tennessee captive 2015 report
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LEGISLATIONCreating a captive-friendly domicile
SYNERGYMoving in the same direction
GROWTHNow the home of 302 risk-bearing entities
TENNESSEE CAPTIVE 2015
From the publishers of
3 TENNESSEE REPORT 2015 | WWW.CAPTIVEREVIEW.COM
As the commissioner of the Ten-
nessee Department of Com-
merce and Insurance, I am
pleased to highlight the suc-
cesses earned by the Tennessee
Captive Insurance Section in recent years
and discuss our future.
Backed with the full support of Gover-
nor Bill Haslam and the Legislature, Ten-
nessee’s captive statute was revised in 2011
to create effective, flexible and balanced
regulations that are focused on a business
mindset and marketplace needs.
Along with our new, modernized laws,
Tennessee installed a trained regulatory
staff whose goal is establishing Tennessee as
a viable captive domicile to promote invest-
ment and job creation. Leading that team is
Michael Corbett, a regulator with 30 years
of financial experience in the private sector
who has helped build and develop our top-
flight staff and work with businesses choos-
ing Tennessee as a domicile.
Our work is paying dividends as Ten-
nessee takes its place on the international
stage as a destination for captive insurance
companies.
Since 2011, Tennessee has become home
to 302 risk-bearing entities (83 captive in-
surance companies and 219 cell compa-
nies). In financial year 15-16, revenues for
captive insurance will grow in Tennessee to
approximately $2.3m from $1.3m in finan-
cial year 14-15. Projections show Tennessee
collecting $4m in financial year 16-17. And
the accolades are piling up too, as Michael
Corbett was named 2015 Captive Profes-
sional of the Year during the US Captive
Services Awards.
Looking ahead, we must continue to im-
prove Tennessee’s captive insurance stat-
ute, ensuring that it stays relevant to the
changing needs of the business market-
place. We must maintain a regulatory staff
that has a sterling reputation as knowl-
edgeable, experienced and supportive. We
must support the service provider industry
as it continues to expand across Tennessee.
When you think of a captive domicile,
think of Tennessee. You are welcome here!
Julie Mix McPeak Commissioner, Tennessee Department of Commerce and Insurance
WELCOME!
INTRODUCTION
Commissioner Julie Mix McPeak is the first woman to serve as chief insurance regulator in more than one state. She brings to the department more than 14 years of legal and administrative experience in state government.
4 TENNESSEE REPORT 2015 | WWW.CAPTIVEREVIEW.COM
TENNESSEE | CONTENTS
6 THE IRS’ 2015 “DIRTY DOZEN” LIST OF TAX SCAMSMatthew J. Howard of Moore Ingram Johnson & Steele,
LLP, comments on the IRS “Dirty Dozen” list of tax scams
for the 2015 filing season
8 CLEARING UP THE CONFUSIONSean King and Nate Reznicek, of CIC Services and
Assurance Partners LLC. respectively, help shed some
light on the growth of micro captives and confusion
surrounding them
11 THE ROLE OF THE ACTUARY IN THE LIFE OF A CAPTIVEThomas E. Meyer and Daniel A. Linton of Select Actuarial
Services discuss how the actuary fits into the life of the
captive
12 SUPPORTING CAPTIVESDeryl J. Bauman and Bryan Bell of First Tennessee Bank
discuss the bank’s role in the Tennessee captive market
15 THE CAPTIVE MANAGER AND THE MIDDLE MARKET Joel Pina of KRP Managers talks to Captive Review about
the role of the captive manager for middle market
businesses
19 REACTING TO CHANGES IN TAXATIONBill Buechler of Crowe Horwath discusses changes to the
Tennessee Industrial Insured Tax and how the industry
might react
24 CAPTIVES FOR ANY SIZE EMPLOYERWilliam C. Beeler, president of Risk Solutions Captive,
Inc., talks to Captive Review about how healthcare
captives can fit the needs of employers of all sizes
27 BUILDING A CAPTIVE DOMICILEKevin Doherty, partner of Nelson Mullins and chair of
TCIA, talks to Captive Review about Tennessee’s strategy
for captive growth and considers the future of the
industry in the domicile.
28 KEEPING CAPTIVES COMPLIANT Michael A. DiMayo and Kevin E. Myers, principals at
Oxford Risk Management Group, discuss the importance
of ensuring compliance and other things to consider for
enterprise risk captives making an 831(b) election
31 EVALUATING RISKScott Schumpert, a partner at Carr, Riggs & Ingram,
explains how the captive insurance model can help
middle-market businesses expand their risk management
profile
33 REDUCING THE COST OF HEALTHCAREAndrew Cavenagh, managing director and founder of
Pareto Captive Services, talks to Captive Review about
what an employee benefit captive can offer medium-sized
employers
36 TENNESSEE: A LEADER IN CAPTIVE INSURANCENorman Chandler, co-founder of Arsenal Insurance
Management, explains why Tennessee is a leading
domicile for captive insurance companies
39 THINK TENNESSEE Summary by Michael A. Corbett of Tennessee’s Department of Commerce & Insurance
41 SERVICE DIRECTORY
REPORT EDITOR Mike Sheen +44 (0)20 7832 6628 m.sheen@pageantmedia.com // CAPTIVE REVIEW EDITOR Richard Cutcher +44 (0)20 7832 6659 r.cutcher@captivereview.com // GROUP HEAD OF CONTENT Gwyn Roberts // HEAD OF PRODUCTION Claudia Honerjager // DESIGNER Jack Dougherty // SUB-EDITORS
Luke Tuchscherer, Mary Cooch, Alice Burton // PUBLISHING DIRECTOR Nick Morgan +44 (0)20 7832 6635 n.morgan@captivereview.com // PUBLISHING ACCOUNT MANAGERS Jessica Ramella +44 (0)20 7832 6631 j.ramella@captivereview.com // Lucy Kingston +44 (0)20 7832 6637 l.kingston@captivereview.com // DATA/
CONTENT SALES Nick Byrne +44 (0)20 7832 6589 n.byrne@captivereview.com // Alex Blackman +44 (0)20 7832 6595 a.blackman@pageantmedia.com // HEAD OF EVENTS Beth Hall +44 (0)20 7832 6576 b.hall@captivereview.com // EVENTS MANAGER Jessica Jones +44 (0)20 7832 6517 j.jones@captivereview.com //
CEO Charlie Kerr
Published by Pageant Media, Thavies Inn House, 3-4 Holborn Circus, London, EC1N 2HA
ISSN: 1757-1251 Printed by The Manson Group
© 2015 All rights reserved. No part of this publication may be reproduced or used without prior permission from the publisher.
TENNESSEEcaptive insurance
Michael CorbettCaptive Insurance Section - State of Tennessee
500 James Robertson ParkwayNashville, TN 37243
615.741.3805captive.insurance@tn.gov
www.captive.tn.gov
Justin MillerTennessee Captive Insurance Association150 Fourth Avenue North, Suite 1100
Nashville, TN 37219888.668.3188
jmiller@tncaptives.orgwww.tncaptives.org
6TENNESSEE REPORT 2015 | WWW.CAPTIVEREVIEW.COM
TENNESSEE | MOORE INGRAM JOHNSON & STEELE
On February 3, 2015, the Inter-
nal Revenue Service said using
abusive tax shelters and struc-
tures to avoid paying taxes
continues to be a problem
and remains on its annual list of tax scams
known as the “Dirty Dozen” for the 2015
fi ling season. Below is an excerpt from the
IRS.GOV site, with the author’s comments
added in italics below.
Another abuse involving a legitimate
tax structure involves certain small or
“micro” captive insurance companies.”
Note that the IRS acknowledges that this is a
“legitimate tax structure.”
Tax law allows businesses to create “cap-
tive” insurance companies to enable
those businesses to protect against cer-
tain risks.
As long as the risks insured are real and
fortuitous, each business owner has the
legal right to acquire these policies through
their own captive.
