Belinda Fortman, TDCI
15 March 2021Law & regulation

Tennessee: providing certainty in uncertain times

How many captives set up in Tennessee in 2020?

There were 59 new formations, comprising 18 standalone captives and 41 cell captives.

Are you seeing evidence of the hardening market significantly encouraging more businesses to turn to captives, either in terms of launches or increased use of existing captives?

The hardening insurance market—combined with the COVID-19 pandemic—are causing businesses to take a closer look at their risks. It is not uncommon at their renewal of their traditional insurance policies for businesses to see significant increases in premium quotes across multiple lines of coverage.

Therefore, risk managers and C-suites are seeking alternative solutions to better control costs while continuing to properly protect their lines of business and, as such, we are seeing an increase in the interest and formation of captive insurance companies to meet these needs.

What regulatory changes have you implemented and/or do you have planned for captives?

Tennessee is always evaluating opportunities to enhance its captives law to better support businesses and the industry. Discussions continue to be ongoing about what this may look like for 2021 and beyond. However, to date, we’ve announced nothing publicly.

That said, we are working on changes for our regulatory processes and procedures, including adding an online portal for the submission of captive applications and other filings. We think this will improve the efficiency for, and communications with, our captive insurance managers to ensure their experience working with Tennessee continues to be business-friendly.

What has COVID-19 meant for the state’s captive industry? Has it changed the coverage captives are writing, and has it made captives more or less interesting as a proposition?

In the current market, there are several factors affecting the captive insurance industry that create unique challenges for C-suites and risk managers. Prior to the pandemic, we started seeing the hardening of the market with premium increases occurring across nearly all lines of coverage.

Additionally, the pandemic has caused many to re-evaluate not only their insurance programmes but their overall operating strategy. All this boils down to businesses seeking some form of certainty during very uncertain times.

The good news is the captive insurance industry is designed to do just that and the many amazing service providers across Tennessee and the country are primed and ready to help businesses navigate through these unprecedented times.

What is the state’s unique selling point for captives?

Nashville, our capital, is currently one of America’s hottest cities and the opportunity for captive board members to travel to our state for the annual meetings is a plus. Tennessee offers the local crucial infrastructure a captive must have to get started, including approved captive management experts, actuaries, CPA firms, financial institutions, law firms and other service providers.

“The ability for businesses to re-domesticate to their ‘home’ state has increased.”

Tennessee’s pro-business environment is reflected in how the captives section works with its captive customers. We strive to be competitive on a cost basis, including having examinations performed in-house, and offering first-year minimum premium tax credit to offshore captives re-domesticating to Tennessee.

Our laws offer the ability to form series limited liability companies, which is not available in many other captive insurance domiciles, and our statutes provide the ability to license virtually all captive licensing types allowable under the captives statutes of other leading domiciles.

In addition, our captive insurance statutes permit captives to write medical stop-loss directly, give the ability to insure annuities, and offer flexible options for the minimum capital and surplus contributions. Above all, we have a team of professional, credentialled captive insurance analysts who are all focused on providing the best customer service available in our industry.

Do you see any trends in terms of the types of captives that are coming to your state?

We are seeing an uptick in the number of captives with home offices in this state re-domesticating their captive insurance companies to Tennessee. This attests to the reputation our domicile has earned for providing responsible and business-friendly regulation. In terms of types of captives being formed, we continue to see a frequent use of the protected cell captive licensing type, but standalone pure captives remain a popular option as well.

In terms of programmes offered within the captive insurance companies, we are seeing an increase in what may be described as traditional captive insurance coverages, such as deductible reimbursement or self-insured retentions for property and liability insurance. We believe this has been the result of the hardening market in both these areas.

The controversies around 831(b)s don’t show any signs of letting up, has this had any impact on interest in these structures? And do you have any thoughts about the IRS’s campaign in this area?

We have seen a decrease in the number of captives being formed and electing to be taxed under section 831(b) for several years. Those that are being formed have coverages that include more high frequency/low severity lines, as opposed to all high severity/low frequency lines as was seen in the past. The latter was one of the concerns the Internal Revenue Service (IRS) had expressed with the 831(b) structures that had been investigated, so the move towards more “traditional” coverages may be impacted by this factor as well as the hardening market.

In terms of thoughts on the IRS’s interest in this area, I think clarity would be of benefit to the industry as a whole. The experience of the pandemic and impact on businesses to some extent undermines the concern that high severity/low frequency lines of business do not have a basis for the premium values some captive programmes had charged their insureds.

Business certainly experienced significant losses from this infrequent event. Those businesses that had a captive programme in place to cover business interruption losses due to the pandemic would have had resources available to help them get through the financial hardship they faced from it.

US states seem to have been pushing to win business from offshore domiciles such as Bermuda and Cayman—do you agree?

The change in the tax laws relating to offshore entities reduced the benefit of domiciling a captive offshore. Also, the number of states offering captive insurance regulation has increased over the past several years so the ability for businesses to re-domesticate to their “home” state has increased.

As mentioned, we have seen several offshore captives re-domesticating to Tennessee, and the growth of Tennessee as a leading captive insurance domicile was part of the decision for them to make the move.