Despite the fact that Tennessee has held an antiquated form of captive law on its books for some time, the industry proper did not kick-start until 2011, when the state government introduced new legislation designed to bring its captive insurance laws in line with other US domiciles...
Despite the fact that Tennessee has held an antiquated form of captive law on its books for some time, the industry proper did not kick-start until 2011, when the state government introduced new legislation designed to bring its captive insurance laws in line with other US domiciles. This revamp to the existing captive legislation was designed to create another reason for major companies to locate their US operations in the state of Tennessee.
As a result of this overhaul, Tennessee has seen favourable growth in its captive insurance market—expanding from two captive entities to 35 in the space of two years. Since 2011, the state has also run a department of economic development with its own specifically designated resources and staff to help focus on captive regulation. Additionally, the captive section has been blessed with robust support from the Tennessee Captive Insurance Association (TCIA).
Another government initiative in 2011 was to bring Julie Mix McPeak in as the new insurance commissioner. According to the director of Tennessee’s captive insurance section, Michael Corbett: “[McPeak] must be given full credit for seeing the great potential that a vibrant captive domicile could bring to the development of employment and investment in the state. Her efforts led directly to the revitalisation of the Tennessee captive statutes and the development of a ‘best in class’ regulatory team, of which I am humbled to be a part.”
With the proliferation of competing domiciles across the US, captive owners and service providers are actively looking for domicile locations that best suit their budgets as well as their needs.
For many, the main job of a captive is to provide a mechanism for companies to control risk. Corbett comments: “At its essence ‘controlling risk’ means that people go home safe at night. Any captive that comes to Tennessee and meets the spirit of this test will have the full support of the Tennessee captive section. On a more granular level, the Tennessee captive section seeks to ensure that all captives are properly capitalised and that our section fosters an environment and commitment to the captive insurance industry that supports all present and future captives.”
In particular, Tennessee is primarily dedicated to serving the ‘middle market’ US companies. These companies, particularly the ones covered by the 831(b) election, are smaller in the market compared to those favoured by other domiciles, and Tennessee has begun to cater to that niche.
An insurance company, including a captive, may elect under 831(b) to be taxed on its investment income only, so long as the company receives less than $1.2 million in premiums each year. The 831(b) election is filed along with the company’s first tax return, and cannot be revoked without the consent of the secretary of the treasury. This election is an incentive provided by Congress to encourage the formation of new insurance companies.
This niche has allowed Tennessee to be selective in the captives that it will authorise.
The state strives for captives that provide steady growth and sustainability. These types of captives can then, in turn, do good things for the business owner, allowing them to, ultimately, save dollars and either deploy them back into the business or benefit the employees of the company.
Andy Rhea, managing director for Tennessee’s first home-grown captive management company, Iroquois Captive Services, says: “Captive services have not, traditionally, been readily available to companies in Tennessee’s immediate vicinity. The thought process for many people who have been apprehensive to establish a captive may have been that it would be too difficult to relocate to somewhere like Vermont. Now that they have the option to run a company from their current location, it becomes much more appealing.”
On Iroquois, Rhea says: “We recently saw an opportunity to form this company and we are really excited about it. Being the first captive management company to be domiciled here gave us the chance to bring together advisors who had previously been in the captive industry and put them all under one roof. We think, at the moment, that we are ahead of the curve in what we feel is going to be a lot of growth.”
Although approximately 30 states have captive legislation, there are only around seven that are actively involved with captive management on a daily basis.
Rhea continues: “While I expect that more states will try to pass legislation—if they do not commit to putting the regulatory expertise together, then they cannot be successful. They need the backing and resources of the government behind them—because a captive cannot be regulated in the same way as a traditional insurance company.”
Aside from start-ups such as Iroquois, some of the larger, national captive managers have seen the potential for captive growth that is currently endemic in Tennessee. One such company, Strategic Risk Solutions (SRS), has established an office in Tennessee that is currently staffed by a senior person who relocated from Vermont. Although it is a start-up office, president and CEO Brady Young is optimistic for development in the future.
Young comments: “At first we usually manage captives on a remote basis and, once a critical mass of clients is reached, we can begin to hire locally or move some of our own people in and grow from there. What’s different with Tennessee is that we are optimistic of the domicile’s success given the infrastructure and governmental support available. As such, we decided that we wanted to commit and be on the a part of Tennessee’s initial growth surge, instead of waiting on the sidelines.”
One of Tennessee’s largest growth areas for captives at present is employee benefits, following implementation of the Patient Protection and Affordable Care Act (PPACA), commonly known as ‘Obamacare’.
This is a growth area for captives nationwide and Tennessee in particular—which is well positioned in terms of healthcare. Nashville has some of the largest hospital corporations in the US. Although becoming pigeon-holed into one niche is not the plan, the healthcare insurance industry is, according to Rhea, “without a doubt [Tennessee’s] biggest growth area”.
While many of Tennessee’s competitors see their own regulatory frameworks as a unique selling point, Young claims that this alone is not enough to guarantee success as a captive domicile.
Young says: “It is no use giving somebody a beautifully-made violin if they have never played one before—the same principal goes for captive domiciles. While Tennessee’s laws are competitive, I believe it is not the law that makes the domicile but the way in which that law is administered.”
“We think Tennessee has a great regulatory team in place that is knowledgeable, supportive and, above all, accessible. In addition to this, Tennessee captive owners and managers can rest assured that they are domiciled in a supportive business environment.”