The insured claims deductions under the
tax code for premiums paid for the insur-
ance policies while the premiums end
up with the captive insurance company
owned by same owners of the insured or
family members.
The U.S. Tax Court never agreed with the
IRS’ “Economic Family Theory”. This the-
ory, abandoned by the IRS in 2001 (Rev. Rul.
2001-31, 2001-26 I.R.B. 1348 (6/25/2001)),
argued that the same economic group
could not insure its own risks.
The captive insurance company, in turn,
can elect under a separate section of the
tax code to be taxed only on the invest-
ment income from the pool of premiums,
excluding taxable income of up to $1.2m
per year in net written premiums.
This Code Section was enacted into law as
part of The Tax Reform Act of 1986.
In the abusive structure, unscrupulous
promoters persuade closely held entities
Written by
Matthew J. Howard
Matthew J. Howard JD, LL.M. serves as senior part-ner in the captive, tax, and estate planning depart-ments of Moore Ingram Johnson & Steele. Matthew specializes in the taxation of micro captives, estate planning and tax controversies. MIJS currently man-ages over 100 micro captives.
Matthew J. Howard of Moore Ingram Johnson & Steele, LLP, comments on the IRS “Dirty Dozen” list of tax scams for the 2015 fi ling season
THE IRS’ 2015 “DIRTY DOZEN” LIST
OF TAX SCAMS
7 TENNESSEE REPORT 2015 | WWW.CAPTIVEREVIEW.COM
MOORE INGRAM JOHNSON & STEELE | TENNESSEE
to participate in this scheme by assist-
ing entities to create captive insurance
companies onshore or offshore, drafting
organizational documents and preparing
initial filings to state insurance author-
ities and the IRS. The promoters assist
with creating and “selling” to the
entities often times poorly drafted
“insurance” binders and policies to
cover ordinary business risks or eso-
teric, implausible risks for exorbi-
tant “premiums”, while maintaining
their economical commercial cover-
age with traditional insurers.
Micro Captives (captives with lim-
ited premiums and elect IRC Sec
831(b) treatment) should only be
formed and managed by a team of
experienced liability, tax, account-
ing and actuarial experts. The pol-
icies should cover risks that are real
and applicable to the insured paying
the premiums. The captive policies
should be written to compliment and
supplement the insured commercial
or group captive policies and not
be contradictory or redundant thereto.
These captive policies should be annu-
ally reviewed for changes to the insured’s
business and/or commercial policies and
periodically repriced by a competent and
independent actuary.
Total amounts of annual premiums often
equal the amount of deductions business
entities need to reduce income for the
year; […]
This should never happen purposefully
nor even be considered when the compe-
tent and independent actuary is pricing the
policies.
[…] or, for a wealthy entity, total premi-
ums amount to $1.2m annually to take
full advantage of the Code provision.
In reality, premiums of exactly $1.2m should
occur as often as a lightening strike. The
captive should be used to secure needed
insurance coverages not needed premiums.
Underwriting and actuarial substantia-
tion for the insurance premiums paid are
either missing or insufficient.
This is unacceptable in all instances.
The promoters manage the entities’ cap-
tive insurance companies year after year
for hefty fees, assisting taxpayers unso-
phisticated in insurance to continue the
charade.
Everyone has a right to make an honest liv-
ing (the operative word is “honest”).
The IRS is completely justified in includ-
ing micro captives on this tax shelter list.
We have assumed management of several
captives, which we needed to rehabilitate.
The captive industry, including several DOI
Departments in the USA domiciles and USA
State Captive Associations, is doing a better
job lately in not tolerating “unscrupulous
promoters” by insisting that micro captives
be formed and managed properly.
These micro captives can serve a vital role
in augmenting the insured’s commercial or
group captive program. We have wit-
nessed a business that would be defunct
today were it not for the coverage they
filed a claim on in their captive.
It is imperative that every micro cap-
tive exemplify a real insurance company
by exhibiting, among other indices, risk
shifting and risk distribution. These prin-
ciples have been upheld by the Courts.
Rent-A-Center, Inc. v. Commissioner,
142 T.C. 1, 21 (2014); Sears, Roebuck & Co.
v. Commissioner, 96 T.C. 61, 101 (1991),
aff’d in part and rev’d in part, 972 F.2d 858
(7th Cir. 1992); AMERCO, Inc. & Subs. v.
Commissioner, 96 T.C. 18, 38 (1991), aff’d,
979 F.2d 162 (9th Cir. 1992); Harper Grp. v.
Commissioner, 96 T.C. 45, 58 (1991), aff’d,
979 F.2d 1341 (9th Cir. 1992) and have been
echoed by the IRS in Revenue Rulings
2002-89 and 2002-90.
In closing, I hope our captive industry
continues to weed out the unscrupulous
folks and I hope the IRS takes the time and
effort to distinguish those of us forming and
managing captives properly for our clients
from the unscrupulous promoters. Nei-
ther task is difficult!
“I hope our captive industry continues to weed
out the unscrupulous folks and I hope the IRS takes the time and effort to distinguish those of us
forming and managing captives properly for our clients from the
unscrupulous promoters”
10. The client, in the first discussion about captives, insists that they pay $1.2m in insurance premiums and the promotor responds “no problem”
9. They suggest to their client that a captive can be formed offshore for less capital, regardless of underwriting
8. The promoter agrees with client that premiums paid into the captive can be withdrawn as a loan in any amount and as soon as the premium has been paid
7. Premium levels never change throughout the life of the captive
6. Promoter charges fees based upon a percentage of premiums paid
5. Promoter agrees or even encourages the captive owner to invest most or all of the captive money in a life insurance policy that has little or no cash surrender value in the first few years
4. The promotor has a menu of coverages and pre-written policies to choose from regardless of the insured’s business
3. The promoter tells his client that he never really has to file a claim
2. The promoter does not have one commercial liability insurance broker in his contacts list
1. The promoter has never read or subscribed to Captive Review!
TOP 10 REASONS YOU CAN RECOGNIZE AN UNSCRUPULOUS CAPTIVE PROMOTER
8TENNESSEE REPORT 2015 | WWW.CAPTIVEREVIEW.COM
TENNESSEE | CIC SERVICES & ASSURANCE PARTNERS
Captive insurance companies.
A tool once reserved for only
the largest of companies has
continued to see signifi cant
growth in utilization across
all industry in the US. Competition from
states continues to drive down the cost of
entry into the market and the exponential
sophistication of small and middle-mar-
ket businesses aligns with the signifi cant
competitive advantages available through
the ownership of a captive insurance com-
pany.
The continued growth of small and
closely-held companies has led to a steady
trend of formations of new “micro cap-
tives”. This infl ux of new captive insurance
companies has led to some confusion,
half-truths, and misinformation around
the purpose of these captive insurance
companies and the legitimacy of the
arrangements.
Captive Review (CR): What is a “micro
captive”?
Sean King (SK): Micro captives are simply
small captive insurance companies gen-
erally utilised by middle-market, private-
ly-held businesses. Small businesses face
unique survival challenges as compared to
Fortune 1000 companies. Their revenue
streams are not nearly as diversifi ed, they
have smaller and often more highly-lev-
eraged balance sheets, and they cannot
readily access capital and credit markets
to smooth cash fl ows when the unforeseen
happens. Events that might simply knock
a few dollars of the earnings per share of
a Fortune 1000 company can easily bank-
rupt small or mid-market business.
Nate Reznicek (NR): Micro captives look,
feel, and operate very similarly to “tradi-
tional” captive companies. However own-
ership of these captives is typically held
by owners of small or mid-sized close-
ly-held companies instead of the Fortune
1000 organisations in which we are most
familiar. These micro captives are more
often used to insure fi rst-party exposures,
deductible reimbursements, business
interruption or loss of income events, and
other low frequency/high-severity events
that larger companies, with their more
robust business models, may choose to
just informally “self-insure”.
CR: What are the advantages of the 831(b)
tax election for captive insurance compa-
nies?
