Captives Bring Premium Dollars and Jobs to Missouri

When it comes to the captive insurance industry, slow and steady growth is just fine with the state of Missouri. But it’s not like the state is reluctant to encourage captives to form or relocate there. Far from it.

In 2009, the state had three captives; now it has 19 active captives and one that was recently licensed. Legislative initiatives in 2007 and 2009 paved the way for the industry’s growth.

“In 2009, there were only three active captives,” explained John Rehagen, captive program manager for the Missouri Department of Insurance, Financial Institutions & Professional Registration. “This last year, at the end of 2011, we issued our 20th license; 17 of the 20 licenses we’ve issued have occurred since that change in the law.”

Rehagen added that at the end of 2008, captives in the state “had written about $123 million in premium. Immediately in 2009, premium jumped to a billion [dollars].” By early 2012, captive written premium had risen to $1.5 billion, he said.

Missouri wasn’t always bullish on captives, said David Dimit, executive director of the Missouri Captive Insurance Association (MOCIA). But in 2007 and 2009, the state made the conscious decision not to let go of the dollars that would be generated by Missouri companies wishing to form captives in order to better manage their exposures and their insurance costs.

Proponents of the legislation asked, “‘why would we want to let Missouri companies form a captive in Tennessee? Let’s make it easy and simple and inexpensive for them to form it in Missouri,'” Dimit said. “So that’s what they’re doing.”

While there are more than 33 states that allow captives to be formed within their jurisdiction, only about 10 or 15 states are really serious about encouraging them.

“Missouri is one of those states,” Dimit said.

There has been little resistance from lawmakers, or anyone else, to the captive industry in the state, Dimit said. “The original legislation was passed under a Republican governor, and the current governor is a Democrat, and he’s very pro-captive and supportive of what we do. We don’t know of anybody, [any] group of people in Missouri that have any opposition to captive formation.”

While some companies and industries form captives offshore for tax purposes, in places like Bermuda and the Cayman Islands, the taxation issues are becoming less relevant, Dimit said. Missouri, aware that it is in competition with foreign domiciles as well as other states, is trying to make it easy for companies to form domestically.

“It’s very easy and simple and quick to form a captive in Missouri as opposed to those foreign domiciles. It’s very much of an advantage to have all the work done — the accounting, the actuarial studies — being done here in the United States as opposed to a foreign branch of that company,” he said.

Gov. Jay Nixon signed House Bill 577 in July 2009, simplifying the process of moving offshore captive operations to Missouri. The bill made it easier for companies to bring their captive operations to Missouri by removing certain financial and investment restrictions and expanding organizational options for captives, according to information released by the insurance department.

Insurance regulators asked the state legislature for the law to encourage captive growth in Missouri, and it has worked as designed, said Insurance Director John M. Huff when announcing in 2010 the dramatic gains in captive premium volume in the wake of the legislation. Huff said the captive insurance industry contributes to Missouri’s economy through premium tax collections, as well as bringing in high-paying support jobs, including attorneys, CPAs, actuaries, brokers, captive managers and more.

Good for Business

“Each new captive is a positive revenue generator for the state,” Rehagen said. “Every captive pays a premium tax, or they pay fees.

The captives typically are not owned by insurance companies, so they need managers, they need accountants, they need actuaries, consultants to help them run that insurance business.”

In 2007, there were only five approved service providers in the state, according to Rehagen. At last count there were around 85 captive industry service providers, with more on the way, he said.

“I would say in general, most of the companies don’t want to really be in the insurance business,” Rehagen said. “They’re using their captive, and they’re being professionally advised on how to operate an insurance company by the third-party service providers,” such as insurance brokers.

“Some of the largest captive management firms, Marsh and Aon and Willis, these guys are all brokers,” Rehagen added.

In addition to leading the captive insurance association, which promotes and serves as an information resource for the industry, Dimit is an approved captive manager in the state of Missouri.

He agreed that captives usually hire someone to run their operations. “It can be a broker. It can be a captive manager. It could even be an attorney. … There’s a large industry of captive managers, and most large brokerage companies have a captive specialist within their personnel, such as Marsh, or AIG, or Aon. They all have captive managers.”

