended, compiled in 15 U.S.C et seq., as a stock or mutual corporation, a reciprocal or other limited liability entity. Risk retention groups formed under this chapter are subject to all applicable insurance laws, including but not limited to, any applicable provisions in chapters 1, 2, 5, 6, 11, and 45 of this title. 5

subject to the discretion of the Commissioner.

6 Stock Mutual Reciprocal Manager-managed LLC Non-profit corporation Partnership Pure - $250,000 Special Purpose Financial - $250,000 Protected Cell - $500,000 Association - $500,000 Industrial Insured - $500,000 Risk Retention Group - $1,000,000 Minimum must be provided in cash or LOC 6

Protected Cell - $500,000 Association - $500,000 Industrial Insured -

7 Association and RRG captives -- standard investment restrictions for insurers, subject to Commissioner s authority to approve alternative reliable methods of valuation Pure, protected cell (including incorporated), SPFC, and industrial insured captives -- no restrictions on permissible investments May provide reinsurance as authorized by Title 56 on risks ceded by any other insurer May take credit for reinsurance ceded to qualified reinsurers With consent of Commissioner, may take credit for reinsurance ceded to unauthorized reinsurers Insurance of any worker s comp. or health qualified plan of parent is deemed reinsurance May take credit for reinsurance ceded to pool, exchange or association to extent authorized by Commissioner 7

any other insurer May take credit for reinsurance ceded to qualified reinsurers With consent of Commissioner, may take credit for reinsurance ceded to unauthorized reinsurers Insurance

8 0.4% on first $20 million in direct premium collected or contracted, and 0.3% thereafter 0.225% on first $20 million of assumed reinsurance; 0.150% on next $20 million of assumed reinsurance; 0.050% on next $20 million of assumed reinsurance; and 0.025% thereafter Minimum annual tax is $5,000 Maximum annual tax is $100,000 (applies to each protected cell, not whole captive) Premium $0 - $20,000,000 $20,000,000 - $40,000,000 $40,000,000 - $60,000,000 > $60,000,000 Direct 0.4% 0.3% 0.3% 0.3% Reinsurance 0.225% 0.150% 0.050% 0.025% Minimum Tax - $5,000 Maximum Tax - $100,000 8

025% thereafter Minimum annual tax is $5,000 Maximum annual tax is $100,000 (applies to each protected cell, not whole captive) Premium $0 -

9 Insurance treatment under federal tax law permits deferred taxation through deduction of premium payments and losses as well as loss reserves (including incurred but not reported losses IBNR). Insurance treatment under federal tax law requires risk shifting and risk distribution. Can accomplish risk shifting and risk distribution through either a brother/sister arrangement or by insuring sufficient third party business. Tennessee Department of Commerce & Insurance Captive Insurance Department Self-Insurance Institute of America, Inc. 32 nd Annual National Educational Conference & Expo October 1-3, 2012 Indianapolis, IN 9

Can accomplish risk shifting and risk distribution through either a brother/sister arrangement or by insuring sufficient third party business.

10 Agenda A. Commerce & Insurance B. Regulatory Team C. Captive Assessment D. Application E. Forms F. Q & A Commerce & Insurance Tennessee is the second oldest US captive domicile having first passed a captive law in Tennessee s new captive law, contained in the Revised Tennessee Captive Insurance Act, became effective on September 1, Changes in the new Act put Tennessee on the leading edge of captive regulations in the United States. 10

11 Commerce & Insurance The Law permits the formation of: Traditional single parent captives (Pure) Group captives Industrial insured captives Risk retention groups Protected cell companies Branch captives, and Special purpose financial captives Regulatory Team Julie Mix McPeak - Insurance Commissioner Larry Knight - Assistant Commissioner Michael A. Corbett - Director Captive Insurance Robert J. Ribe - Examinations Director Tony Greer Chief Counsel for Insurance Andrew P. Rhea - Assistant General Counsel 11

Regulatory Team Julie Mix McPeak - Insurance Commissioner Larry Knight - Assistant Commissioner Michael A.

12 Focus Two primary objectives: Monitoring the solvency and standards of captive insurance companies. Ensuring regulation does not hinder the fair operation of the market. Captive Assessment The process: Select an authorized captive manger Engage a qualified law firm Arrange a meeting with the Commerce and Insurance Captive Director and staff. 12

Ensuring regulation does not hinder the fair operation of the market.

13 Application Process Two-track process: 1. Prepare documents necessary for incorporation. 2. Prepare documents necessary for application to the Department. Steam boat whistle.mp3 Application Process Sample of additional information required: Detailed plan of operation Submit a description of coverage, limits & rates Adequacy of loss prevention programs Feasibility study Strength of management Biographical affidavits 13

mp3 Application Process Sample of additional information required: Detailed plan of operation Submit a

14 Application Process Minimum Capital & Surplus Deposited with Commerce & Insurance: Pure - $250,000 Special Purpose Financial - $250,000 Association - $500,000 Industrial - $500,000 Protected Cell - $500,000 RRG - $1,000,000 Application (continued) Other requirements: The captive manager, CPA and actuary must be approved by the captive department. The Department may perform an organizational exam shortly after issuing the Certificate of Authority. Application fee - $675 Feasibility Study Review Pass thru: Est. $3,000 - $4,000 No annual license fee 14

captive manager, CPA and actuary must be approved by the captive department.

15 Local Representation Requirements Annual Directors meeting in Tennessee Principal place of business in Tennessee One board member must be a Tennessee resident Forms & Information Forms & information available online ( Application form Biographical affidavit Approval forms for managers, actuaries & CPA firms List of currently approved managers, actuaries & CPAs Index format for captive application Letter of credit form Helpful links 15

gov/commerce/insurance/captive) Application form Biographical affidavit Approval forms for managers, actuaries & CPA

16 Comments, Questions & Suggestions Working to create a world class captive insurance domicile in Tennessee State of Tennessee Department of Commerce & Insurance Captive Insurance Department (888)

Tennessee Department of Commerce & Insurance

Tennessee Department of Commerce & Insurance Captive Insurance Department Tennessee Captive Insurance Association December 7, 2011 TDCI s Focus Two primary objectives: 1. Monitoring the solvency and standards