SK: “Small” insurance companies (those
that take in less than $1.2m per year of
premium income and meet a few other
criteria) can elect under Internal Rev-
enue Code Section 831(b) to pay no tax
on their underwriting profi ts. This tax
benefi t is designed, in part, to incentivise
small businesses to form captives to better
manage their well-known risks. It is also
intended to make operating these smaller
insurance companies economically viable
as without the tax subsidy, the operating
costs (legal, accounting, actuarial, admin-
istrative, managerial, jurisdictional, etc.)
would in many cases exceed the potential
benefi ts.
Micro captives, being small and oth-
erwise meeting the criteria, frequently
take advantage of this tax benefi t and are
therefore often referred to as “831(b) cap-
tives” or “micro captives”.
Congress cares about the risk man-
agement practices of small businesses
because, per the Small Business Admin-
istration, such businesses employ nearly
half of all private sector workers, rep-
resent more than 99% of the country’s
exporters, and have accounted for nearly
two-thirds of all net new jobs created over
the last 17 years.
NR: Sean is exactly right. The 831(b)
election helps to level the playing fi eld
between the Fortune 1000 captives (and
Sean King and Nate Reznicek, of CIC Services and Assurance Partners LLC. respectively, help shed some light on the growth of micro captives and confusion surrounding them
CLEARING UP THE CONFUSION
Written by
Sean King
Sean King is a principal and one of the founders of CIC Services, LLC., and serves as In House Counsel. With a background in accounting, law, taxation and insurance, Sean is uniquely qualifi ed to work in the captive insurance industry.
Written byNate Reznicek
Nate Reznicek champions the agencies captive insurance program off ering and is the centralised communication link to the Assurance Partners’ risk management resources and resource partners. Assurance Partners develops sustainable enterprise risk management strategies and programs designed to lower business owners’ total cost of risk, increase profi tability and help ensure fi nancial stability.
9 TENNESSEE REPORT 2015 | WWW.CAPTIVEREVIEW.COM
CIC SERVICES & ASSURANCE PARTNERS | TENNESSEE
their significant tax advantages) and suc-
cessful small/mid-market businesses.
These businesses are the backbone of our
economy and the risks they face are very
real. This election provides these smaller
business with the opportunity to formally
insure their risks, closing significant gaps
in coverage and providing protection
from significant existing exposures.
CR: How should the captive owner
ensure the policies written through
the captive stand-up to regulatory
and IRS scrutiny?
SK: The Captive Insurance Company
Association (CICA) has published two
“best practices” documents. Com-
plying with the recommendations
therein goes a long way toward ensur-
ing the legitimacy of one’s captive
from a regularity and tax perspective.
NR: It is important to remember that
there is more to a legitimate captive
insurance company than just defensible
policies. Although a captive does not have
to operate in the exactly the same fashion
as a traditional commercial insurance
carrier, they are still insurance companies
and must operate as such. Proper legal
advice, actuarially determined premiums,
appropriate risk distribution/sharing,
effective loss control, for example. These
are just a few of the traits that a legiti-
mate captive should have and help ensure
alignment with best practices.
CR: What are the main considera-
tions for a company when assessing
whether to establish a micro captive?
SK: The first main consideration is
risk. The US Government’s disaster
preparedness website (Ready.gov) has
a landing page for small businesses
that emphasises and discusses the
many relevant risks.
The second main consideration is
cash flow. Businesses with lots of risk
may nonetheless be unable to cash flow
the necessary premiums. The tax benefits
afforded by Section 831(b) mitigate the
cash flow problem, but not completely.
NR: I would add that a captive owner also
needs to have a relatively sophisticated
view of risk. Thanks to better regulation
and talented captive management firms,
running a captive is not an entirely time
consuming endeavour. But it does require
a change of mind-set. These individ-
uals are now owners of an insurance
company and as such must operate the
captive as such. The ideal candidate for
captive insurance company ownership
has a high level of accountability for the
performance of their risk management
programs. Individuals that fit this mould
have the most successful and profitable
captive insurance operations.
CR: Why is Tennessee a suitable jurisdic-
tion for establishing a micro captive?
SK: Our home state of Tennessee is an
ideal jurisdiction form 831(b) captives.
Unlike some competing jurisdictions, Ten-
nessee does not just license these captives
but it actively regulates them also. The
regulators are strict but sensible, which
is an all-too-rare combination these days.
Businesses forming captives in Tennessee
have the peace of mind of knowing that
Tennessee’s regulators are looking out for
them and protecting their interests. Ten-
nessee also has a very modern and pro-
gressive captive statute, and a very busi-
ness-friendly Governor.
NR: I would agree that the way in which
Tennessee regulates their captives is ben-
eficial in ensuring the legitimacy of insur-
ance operations without placing undue
restrictions or requirements on a business
owner that would diminish their captive’s
performance or ability to provide much
needed coverage to their insureds. The
state has also taken a proactive approach
to captive education and has successfully
participated in events designed to create
legitimate and successful captive insur-
ance companies.
CR: To what extent can the 831(b) tax
election be seen as the primary
driver of growth in captive use by the
middle market?
SK: In our view, too much is made
of this. Undoubtedly more 831(b)
s are formed than would otherwise
be the case of the tax benefits were
not available, but this is, after all, the
whole reason Congress makes such
tax benefits available - to incentivize
desirable behaviours. Additionally,
the tax subsidy makes economically
feasible insurance arrangements that
otherwise would not be. So clearly the
tax subsidy is an important reason that the
831(b) market has grown.
But, importantly, the tax subsidy of
831(b) has been around for nearly 30
years now, and yet the growth of micro
captives is relatively recent. So, if the tax
treatment of these arrangements has not
changed, what has? The answer is cost.
Thanks to competition among a growing
number of captive-friendly jurisdictions,
and resulting increases in the number of
professional advisors familiar with
captives, the costs of forming and
operating a small captive insurance
company have fallen by 50% or more
over the last decade.
This, and not taxes, is the real
driving force behind the industry’s
growth.
NR: I also believe that the increased
sophistication of successful business
owners and their strategic advisors
have had a major impact. Captives
have utilised the 1950s and the 831 (b)
election is nothing new. What is new is
that business owners and their advisors
are expanding their operations into more
advanced and rewarding endeavours.
The current economic environment that
we operate in demands that businesses
take advantage of all of the tools available
to them in order to remain competitive
and help to ensure survivability into the
future.
“It is important to remember that there
is more to a legitimate captive insurance company than just defensible policies”
“The costs of forming and operating a small captive insurance company have
fallen by 50% or more over the last decade”
At Oxford Risk Management Group, we specialize in conducting captive feasibility analysis and coordination of turn-key captive insurance company arrangements. As an alternative risk and captive insurance research and consulting company, we’re focused on coordinating design, implementation, regulatory approval and management of captive insurance companies.
We bring together the right partners with expertise where it matters most, to deliver the highest possible degree of long-term success for your captive insurance company.
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• The most experienced and respected Best-In-Class experts in the industry• No hassle, Turn-Key approach• All-inclusive fee structure with industry leading pricing• Engineered for small to mid size enterprises• Committed to customer service
There’s a reason why we’re the industry’s fastest growing captive management company:
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11TENNESSEE REPORT 2015 | WWW.CAPTIVEREVIEW.COM
SELECT ACTUARIAL | TENNESSEE
Captives have become widely
popular within the last decade.
This is not surprising as cap-
tive owners enjoy a wide range
of benefi ts, including reduced
insurance premiums, direct access to cov-
erages that are diffi cult to place or simply
do not exist in the market, tax advantages,
and a host of other benefi ts. If you are con-
sidering forming a captive, it is important
to be surrounded with a team of profes-
sionals that can ensure the captive is set up
properly and meets your organization’s risk
management objectives. Serving a vital role
within this team is the actuary.
