16 February 2021Law & regulation

Alabama legislature considers “Herculean” captive bill

Alabama’s state legislature is examining a captive bill that will expand the state’s offering of alternative investment vehicles with three new categories of captives, for agency captives, reinsurance captives and special purpose finance captives.

Alabama’s 2021 captive bill also includes a number of  changes relating to branch captives that had been presented to the state government in 2020 that were never ratified due to the legislature closing early amid concerns about COVID-19. These changes had proposed allowing multi-state and multinational organisations to better manage their Alabama risks in Alabama.

The captive bill will see the capital requirement for both single parent captives and protected cell captives reduced from $250,000 to $100,000. It will also be made possible to use surplus notes for us to 10 percent of the capital held by the captive, where currently surplus notes cannot be held as part of that capital allocation.

To encourage more captives to redomesticate to Alabama, the state will allow captives that have already passed an examination to assess their suitability to set up without having to sit another examination, as long as the previous state’s examination is deemed equivalent to Alabama’s.

Alabama is also consolidating all the rules relating to RRGs in Alabama, which are currently spread across a number of different laws and statutes, into one place. Having a single law related to RRGs is intended to simplify the process - both for the regulator and for companies wishing to join an RRG.

In rules first presented to the government in 2020, Alabama will relax capital standards for branch captives, aligning them with other pure captives under the Alabama law and expand their use to new lines of business. Currently branch captives are only allowed to write employee benefits in Alabama.

Alabama is also codifying a formal dormancy statute, allowing captives to cease writing business for up to five years while remaining in existence. Technical corrections to the language of the captive regime also introduced greater consistency between chapter 31(B) and 31(C) of the code, removing the requirement that coastal captive coverages be fronted through an admitted traditional carrier.

Ben Richardson: director of external affairs at the Alabama Captive Insurance Association, described the 2021 captive bill as “a Herculean legal undertaking,” with a busy programme for 2021 added to what was also an ambitious bill in 2020.

“You don’t often see such an ambitious and aggressive bill for captives,” he said.

“Usually states only make minor updates to their captive legislation. But the feedback we have received so far from legislators is positive and we are confident that this bill will be approved. It is difficult to predict the timing with any legislation, but we expect it to be in place by June or July.”

The new categorisations for agency, reinsurance and special purpose finance captives are designed to broaden the scope of what is possible for captives that are domiciled in Alabama.

Agency captives are designed for risks that are difficult for commercial market insurers to cover. Alabama has a vibrant insurance industry and a lot of insurance companies domiciled in the state, and reinsurance captives will be able to reinsure risk insured by third party insurers, whether they are based in Alabama or not.

Special purpose finance captives allow for bespoke captive structures to be created according to the unique needs of the client if other structures are not suitable. It is intended to offer flexibility, allowing companies to create any kind of captive they can think of, as long as it is approved by Alabama’s Insurance Commissioner.

The wording for the special purpose finance captive legislation is modelled on the same offering that is already available in DC.

Richardson said: “With these new vehicles, as well as branch captives, there is really nothing a captive cannot do in Alabama.”

He added: “The legislature is moving quickly. Last year was a difficult year with COVID and a lot of legislative business ended up not getting done, including the 2020 captive bill. This year tremendous steps have been taken to ensure that doesn’t happen again and Alabama can get everything on its agenda done.”