Illinois has had a quiet captive insurance history, but after enacting landmark captive reform in late 2018, could it be set to arrive on the captive scene?
Illinois does not have a history of strength in the captive insurance marketplace. That is not to say that it has seen no action in the industry—there are currently three captives (all pure) domiciled in the state—nor that it lacks any of the characteristics that may make it a good option. It is the state with the fifth highest GDP and the home to the third largest US city, Chicago, but in previous years, underdeveloped captive insurance legislation and high self-procurement tax has meant the state hasn’t been viewed as a feasible domicile for captives. Now, however, revelatory regulatory changes made in 2018 mean the jurisdiction may soon become recognised as a viable option for captives.
Regulation revelation
On 27 November 2018, Illinois adopted SB 1737, a reform of the state’s captive insurance regulatory framework that saw it follow in the footsteps of success captive domiciles, such as Vermont, Hawaii, and South Carolina, in providing a substantially improved environment for companies looking for captive solutions.
The landmark bill, the potential impact of which should not be underestimated, did not pass without its issues. After being passed by the Illinois General Assembly on 31 May last year, the bill was vetoed in August by Governor Bruce Rauner due to the “concerning” regulatory barriers it imposed on short-term limited-duration health plans and workers’ compensation insurance. Rauner was, however, in support of the updates to the captive regulatory structure, and following the state Senate’s unanimous vote to override his amendatory veto, it was passed in late November.
The bill amends the state’s captive law in a variety of ways. One of the key changes is that it provides the Illinois director of insurance with the authority to set minimum capital and surplus for captives licensed in the state, based on criteria deemed to have a significant impact by the director. The capital or surplus requirements must not be less $250,000 for pure captives (down from $1 million previously), $500,000 for industrial insured captives, and $750,000 for association captives.
Additionally, it authorises captives to write insurance that covers the risks of a ‘controlled unaffiliated business’, an unaffiliated entity with whom an affiliate of the captive has a contractual relationship, and the risks of a captive’s affiliates.
The bill also permits captives to meet the minimum capital and surplus requirements using Illinois bonds, US-backed securities or an irrevocable bank letter of credit approved by the director.
Captives are authorised to issue contractual reimbursement policies to affiliated certified self-insurers (as long as they were authorised under the Illinois Workers’ Compensation Act or an analogous law of another state) and to affiliates insured by workers’ compensation insurance policies with a negotiated deductible endorsement.
The bill also offers enhanced lending flexibility to Illinois-licensed captives, providing that the captives may make loans to their affiliates. Additionally, it authorises captives to accept risks from and cede risks to, or take credit for, reserves on risks ceded to an approved affiliated captive insurer or captive reinsurance pool—with the approval of the director.
Another key change is the reduction of the self-procurement tax. The premium tax rate for contracts of self-procured insurance has dropped from 3.5 percent to 0.5 percent of gross premium.
The bill, which was supported by the Illinois Department of Insurance, key industry groups, and several large Illinois-based taxpayers, has been very well received by the captive industry. In a blog post prior to its enactment, Mary Kay McCalla Martire, Thomas Jones, and Lisa Kaderabek from McDermott Will & Emery referred to it as “a positive step forward” and an “important and exciting development for the captive community”.
They suggest that the bill will mean the state will “certainly warrant consideration by Illinois-based enterprises that have previously had no real option but to locate their captives elsewhere”.
Victoria Fimea, Gallagher senior vice president, legal counsel and head of regulatory department for North America, said the bill’s implementation shows Illinois has “finally succeeded” in amending “captive insurance statute to make Illinois a more attractive jurisdiction”.
Fimea praises the state Department of Insurance and legislature for being “responsive to industry concerns concerning its statute”.
Untapped potential
With the amendments to the captive statute now embedded, Illinois has reasons to be optimistic, with hopes it can emerge into the captive market with a vigour similar to the reemergence of its Chicago Bears, which returned to the NFL playoffs this year, after an eight year hiatus.
The state has the fifth highest GDP, is the sixth most populous, is home to myriad companies, large and small, and has the advantage that many captive insurance service providers already have a presence in the state.
Fimea suggests it is “a logical jurisdiction for captive growth”, and argues that its prior captive law, which was for so long its achilles heel, could now be viewed as a strength because it means the market has great “untapped” potential.
While it does offer an untapped market, the freshness of its captive legislation does mean that Illinois lacks experience in the captive market, which Fimea highlights as a key obstacle in its growth.
She explains: “Though Illinois has made great strides with its captive legislation, it does not yet have dominant profile as a captive domicile. It will be important for Illinois to have a presence in the captive industry through visibility at captive industry conferences. It will serve Illinois well to be able to assure the captive industry that it has the internal resources, staff and support to efficiently manage captives domiciled in Illinois.”
“The Illinois Department of Insurance will need to enhance its website so that the captive industry may easily find information about domiciling a captive in Illinois. Should the industry grow in Illinois, then a formal and organised captive association will most assuredly develop.”
Action over words
As important as the adoption of the legislation has been, what is vital moving forward is that the Illinois Department of Insurance does not rest on its laurels, and is active in supporting the legislation and dedicating substantial energy to growing the state’s captive market.
Should it do this, Fimea predicts the Prairie Dog State will “leap in the standings of domiciles based on number of captives”.
Jones, McCalla Martire, and Kaderabek’s conclusions are on a similar note. They argue that whether Illinois is able to become a favored captive jurisdiction remains to be seen and will depend upon whether the Illinois Department of Insurance acts in a supportive manner in adopting regulations, handling applications and providing interpretations, as well as whether service provider infrastructure develops.
