The Midwest state has enjoyed a sharp increase in the number of captives redomiciling there since it made proactive amendments to its insurance legislation.
Missouri entered the captive arena relatively late—at the end of 2007—but it has since proved to be a success story. Businesses wanted an option that allowed them to keep their captive near the base of operations, while the state saw an obvious benefit in developing this industry in Missouri. The result was a collaborative effort between Midwestern businesses, insurance companies and state government that ensured the smooth passage of legislation establishing Missouri as a domicile.
In the first few months, two newly licensed captive insurance companies produced $30 million in premiums. The captive programme continued to grow throughout 2008, delivering $123 million in premiums written despite the Internal Revenue Service’s (IRS) attempts to eliminate tax benefits for captives and the continued soft commercial market cycle. While the growth in premiums was impressive, the crisis in the financial markets placed many redomiciliations and new programmes on hold. In response to the difficult financial climate, Missouri passed a revision to the captive law in 2009 designed to make new formations and redomiciliations even more attractive. Restrictive investment requirements were eliminated, redomiciliation for alien companies was clarified, new formation types were added and additional options were incorporated to address issues that our special purpose captives were having in securing credit. As a result, captive premiums increased dramatically in 2009 to $1.1 billion in what was only the second full year of the programme.
This explosive growth demonstrated that Missouri had the necessary ingredients to become a major US domicile, not least its location in the Midwest, which affords easy access from anywhere in the United States.
Missouri has two large metropolitan areas located on either side of the state, and approximately 40 percent of the largest publicly traded companies are located within a 500-mile radius. The state department has offices in St. Louis, Kansas City and Jefferson City, and uses those offices to ease the burden for out-of-state travellers. These cities also offer easy access to state departments and to a multitude of insurance and captive insurance experts. It usually takes time for a new domicile to gain the critical mass needed to attract the service providers necessary to operate captive insurance companies. In Missouri, however, those service providers are already here.
St. Louis is a hotbed for captive insurance company development because there are many large companies located there and it has a good service provider infrastructure. As a result, many captive experts are based there. From PricewaterhouseCoopers (PwC), St. Louis, David Monday manages the captive consulting group of PwC. The group offers a full range of captive services for new or existing captives, including auditing, consulting, feasibility and review of existing captive plans. Larry Pevnick and his team at Brown Smith & Wallace specialise in captive audits and tax advice, also from an office in St. Louis. Marsh Captive Solutions has dedicated its office in St. Louis to captive development throughout the Midwest. Milliman conducts many of the department’s captive application actuarial reviews out of its St. Louis office. Attorneys throughout St. Louis already serve captive clients. Taken together, all these captive experts actively support Missouri’s captive industry.
Kansas City is increasingly becoming a major centre of captive insurance activity. Lockton, the world’s largest privately heldinsurance broker, is headquartered there, as is its international captive development team. A Missouri-based captive management firm (Forrest T. Jones & Company, Inc.) also calls Kansas City home. Most of the St. Louis-based service providers also have offices in Kansas City. Another consideration is that the National Association of Insurance Commissioners (NAIC) is located in Kansas City. There is also a wealth of insurance expertise available for service providers considering expanding into Missouri, including many of the state’s major law firms that have based their insurance and captive experts in the Kansas City area.
The whole state has embraced captive insurance. Most of the service providers in our two largest cities also have offices in Springfield, our third-largest city and the gateway to the entertainment centre of the Midwest, Branson. The Jefferson City-Columbia area is brimming with attorneys who specialise in insurance, and many are currently providing legal counsel for our captive companies. All the major brokers, actuarial firms and accounting firms have offices in the state.
The list goes on. There are also dozens of approved service providers not currently located in Missouri who are allowed to do business in the state. For companies interested in redomiciliation, there is a simple approval process that allows them to continue to use their current service providers.
"Missouri has the desire to continue to grow our captive programme and has the funding mechanism in place to maintain our experienced staff now and as the programme continues to grow."
Although premium growth has been outstanding, Missouri’s captive development plan is focused on long-term growth, thereby maximising the benefit to our state and Midwestern businesses. Missouri’s law allows for the popular formation types seen in most domiciles, but it does not legislate for risk retention groups or protected cell captives. With increased scrutiny and accreditation standards being enforced on risk retention group domiciles and with cell captives’ tax arrangements being reviewed by the IRS, it was considered prudent not to include these formation types in the initial phase of the programme. This continues to give the department the flexibility it needs to regulateeach captive as an individual without mandated requirements being imposed. Missouri wants to work with captive owners to develop unique plans that work well for them and provide a benefit to the state.
Support for Missouri’s programme comes from the highest level of state government. Our department is funded by fees from the companies we regulate, rather than state general revenue. This feebased structure, requiring a $7,500 licensing and renewal fee, is integrated into the captive law. With the understanding that this is not a competitive fee, a credit was established in the law for off-setting the full fee amount against future premium taxes. The credit allows the captive to write approximately $2 million in direct premium and $3.5 million in assumed premium before any premium tax is due. This fee structure also makes funds immediately available throughout the year that the department can use to promote and regulate the captive industry. The fee structure also allows the department to maintain adequate staffing or increase it to remain responsive as the number of captive companies continues to grow.
All types of companies are benefitting from captive insurance in Missouri, from small pure captives and association captives to large life reinsurance captives. Missouri is also home to international life and property and casualty (P&C) reinsurance groups such as RGA, Swiss Re and General Re. Having these types of companies domiciled in Missouri has meant a proliferation of experienced reinsurance and actuarial staff who understand complicated reinsurance transactions. Nearly all captives use some form of reinsurance, so this experience provides a good understanding of the captives’ overall risks and reinsurance programme. It also makes Missouri a natural place for large insurers from across the nation that are considering forming a special purpose life reinsurance captive. The special purpose law is designed to allow several options for direct writers and reinsurers to securitise or use alternate forms of collateral to secure credit for reinsurance. This frees up capital for the ceding company to use in growing its business. An added feature that our special purpose captives enjoy is a legal requirement that the department makes its application decision within 60 days of receiving a completed filing.
Captive insurance is here to stay. Missouri is interested in licensing all types of captives allowed under the law, and several new formations are already under way in 2010. Missouri has the desire to continue to grow our captive programme and has the funding mechanism in place to maintain our experienced staff now and as the programme continues to grow. Service providers are available all over the state to support our captive companies. The law allows favourable formation options for most businesses and insurance companies, and our state government continues to demonstrate a commitment to maintaining an attractive captive law. Missouri is a great place to do business, and you’ll find our common-sense approach to regulating captives and our Midwestern work ethic to be very conducive to maximising the value of your captive. So whether you are considering forming a new captive or moving your existing captive closer to home, Missouri is ready to listen and work with you to get the job done.
John Rehagen is the captive program manager at the Missouri Department of Insurance, Financial Institutions and Professional Registration. He can be contacted at: john.rehagen@insurance. mo.gov or on: (573) 522 2563. Forms and additional information are available at: www.insurance.mo.gov