The actuary will be involved throughout
the life of the captive. At the onset, it will
determine the feasibility of the captive
based on the coverages to be written and
the overall business plan. Centered on a
combination of exposure, premium and
capital, any captive is feasible, though it
may not be attractive.
There should be active dialogue between
you and the actuary to develop the appro-
priate balance between these three factors,
aligning with the level of risk tolerance and
the expected return. Once all of the infor-
mation is gathered, the actuary will develop
pro-forma fi nancial statements under dif-
ferent loss scenarios and possibly different
capitalization and premium levels over a
fi nite time horizon – typically three to fi ve
years. Included within these loss scenarios
will be an adverse scenario determining
whether the captive could weather severe-
loss experience early in its lifetime – could
the captive survive a full limits loss in year
two? If it cannot, adjustments may need to
be made.
Once the captive is up and running, the
actuary will need to provide an annual
reserve analysis gauging the outstanding
losses. Subject to the coverages written, this
could involve a lot of work by the actuary.
For example, if the captive only writes cov-
erage that attaches on a claims-made basis
and no claims have been made, then the out-
standing losses are $0. On the other hand,
if the captive writes longer-tailed coverage
like general liability on an occurrence basis,
more in-depth analysis will be required,
even if a loss has not been reported yet. The
estimated outstanding losses will be based
on a variety of assumptions and techniques
that should be explained in a straightfor-
ward manner. The actuary can also set the
rates for the upcoming year to ensure the
premiums charged are adequate. This anal-
ysis may be included in the reserve study or
prepared as a separate study later in the year.
Next, grounded on the reserve study and
a review of the company fi nancials, the
actuary will need to provide a Statement
of Actuarial Opinion regarding the actual
reserves booked on the balance sheet. The
document is used for regulatory purposes
to ensure the booked reserves are sensible.
As time passes, the captive hopefully
builds up surplus to protect and help it
manage its exposures. But how much sur-
plus is enough and how much is too much?
Here, the actuary can serve a vital role in
determining capital needs by evaluating all
the risks of the captive and how they inter-
act with one another. This includes both
liabilities and assets. This is vital in evalu-
ating the overall health of the captive and
maximizing its effectiveness as a risk man-
agement tool. This evaluation may lead to
awareness that the level of surplus is such
that the captive does not need all of it to
support its operations. This money, or “free
capital,” could be used for many reasons:
• To grow the captive by expanding lim-
its of current exposures or writing new
ones.
• To invest in assets that generate a
higher expected return.
• To pay out a dividend.
The level of free capital is a dynamic fi gure
determined by the overall risk profi le of the
captive as well as the level of risk tolerance.
The lower the tolerance for risk, the less
free capital is available and vice versa. It is
important that the actuary play an integral
role in the life of the captive. Doing so will
allow it to manage risk more effectively and,
more importantly, take advantage of the
upside to risk retention and management.
Thomas E. Meyer and Daniel A. Linton of Select Actuarial Services discusshow the actuary fi ts into the life of the captive
Written byThomas E. Meyer
Thomas E. Meyer has more than 16 years of prop-erty/casualty experience, being one of the founding members of Select Actuarial Services. As a senior consulting actuary, he provides expert services to a wide range of clients, helping them maintain and design strong risk management programs.
THE ROLE OF THE ACTUARY IN THE LIFE OF A CAPTIVE
Written byDaniel A. Linton
Daniel A. Linton is established evaluating a variety of property/casualty exposures including workers compensation, general and auto liability, directors & offi cers liability, and medical malpractice.
“As time passes, the captive hopefully
builds up surplus to protect and help it
manage its exposures. But how much surplus
is enough and how much is too much?”
12TENNESSEE REPORT 2015 | WWW.CAPTIVEREVIEW.COM
TENNESSEE | FIRST TENNESSEE BANK
Captive Review (CR): Why is First Ten-
nessee Bank supporting captive forma-
tions in the Tennessee Domicile?
Deryl J. Bauman (DJB): In 2011, the Tennes-
see State Legislature embraced the newly
elected governor’s legislative agenda to
promote economic development and jobs
growth for Tennessee with the passage of
the Revised Tennessee Captive Insurance
Act, Title 56, Chapter 13 of the Tennessee
Code Annotated. This law combines the
best practices of all major captive domi-
ciles with a business friendly attitude and
provides for a variety of captive types with
very reasonable minimum start-up capital
and surplus requirements. This legislation
is supported by a regulatory environment
insuring the process of starting and oper-
ating captive insurance companies is fl ex-
ible, reasonable and affordable.
In addition to the positive govern-
mental and regulatory environment
for Tennessee captives, this burgeon-
ing new industry has had the much
needed support of the Tennessee Captive
Insurance Association, an 80-member
company association of captive own-
ers and insurance industry service pro-
viders, founded in 2011. First Tennessee
joined the TCIA in 2013.
Tennessee’s pro-business environment
and its central location in the US as a
transportation hub have served to provide
an excellent incubator for business re-lo-
cations and entrepreneur-spirited eco-
nomic development. First Tennessee Bank
recognized early on the opportunity for
success with its strategy for offering fi nan-
cial services to the Tennessee Captives.
These same factors have assisted the State
to grow from two licensed captives in 2011
to now 82, with 218 protected cells, thus
300 insurance bearing entities operating
within Tennessee. This success affi rms
First Tennessee’s attitude that what is good
for economic development in Tennessee
is good for businesses, and therefore First
Tennessee.
It was this type of business growth
opportunity that motivated First Ten-
nessee to initiate a strategy to provide
fi nancial services to the Tennessee Cap-
tive Insurance industry beginning in
2013. First Tennessee has the 14th oldest
active national banking charter in the US
and is the 35th largest publicly traded US
bank in terms of asset size. First Tennes-
see Bank has the leading deposit market
share in the counties in Tennessee where
we do business*. We enjoy a 95% customer
retention rate, one of the highest of any
bank in the country, and are the winner
of seven Greenwich Excellence Awards
for customer satisfaction among com-
mercial business clients**. These factors
combined with a 13.18% Tier One Capital
Ratio***, considered top-tier among our
major bank competitors, have made First
Tennessee Bank a logical choice of Captive
Sponsors and Captive Managers alike for
their fi nancial service needs.
CR: Why is First Tennessee Bank sup-
porting captive formations in the Ten-
nessee Domicile?
DJB: Once a sponsoring business decides
to form its own captive and selects an
appropriate captive manager to help
them obtain their insurance license
under the Tennessee Law, their next col-
lective decision will be where to obtain
their financial services. We, at First Ten-
nessee Bank, have a team of experienced,
professional commercial bankers who
have developed expertise in helping to
Deryl J. Bauman and Bryan Bell of First Tennessee Bank discuss the bank’s role in the Tennessee captive market
SUPPORTING CAPTIVES
Written by
Deryl J. Bauman
Deryl J. Bauman has more than 40 years of fi nancial services experience in commercial banking, 33+ at FTB; concentrating in construction related trades, not for profi ts, wholesale and international trading business and now captive insurance banking. Com-munity involvement in Lions International and Nash-ville Predators Foundation.
Written by
Bryan Bell
Bryan Bell has 17 years of experience in the fi nancial services industry. This includes work in analysis based asset management, comprehensive estate planning, retirement planning and trust administration.
13 TENNESSEE REPORT 2015 | WWW.CAPTIVEREVIEW.COM
FIRST TENNESSEE BANK | TENNESSEE
facilitate the formation of captives. First
Tennessee offers a number of solutions to
expedite the process of working with the
captive sponsor’s chosen legal advisors,
CPAs, and captive managers to facilitate
this opportunity.
First Tennessee’s captive bankers are
knowledgeable and experienced in deal-
ing with the reporting and documenta-
tion requirements for capital depository
accounts and letters of credit. We work
with our clients to help them minimize
the approval process time and cost.
Because we understand captive spon-
sors’ and captive managers’ needs for
liquidity of first year premium funds
and for ease of doing business, we have
designed our captive operating accounts
for checking/savings to provide best in
class BizEssentials® Treasury Manage-
ment Services such as wire transfers,
ACH originations, and online banking
access, where needed, at the lowest pos-
sible cost. We also provide investment
options for idle excess premium funds.
