Despite challenges Tennessee experienced a year of growth during 2020 but will that continue over the next 12 months?
The State of Tennessee might be known for its country music scenes, hot chicken and whiskey but it has something else to add to its repertoire — it is also home to the seventh-largest captive insurance domicile in the US. The Tennessee insurance market experienced strong growth in 2020, surpassing the growth it experienced in the prior three years. The Volunteer State ended 2020 with a total of 720 risk-bearing entities, which included 212 captives and 508 cells.
It also saw a 64 per cent increase in licensed entities on its 2019 figures, with 18 new captives and 41 new cells in 2020, according to figures from the Tennessee Captive Insurance Association (TCIA).
In December last year, it was revealed exclusively to Captive Insurance Times that International Paper, a Memphis-based global fibre-based packaging, pulp and paper products, had moved its captive to Tennessee from Vermont. The arrival of International Paper’s captive insurance company was “a milestone for Tennessee” as it represented the state’s 700th risk-bearing captive insurance entity, according to the Tennessee Department of Commerce and Insurance (TDCI). In 2020, $22.8 million was located and returned to Tennesseans in combined life insurance benefits/annuities and monies returned through the department.
Commenting on what is the drive behind this growth, Belinda Fortman, director of captive programmes for the TDCI, states: “The hardening market has certainly been a contributor to the recent growth in captive insurance entities, but it is noteworthy that Tennessee was one of only a few captive insurance domiciles that had more formations than dissolutions.”
Fortman suggests that Tennessee’s “growing reputation as a respectable, business-friendly domicile” has been a key factor in why captive owners and captive managers are choosing to form captive insurance companies in the state.
Another factor adding to growth, is around the attraction of the state’s cell structure legislation, according to Gary Osborne, vice president, alternative risk programmes at Risk Partners.
Osborne says: “When evaluating Tennessee, it is critical to note just how much feature cells are in the success of Tennessee as a domicile.”
Although Tennessee has experienced growth and is looking to keep on top with proposed captive legislative changes, the last 12 month have been far from easy.
“We would be remiss to not mention the impact that the COVID-19 pandemic has had on the Tennessee captive insurance market and the industry generally,” Fortman comments.
“Fortunately, the Tennessee captive section was able to pivot to a remote work environment due to our having implemented technological changes well in advance of the pandemic lockdown,” she adds.
Although the situation was challenging, Fortman highlights that the captive section was able to make the transition seamlessly, without impacting customer service or responsiveness.
The letter of the law
The growth of Tennesee’s captive insurance industry remains a priority for Governor Bill Lee and Commissioner Carter Lawrence – ensuring a bright future for Tennessee as a captive insurance domicile. From an economic impact perspective, Tennessee has written over $6.4 billion in premium and collected over $16 million in taxes and fees.
One way to remain competitive is keeping its captive legislation up to date. Tennessee’s captive advantages include permitting virtually all captive licensing types allowable under the captive statues of other leading domiciles.
Fortman states that the captive section has initiated new legislation for 2021 and it is currently under consideration with the state legislature.
The legislation, which is currently pending, will reduce the minimum capital for protected cell captives to $100,000 and permit parametric insurance for captives.
“The reduction to $100,000 will spur continued growth of captives in Tennessee because it will help make captives more affordable for medium to smaller-sized companies,” Kevin Doherty, member at Dickinson Wright and president and chairman of the TCIA, explains.
Meanwhile, Doherty says the parametric option will provide for “increased flexibility and creativity in designing programmes to address risks such as natural disasters, where providing a basic level of coverage without detailed claims adjustment will help put claims money back into the pockets of companies when they need it the most”.
Fortman notes that the TDCI is currently working with the TCIA to ensure the state’s captive statutes are up-to-date, competitive, and provide a strong basis for balanced and consistent regulation.
Like other domiciles, Tennessee is challenged by making sure that the state’s regulatory environment provides appropriate oversight without being overly burdensome.
Doherty explains: “As in many domiciles, there is a natural tension between the appropriate level of regulation of the traditional marketplace versus captives.”
“Tennessee will have to continue to work hard to make sure it offers the best of opportunities and regulation in the captive marketplace,” Doherty affirms.
Another issue facing Tennessee within its regulatory department is the challenge of transitioning the state’s regulatory team with some turnover in senior positions.
Osborne explains although this is causing challenges, “[the state] has been able to bring in new but old faces that are known to the industry and who can build on the trust and stability that the state has established”.
In June 2020, Fortman joined the TDCI as captive insurance section director. She replaced Jennifer Stalvey, who took on the role in December 2019.
In November 2020, Tennessee governor Bill Lee appointed Carter Lawrence as commissioner of the TDCI. Lawrence replaced Hodgen Mainda, the previous commissioner after he stepped down from the role after just one year.
Mirroring the good times
Forecasting on what 2021 might look like for Tennessee and if continued growth is on the cards, Doherty suggests that even more growth is on the cards for the next 12 months.
Despite difficulties surrounding the pandemic, Doherty notes that Tennessee had a good year.
He explains: “Now that the economy is opening up again and in general continues to grow exponentially, there will be even more interest in captives because they provide such good business answers to the insurance needs of all types of companies.”
The captive domicile ‘competition’ field is busy. Out of the 50 states in the US, around 30 of them are captive domiciles, along with being surrounded by offshore islands such as Bermuda and the Cayman Islands.
So how has Tennessee established itself on the top of that field?
Osborne highlights that Tennessee is one of a few well-established domiciles with a dedicated captive service team and internal examination capacity as well as an attractive central location.
He adds: “It sends its people out to build the brand and spread the message that captive business is welcome in Tennessee.”