Premium tax revenues and the creation and relocation of new businesses in the state are not the only economic benefits the captive industry brings to the state, Rehagen said. Other benefits include increased travel and tourism dollars spent by out of state company owners and service providers, as well, he said.

Good for Risks

In a report released in 2011, insurance broker Marsh noted that organizations forming new captives between 2007 and 2010 more than likely established them in onshore U.S. domiciles.

The Marsh report, “Trends and Performance — 2011 Captive Benchmarking,” released at the 2011 Annual Conference of the Risk and Insurance Management Society Inc., showed that while the number of active captives remained relatively consistent, aggregate premium levels increased substantially across all geographies and most industry sectors.

“In a period when the reinsurance and insurance markets continued to soften, and when many organizations struggled to just keep float, captive insurance companies performed exceedingly well,” stated Michael Cormier, global captive solutions practice leader for Marsh. “Moreover, the financial stability and claims paying ability of captives generally improved during the four-year period.”

He added that “rather than using captives as a money-saving vehicle when traditional insurance costs rise, owners are viewing their captives as efficient and effective long-term risk management and risk financing solutions.”

Speaking at the World Captive Forum in Miami, Joe Plumeri, chairman and CEO of Willis Group, also touted captives as an effective and creative tool for helping corporations manage “unpredictable” risks.

“Captives play a key role in the insurance industry, offering creative solutions for critical risks,” Plumeri said.

Dimit, with the MOCIA, said a captive can work for most industries but there is a size minimum. Whether it’s a public company or private company, “it really doesn’t make sense to be in a captive unless you’ve got a premium of $250,000. … If you want to be in a group captive, then you can be smaller, down to maybe even $150,000 in premium. But a real small company, a corner grocery store or a little retail business, they’re too small. A plumbing company, Joe the Plumber, it doesn’t make any economic sense for him to do it.”

The Marsh report noted that financial institutions are the most active users of captive insurance companies, responsible for approximately one-fifth of all captives surveyed, followed by health care and retail/consumer products. Property and general/third party liability represented the two most popular insurance classes for captives.

While captives come in all shapes and sizes, most are focused on commercial insurance, DFIP’s Rehagen said.

“The majority of what we see is, if a company is already retaining that risk, they use the captive as a way to finance that,” he said. For instance, “the owner has to pay the deductible.” So, if the owner has the responsibility to pay the first $500,000 as a deductible, “the captive would be just set up to provide a fund to reimburse the parent as they pay these deductibles,” he said.

“That’s probably the most common thing they do. Captives are just a part of their overall insurance program, and if a company’s going to retain the risk, then they can use the captive a little more efficiently than if they were just fully self-insured. Captives, they can do all kinds of different things, but I would say that’s the most common.”

In Missouri, he noted, there are a variety of captives but most are a single-type, “owned by a single company or an affiliated group.”

As for premium size, they fall into three basic categories. “Most of them, I’d say a third of them, write $5 million or less, so they’re relatively small captives,” Rehagen said. “About a third fit in the range of between $10 and, say, $25 million in premium. Then another third are really large, and they write above $100 million in premium. We have, really, three categories and they’re all pretty much evenly split as far as size.”

Pure Captive

Designed to insure the risks of its parent, affiliated companies or controlled unaffiliated companies, these captives can be incorporated as a stock insurer, non-profit corporation or limited liability company. Minimum capitalization is $250,000; no investment limitations; reports annual financial information on a GAAP basis.

Association Captive

Designed to insure the risks of the member organizations of the association and their affiliated companies, these captives can be incorporated as a stock insurer, mutual insurer, limited liability company or reciprocal. Minimum capitalization is $750,000. Investment limitations are similar to a typical property/casualty insurance company; reports annual financial information on a SAP basis.

Industrial Insured Captive

Designed to insure the risks of the industrial insured group and their affiliated companies, these captives can be incorporated as a stock insurer, mutual insurer or a limited liability company. Minimum capitalization is $500,000; no investment limitations; reports annual financial information on a GAAP basis.

Branch Captive

Alien captive insurer licensed to insure the same risks as a pure captive for its branch operations in Missouri. Minimum $250,000 placed in trust, irrevocable letter of credit or other acceptable assets for the benefit of U.S. policyholders. No investment limitations; reports annual Missouri branch financial information on a GAAP basis.

Source: Missouri Department of Insurance