Finally, it is the First Tennessee Bank
Captive Banking Team’s close proximity
in our Nashville region headquarters
with our investment advisory team at
FTB Advisors, Inc. that provides our
captive clients and their captive manag-
ers a seamless and convenient one stop
solution to all of their captive financial
service needs.
CR: Why is FTB Advisors taking inter-
est in the captive insurance industry?
Bryan Bell (BB): There are four primary
reasons.
First, we appreciate the initiatives the
executive and legislative branches of our
fine state have taken. As with any new
venture, we know early success is often
an important determinant of survival.
We want to use our efforts to help achieve
this early success and benefit our state’s
economy and the clients and communi-
ties served by First Tennessee Bank and
FTB Advisors.
Second, as a full service wealth manage-
ment organization, we have several clients
who may benefit by creating their own
captive. Through our work in the captive
insurance space, we have been able to
identify potential opportunities for clients
and introduce the concepts to them.
Third, captive insurance companies
have financial product needs; we have
the knowledge, products and services
to address the specific financial services
needs of captive insurance companies.
Fourth, many captive insurance com-
pany owners are privately held family
businesses. We are strongly positioned to
plan and implement financial strategies
designed to benefit the owner, the family
and the company. This is a partial list of
services available from FTB Advisors:
• Business Transition
• Estate Planning
• Trust
• Broker/Dealer
• Investment management
• Family Office services
* FDIC Market Share Summary (4Q14)
** 95% customer satisfaction based on average
results from internal Customer Experience
Monitor surveys as of March 2015. 2014 Green-
wich Excellence Awards in Small Business and
Middle Market Banking
*** Tier 1 Capital Ratio as of 2Q15
Investments: Not A Deposit | Not Guaranteed By
The Bank Or Its Affiliates
Not FDIC Insured | Not Insured By Any Federal
Government Agency | May Go Down In Value
FTB Advisors is the trade name for wealth man-
agement products and services provided by First
Tennessee Bank National Association (“FTB”) and
its affiliates. Investment management services
and investments available through FTB Advisors,
Inc., member FINRA, SIPC, and a subsidiary of
FTB.
“Tennessee’s pro-business environment
and its central location in the US
as a transportation hub have served to provide an excellent
incubator for business re-locations
and entrepreneur-spirited economic
development”
15TENNESSEE REPORT 2015 | WWW.CAPTIVEREVIEW.COM
KEYSTONE RISK PARTNERS | TENNESSEE
KRP Managers (KRP), with offi ces
in Tennessee, Delaware and Penn-
sylvania, specializes in domicile
management of single parent and
Series LLC captives that cater to the
middle-market insurance buyer.
KRP combines deep accounting, tax, regu-
latory and insurance underwriting expertise
with effi cient business processes and rigor-
ous internal controls, and broad experience
to provide effi cient, secure and client-fo-
cused captive management services.
KRP is a wholly-owned subsidiary of Key-
stone Risk Partners (Keystone), which spe-
cializes in establishing captive and alternative
risk solutions. Specifi cally, they use their
technical expertise in underwriting and risk
fi nance, working in partnership with insur-
ance agents and brokers, to bring the highly
successful solutions of the Fortune 500 busi-
ness to a wider audience of middle-market
insureds seeking a tailored, innovative cap-
tive insurance company solution.
Captive Review (CR): What are the typical
roles and responsibilities of the captive
manager?
Joel Pina (JP): We think about captive man-
agement in four broad areas:
Accounting and fi nancial reporting We focus our efforts on ensuring that receipts
and expenditures are within the captive’s
authorized operating guidelines, and are
appropriately recorded. We maintain books
and records and produce reports to include
all insurance and reinsurance transactions,
as well as related income, expense and other
transactions of the captive. The books are
maintained on a GAAP or statutory basis to
meet the needs of the captive owner, as well
as the domicile regulator and the Internal
Revenue Service. This function goes well
beyond making journal entries in a general
ledger and monthly bank account recon-
ciliations. It requires coordination with the
captive owner, the insured entities, actuar-
ies, independent accountants and tax coun-
sel. Our key duty is to effi ciently acquire and
provide different information from and to
different stakeholders.
Regulatory services In this role, KRP coordinates the formation
and licensing of the captive. Typically, this
involves organizing and attending a pre-ap-
plication introduction meeting with the cap-
tive owners and local insurance regulators
to discuss the proposed captive insurance
program. From there, KRP coordinates with
the captive owner, their independent insur-
ance broker, tax counsel and other advisors
to prepare the captive business plan and
application for licensure, submit them to the
domicile regulators (for example, Michael
Corbett and his team in Tennessee) and
negotiate the approval and licensure. After
the captive is licensed, the captive manager
submits required regulatory reports, updates
to the business plan, and responds to inquir-
ies and audit requests from the regulators.
Insurance servicesKRP is responsible for executing and issu-
ing all insurance policies, endorsements, as
well as reinsurance agreements, and where
applicable, liaising with fronting insurance
companies or reinsurers. We coordinate
payment of claims with the captive’s third-
party administrator or claims represent-
ative and provide controls to ensure that
claims are paid in accordance with the
terms of the captive-issued policies or rein-
surance agreements.
Banking and investmentsKRP coordinates the opening and ongo-
ing control of bank accounts and custody
accounts in such banks as are approved in
advance by the captive owner. We make
deposits to and disbursements from such
accounts in accordance with the instruc-
tions of the captive owner and the internal
control policies and procedures. We coor-
dinate with the captive’s investment advi-
sor to implement and monitor compliance
with an investment mandate that is appro-
priate for the captive’s needs and in accord-
ance with the regulatory requirements.
CR: What challenges do those responsi-
bilities impart?
JP: The captive manager walks a fi ne line
between being an advocate for the captive
and being the fi rst line of defense in the
domicile regulatory framework. Leaning
too far in either direction creates friction
and the potential investment of unneces-
sary time and expense. So we strive to bal-
ance the needs of our captive clients with
the statutory, regulatory, and administra-
tive requirements of the domicile.
We think our primary responsibility is to
make sure that we understand the captive
owner’s objectives and help them imple-
ment and manage a captive solution in a
way that is compliant with the governing
rules. This inherently requires us to have
clear and ongoing communications with
the captive owners and the domicile reg-
ulators. Michael Corbett and his team in
Tennessee are very accessible, responsive,
and thoughtful in their approach to help-
ing our client’s discern what is a good fi t
within the Tennessee captive regulatory
framework, and what is not.
Joel Pina of KRP Managers talks to Captive Review about the roleof the captive manager for middle market businesses
Written by
Joel Pina
Joel Pina is the CFO of KRP Managers with 25 years of experience in structuring, managing and report-ing complex insurance and fi nancial transactions. Joel is a former C.P.A. and a member of the Ameri-can Institute of Certifi ed Public Accountants
THE CAPTIVE MANAGER AND THE MIDDLE MARKET
16 TENNESSEE REPORT 2015 | WWW.CAPTIVEREVIEW.COM
TENNESSEE | KEYSTONE RISK PARTNERS
CR: What skillsets does a captive manager
need to be successful?
JP: A captive manager needs a strong
understanding of both the financial and
strategic objectives that are driving the for-
mation of a captive. The captive manager
also needs expertise and experience in a
broad array of insurance transactions to be
a resource for their clientele in structuring
their insurance programs
The captive manager needs deep
accounting and tax expertise to develop and
operate business processes that provide the
necessary internal controls and multi-di-
mensional financial reporting. For exam-
ple, we have developed a robust reporting
package that that is integrated and tracks
captive performance against the original
pro-forma financial statements submitted
with the business plan. We find that report-
ing actual results against a budget, which the
captive owner previously understood and
authorized, makes the reports much more
meaningful and understandable to the cap-
tive owner. It also facilitates the regulator’s
understanding, which simplifies any busi-
ness plan amendments and the regulatory
audit processes.
The knowledge base and skillset to organ-
ize and coordinate various professionals
who contribute to the captive insurance
program is critical to the successful cap-
tive manager. Accounting, tax preparation,
actuarial analysis, investment, banking
and trust services all contribute to the cap-
tive insurance program. Effective captive
managers have the expertise, experience
and relationships to direct and harmonize
these activities.
CR: What do you do differently for a mid-
dle-market captive owner?
JP: The middle-market customer typi-
cally does not have an exclusive risk man-
agement department and often procure
their insurance requirements through the
owner, CFO or human resources depart-
ment. These insureds tend to lean on their
agent or broker to provide varying levels
of risk management services and loss con-
trol on an outsourced or as needed basis in
conjunction with their policies. It can be
quite difficult for an insured in this situa-
tion to run a successful captive long term.
They quickly realize that bringing insur-
ance “in house” often requires the seamless
coordination of not only what the captive
should underwrite but also how it should
underwrite the coverage it will be issuing.
We will bridge this gap by coordinating
our insurance underwriting resources
and rate-development consulting with the
risk-management service platform of the
agent to deliver the benefits of a compre-
hensive risk-management department for
these customers.
CR: Do the skills and specialties among
captive managers in Tennessee vary, and
how important is it for a captive owner to
partner with a suitable captive manager?
JP: Given the recent growth of Tennessee as
a captive domicile, there has been a similar
growth in captive managers. Some focus
on a particular type of captive, for example
those that cater to the small insurance com-
pany or 831(b) marketplace. As you would
expect, there are advantages and disadvan-
tages to specialization. A manager with a
narrow focus can typically provide a “cookie
cutter” approach at a lower price point for
clients who fit the mold. If the clients do not
fit the mold, the benefit of the lower price
may be offset by the detriment of trying to
fit a square peg into a round hole.
We have tried to avoid specializing nar-
rowly, and instead focused our efforts on
building tools and business processes that
are easily adaptable to different situations.
For example, about half of the captives we
manage in Tennessee are series of Sunstone
Assurance II, LLC, a Keystone sponsored
insurance facility that allows participants
to create stand-alone captive entities in a
cost- and time-efficient manner. This plat-
form saves time and money across captives
with a wide variety of premium sizes and
lines of coverage, but it is not for everyone.
Determining the right captive manager is
every bit as important as determining the
right legal entity and insurance structure
in driving the ultimate success of a captive
insurance program.
CR: How does a prospective captive owner
to identify a suitable captive manager?
JP: Selecting a captive manager is one step
in the process, but not the first step. The
process typically begins with the client’s
insurance broker identifying and prior-
itizing areas of exposure that are not fully
addressed by the commercial market. This
process can also determine an insured’s
willingness and ability to assume a portion
of their risk to gain greater control over
their long-term costs.
Once this review is complete, it is appro-
priate to contact a captive manager to begin
the evaluation process. Our recommenda-
tion is to begin with an education-driven
overview to ensure the structure makes
sense conceptually before the financial
commitment of a feasibility study.
If the decision is made to move forward,
it is then appropriate to bring actuaries,
accountants, tax advisers and attorneys
into the process as necessary. Combining
these resources along with the traditional
insurance broker, the captive manager
can help build a cohesive advisory team
to establish a cutting edge alternative risk
financing structure.
“A captive manager needs a strong
understanding of both the financial and
strategic objectives that are driving the
formation of a captive”
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BENEFIT CAPTIVES DONE RIGHT
Pareto Captive is the nation’s leading manager
www.paretocaptive.com
19TENNESSEE REPORT 2015 | WWW.CAPTIVEREVIEW.COM
TENNESSEE | CROWE HORWATH
On April 16, 2015, Tennes-
see governor, Bill Haslam
signed Public Chapter No.
155 into law. One section of
the act amends Tennessee
Code Annotated (TCA) §56-
2-411 to broaden the reach of the premium
tax on industrial insureds, which subjects
citizens to the 5% surplus lines tax rate
for fi re and marine insurance premiums
on property located in Tennessee from
insurance companies not authorized to
transact business in Tennessee. Pursuant to
the amendment, all types of property and
casualty coverages listed in TCA §56-2-201
procured from unauthorized companies
also are subject to the tax.
Reading between the lines, this amend-
ment was designed to encourage Tennes-
see-based companies to locate or relocate
any captive insurance companies in Ten-
nessee. For example, if a captive insurance
company is domiciled in Delaware, it is
subject to the Delaware gross premiums
tax on all of its premiums if it is only fi ling
in Delaware. If the insured companies are
based in Tennessee, they are potentially
subject to the 5% tax on gross premiums
as “industrial insured” companies. Since
the tax is on a different entity, there is no
credit for taxes paid in other jurisdictions.
If the captive was domiciled in Tennes-
see, the premiums only would be subject
to the gross-premiums tax applicable to
captive insurance companies, which is
0.4% on the fi rst $20m of premium, with
a $5,000 minimum for stand-alone cap-
tives. Many captive insurance companies
pay premium tax only to the states in
which they are organized. Although many
states have procurement taxes that subject
the insured to taxation, there is a consti-
tutional limit on these procurement taxes.
The U.S. Supreme Court in State Board
of Insurance et al. v. Todd Shipyards Cor-
poration (370 U.S. 451) (1962), held that
insurance premiums cannot be taxed
by a state when the only connection that
exists between the state and the company
in question is that the insurance covers
property located in that state. Although
the Todd Shipyards case is more than 50
years-old, the Texas Court of Appeals in
Dow Chemical Co. v. Rylander, 38 S.W. 3d.
741 (Ct. App. Tex 2001) followed the Todd
Shipyards ruling and the U.S. Supreme
Court declined hearing the appeal. How-
ever, some of the offi cers of the captive
insurance company often are located in
the state where the overall operations or
the headquarters is located, which cre-
ates a risk that some activity other than
the insuring of risk may occur in the
headquarters state. Therefore, this risk
of a procurement tax exposure creates an
incentive to locate the captive in the state
where the operations are headquartered.
Weighing up the riskThis change in the law will result in
Tennessee-based companies having to
weigh the risk of the procurement tax
against the cost of relocating their captive
to Tennessee and the benefi ts of their cur-
rent domestic domicile.
Additional scrutiny of investments in
foreign corporations and other develop-
ments may cause companies to recon-
sider whether to relocate their foreign
domiciled captives. Due to perceived
abuses, the government has imposed a
number of reporting requirements for
foreign corporations owned by U.S. cit-
izens. For example, the Foreign Account
Tax Compliance Act enacted in March
Bill Buechler of Crowe Horwath discusses changes to the Tennessee Industrial Insured Tax and how the industry might react
REACTING TO CHANGES IN
TAXATION
Written by
Bill Buechler
Bill Buechler is a director with Crowe Horwath LLP and is a member of the Firm’s Insurance Practice. He has over 30 years of federal and state tax and unclaimed property consulting experience including extensive experience in captive insurance compa-nies, Tennessee franchise, excise, sales and use taxes, multi state tax planning, and unclaimed property.
“This change in the law will result in Tennessee
based companies having to weigh the
risk of the procurement tax against the cost of relocating their
captive to Tennessee and the benefi ts of
their current foreign or domestic domicile”
20 TENNESSEE REPORT 2015 | WWW.CAPTIVEREVIEW.COM
CROWE HORWATH | TENNESSEE
2010 requires reporting by certain U.S.
citizens that own a specified value of for-
eign financial accounts. Additionally, for
the 2014 reporting period, the Bureau of
Economic Analysis requires all taxpay-
ers with more than a certain ownership
threshold of foreign corporation or unin-
corporated foreign entities to file Form BE
10, 2014 Benchmark Survey of U.S. Direct
Investment Abroad Instructions. In the
past only owners that specifically were
notified were required to file such a form.
In addition, IRC §4371 generally imposes a
4% federal excise tax on premiums for U.S.
risk to foreign domiciled captives and a 1%
tax on reinsurance premiums. However,
a foreign captive can make a §953(d) elec-
tion to be taxed as a U.S. corporation.
Recently, the IRS has been challenging
the validity of a number of the §953(d)
elections and an Office of the Chief Coun-
sel Internal Revenue Service Memoran-
dum AM2014-002, published on 12 Feb-
ruary 2014, demonstrates that there are
a number of very harsh consequences for
a failed 953(d) election. In AM2014-002,
the IRS examined the controlled foreign
corporation and determined that it did
not qualify as an insurance company and
therefore was not eligible to make the
953(d) election. The result of the deter-
mination was extremely detrimental to
the taxpayer because the IRS determined
that even though the company had filed
Form 1120, PC U.S. Property and Casualty
Insurance Company Income Tax Return,
for all years in question, the statute of lim-
itations was extended because the owners
of the captive did not file the correct Form
5471, Information Return of U.S. Persons
With Respect to Certain Foreign Corpora-
tions, for all years and penalty and interest
applied with no statute of limitation.
For a captive insurance company elect-
ing to be taxed under §831(b), this would
mean that the exclusion is at risk until the
statute has run for the 953(d) approved
election. There have been a number of
occasions where the approval has taken
months to obtain because the IRS was
backlogged in getting such elections
approved or because additional informa-
tion was requested. In light of the poten-
tial consequences of a failed election and
the increased reporting requirements, a
number of companies are re-evaluating
whether to remain offshore.
Tennessee has updated its captive law
several times since 2011 to keep it com-
petitive with other captive domiciles. As
a result, Tennessee’s competitive captive
premium tax structure and progressive
captive law features (such as permitting
series limited liability captives and direct
writing of workers’ compensation insur-
ance for qualifying companies) may cause
companies headquartered in Tennessee to
consider changing their captive’s domicile
to Tennessee.
CAPTIVE INSURANCE SECTION • Tennessee Department of Commerce and Insurance500 James Robertson Parkway | Nashville, TN 37243 | 615.741.3805 | www.captive.tn.gov
TENNESSEE
the state of opportunity
24TENNESSEE REPORT 2015 | WWW.CAPTIVEREVIEW.COM
TENNESSEE | RISK SOLUTIONS CAPTIVE
Traditionally, only large employer
groups have utilized the captive
insurance model. Today, captive
offerings have progressed beyond
the Fortune 500 companies and
those benefi ts are now available for any
size employer group. In this editorial, we
will review the latest developments, com-
mon concerns and benefi ts of the captive
insurance model for the small to mid-sized
employer group.
Captive Review (CR): How is the health-
care captive market changing to provide
services to employers of different sizes?
William C. Beeler (WB): Smaller employers
with 25 employees and above are getting
involved with the captive insurance model
to fi nd a more effective way to provide
benefi ts for their employees. These
employers are also forming captive
cells to lower the fi rst layer of risk for
the employer prior to the pooling level
for all employers in the captive.
The captive model provides the
employer with the option to move
from the fully-insured market to the
self-funded market. Entering the
captive model provides the benefi t
of a transfer of risk inside the captive
to protect the assets of the employer
under the self-funded arrangement.
Risk Solutions Captive offers a self-
funded plan to the employer with a
$100,000 individual stop-loss cover-
age. When they enter the captive, the
employer has a separate captive cell set up
below Risk Solutions Captive where the
employer’s cell is responsible for the fi rst
$10,000 in claims per person. The next
$90,000 is provided by Risk Solutions Cap-
tive. Anything over $100,000 is the respon-
sibility of the reinsurance carrier. This
allows the employer to have savings during
a good claims year, but have the protection
with the reinsurance and captive arrange-
ment during a bad claims year.
Overall, the captive insurance mar-
ket creates leverage in an industry where
employers, small and large, are searching
for new options to control their health-
care expenses. In the captive arrangement,
employers have defi ned risk ceilings,
which is important in today’s quickly evolv-
ing healthcare marketplace. This benefi t
provides peace of mind and a streamlined
experience for both the broker and the
employer throughout the process.
CR: What has brought about this change?
WB: Healthcare reform in the US has
brought about tremendous change. It has
driven employers from the fully-insured
market to fi nd alternatives to provide their
employees with quality benefi ts. The fully-
insured market is controlled with man-
dated benefi ts that are not always pres-
ent in the self-funded market, allowing
the employer to be more fl exible in
their plan design.
All self-funded and fully-insured
plans are required to have essential
health benefi ts and a plan that provides
minimum value, to be qualifi ed as an
acceptable plan under the Affordable
Care Act. All of our plans meet this
minimum value requirement.
CR: How can small to mid-sized com-
panies benefi t by adopting the cap-
tive insurance model?
WB: In our model, the employer has
a level-funded arrangement. This is
where they fund a level premium on a
monthly basis and a portion goes to their
captive and a portion goes to Risk Solutions
Captive. Unlike a traditional self-funded
“Healthcare reform in the US has brought about
tremendous change. It has driven employers from the
fully-insured market to fi nd alternatives to provide
their employees with quality benefi ts”
William C. Beeler, president of Risk Solutions Captive, Inc., talks to Captive Review about how healthcare captives can fi t the needs of employers of all sizes
CAPTIVES FOR ANY SIZE EMPLOYER
Written by
William Beeler
William Beeler has in excess of 39 years of experi-ence serving as an administrator and/or consultant to employee benefi t trust plans. Mr Beeler’s experi-ence includes serving on the Administrator’s Com-mittee for the International Foundation of Employee Benefi t Plans as well as extensive dealings with the Department of Labor and the Internal Revenue Ser-vice with regard to 501(c)9 Benefi t Trust Plans.
25 TENNESSEE REPORT 2015 | WWW.CAPTIVEREVIEW.COM
RISK SOLUTIONS CAPTIVE | TENNESSEE
plan, there are no bi-weekly, or weekly costs
for claim payments. All of that is handled by
their captive cell or Risk Solutions Captive.
If the employer’s captive cell has any deficit,
Risk Solutions Captive, as part of a partici-
pation agreement, will pre-fund those
claims for the employer.
Employers have the opportunity to
take their plan from a fully-insured
arrangement, where the only one
making a profit is the insurance com-
pany, to a self-funded captive arrange-
ment where the profits go back to the
employer. Not only can they receive ini-
tial savings through lower premiums,
but employers will also receive any sur-
pluses from their cell based on claims
experience during the benefit year, and
have protection against unexpected
costs so there is never a deficit. This is
why America’s largest companies have
been using captives for years.
CR: What are the most common
concerns employers have regarding
entrance into a captive insurance
model?
WB: Most employers that enter the cap-
tive insurance model have only known the
fully-insured model, usually provided by
one of the big carriers such as Blue Cross
or United. When new to the captive plan, at
times there is concern that if an employee
goes to the hospital, their provider will not
recognize the coverage that they are offer-
ing. In our model, we use a network from
a major carrier, alleviating this uncertainty.
An additional employer concern relates
to provider availability. Every time we pro-
vide a proposal for an employer interested
in our captive offering, we run a ‘Geo-Access
Report’. This makes sure we have sufficient
providers, primary care, specialists and hos-
pitals to meet the needs of their employees,
wherever they are located. The first thing
the employer sees is that we have compre-
hensive provider access for their employees.
CR: What are the challenges that employ-
ers utilizing captive insurance must be
capable of dealing with?
WB: Entering the captive insurance model
resembles a level-funded, fully-insured
product. Therefore, there are few employer
challenges to overcome.
At Risk Solutions Captive, we have
employee meetings to explain any pending
changes. In addition, we offer a toll-free
number and web access to answer any
questions.
We are engaged with our clients
from day one and have nurses who
work hand-in-hand with members on
a variety of health and wellness issues
through programs such as disease and
case management.
CR: What benefits does Risk Solu-
tions Captive offer over group captive
arrangements?
WB: In a group captive arrangement,
the employers own the entire captive.
When they enter this type of captive
arrangement they have a level of lia-
bility that they must meet. Above the
pre-determined liability level, the
employer pools their risk with other
employer groups within the captive
until the reinsurance limit is met. The
employer must then provide a letter
of credit for collateral, which can be
called upon to help fund all of the
other employer groups in the captive
if the overall experience should be unfa-
vourable.
Our captive model differs in that there
is no employer collateral required. The
employer funds to the maximum from
day one. We set up their individual captive
cell for the employer liability, our captive
cell and the reinsurance arrangement,
meaning employers will not be required to
fund any deficits in the captive. That is the
responsibility of Risk Solutions Captive.
“Every time we provide a proposal for an employer interested in our captive offering, we run a ‘Geo-
Access Report’. This makes sure we have sufficient providers, primary care, specialists and hospitals
to meet the needs of their employees, wherever they
are located”
As a business owner, you know that rising insurance premiums can quickly erode capital flexibility. At First Tennessee, we
can put you in touch with legal advisors, CPAs, and Captive managers who can help you determine whether a Captive can
offer you greater financial control over costs. Our experienced banking professionals work with a number of Tennessee-based
Captives today, and through our subsidiary FTB Advisors Inc., can provide a wide range of investment services to help
facilitate Captives.
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FTB Advisors is the trade name for wealth management products and services provided by First Tennessee Bank National Association (“FTB”) and its affiliates. Investment management services and investments available through FTB Advisors, Inc., member FINRA, SIPC, and a subsidiary of FTB.©2015 First Tennessee Bank National Association. www.firsttennessee.com
27TENNESSEE REPORT 2015 | WWW.CAPTIVEREVIEW.COM
NELSON MULLINS | TENNESSEE
Captive Review (CR): What has it taken to
develop and grow Tennessee as a captive
insurance domicile?
Kevin Doherty (KD): I always use the analogy
of a three-legged stool, which is the most sta-
ble kind of chair. Its three legs are:
• The Executive Branch: Governor
Haslam, commissioner McPeak and
captive director Michael Corbett. They
regulate and administer captive law,
and supported it in the fi rst place.
• The Legislature: Has been supportive in
helping create cutting-edge legislation
and passing it. This can be seen in 2011
when we initially rewrote the entire
chapter on captives, again in 2013 and
again recently in 2015.
• The Private Sector: We have an industry
with vital, qualifi ed professionals who
handle the captive insurance business
taking place in Tennessee. This includes
attorneys like us, accountants, CPAs,
banks and actuaries. It also includes,
perhaps most signifi cantly, captive
managers. Several captive managers
have actually opened offi ces in Tennes-
see, which shows a signifi cant commit-
ment to the growth of the industry here.
All three of these legs are critical and present
in Tennessee. I believe that is the reason we
have been so successful in the fi rst four years
of this new domicile.
CR: What are the main captive growth
areas?
KD: Tennessee now has 82 licensed captives
and 218 approved cells that are connected
to several of the protected cell captives in
the state. That is a total of 300 risk-bear-
ing entities and this number continues to
grow.
This is a signifi cant total, by which you
can tell that the leading growth area is the
protected cell captive arrangement, other-
wise known in other domiciles as segregated
portfolio companies. The concept started off-
shore, but became popular onshore. I believe
Tennessee is now one of the leading states in
this area.
What the protected cell captive arrange-
ment allows is for the creation of cells and
captive units for all types of businesses. These
businesses then do not necessarily have to go
to the trouble of putting up the capital them-
selves, and can join an existing facility.
Essentially this arrangement increases the
marketplace to include medium and smaller
sized businesses.
In the past, these businesses were not
necessarily able to participate in the captive
insurance model except on a group basis.
Group captives are not seeing a lot of growth
right now. It is mostly in this protected cell
area, where participants are still retaining
a substantial portion of their own risk – in
most cases up to 49%.
CR: How has Tennessee encouraged this
growth?
KD: The fi rst thing we did was ensuring
the law included a fl exible protected cell
arrangement. This includes not only tradi-
tional protected cells, but also incorporated
protected cells.
Further to this, our incorporated law per-
mits not only corporations, but LLCs and
Series LLCs. There are only a small num-
ber of states that have a Series LLC law as
well as the protected cell law. Signifi cantly,
Tennessee is one of those. These Series pro-
vide a signifi cant administrative advantage
because they do not require registration
with the secretary of state, but they are still
regulated by the Department of Commerce
and Insurance. This streamlines the process,
but it provides adequate oversight because
the department is looking at and improving
each, individual cell.
CR: What does the future look like for cap-
tive insurance?
KD: The simple answer is that we need to
continue to make sure we have the high-
est qualifi ed people in all sectors of our
industry, both public and private. Michael
Corbett and his captive division is doing
exactly that for the public sector. The peo-
ple he is hiring are top-notch. They are
qualifi ed and they are able to understand
the nuances of captive formation.
We need to make sure we keep captives
solvent and hiring in Tennessee. That will
allow us to continue to grow.
We will continue in the future to look
at other domiciles, both onshore and off-
shore. If they are employing innovative
mechanisms to help businesses form cap-
tives that we have not tried before, we will
be open to supporting that in Tennessee.
Kevin Doherty, partner of Nelson Mullins and chair of TCIA, talks to Captive Review about Tennessee’s strategy for captive growth and considers the future of the industry in the domicile.
BUILDING A CAPTIVE DOMICILE
“We have an industry with vital, qualifi ed professionals who handle the captive insurance business that takes place in
Tennessee”
Written by
Kevin Doherty
Kevin Doherty is a partner in Nelson Mullins Riley & Scarborough’s Nashville offi ce. His practice focuses on insurance regulatory law, with particular empha-sis on captives, risk retention groups, self-insurance funds, and other alternative insurance vehicles.
28 TENNESSEE REPORT 2015 | WWW.CAPTIVEREVIEW.COM
TENNESSEE | OXFORD RISK MANAGEMENT
As with any business strategy,
it is essential to conduct the
appropriate due diligence to
ensure compliant implemen-
tation, and captive insurance
arrangements are no excep-
tion. Business owners interested in the even-
tual creation of a captive insurance company
can benefit from a risk management analysis
and comprehensive plan to more effectively
manage enterprise risks and control costs.
Risk managementAt the heart of every captive insurance imple-
mentation is risk management. A captive
insurance company can provide protection
against risks proving to be too costly to obtain
via traditional insurers or may be unavail-
able in commercial markets. It may also be
utilized to address the inability to obtain
specialized types of coverage from commer-
cial third-party insurers. For example, your
company may be subject to economic loss
due to governmental regulatory or legislative
changes. While it would make a lot of sense
for you to purchase coverage for protection
from these risks, you may find that this type
of policy is simply unavailable. Your captive
insurance company is better equipped to
offer specialized coverage, tailored specifi-
cally to your unique business needs.
If a captive insurance company is selected
during the risk management process as the
preferred way of addressing certain expo-
sures, much of the information gathered in
the risk identification process will be utilized
in the preparation of the captive’s feasibility
study and business plan. It is important to
understand that while a captive can be uti-
lized to replace existing insurance coverage,
this may not always be the case. Coverage
issued by the captive such as deductible reim-
bursement does not have to take the place of
existing coverage, especially when your exist-
ing policies provide coverage against the types
of risks, which may result in catastrophic
losses. The captive can provide a policy, engi-
neered to the insurers unique specifications,
to supplement these traditional lines of cov-
erage. In most cases, to the extent existing
property and casualty coverage is reasonably
priced, the most attractive option may be to
retain fully-guaranteed existing policies for
traditional coverage, while supplementing it
by addressing self-insured risks with a cap-
tive insurance company. Therefore policy
features, coverage and limits can be drafted
to meet your specific enterprise exposures.
Business purposeThe concept of valid business purpose is
vitally important and the operating com-
Written by Michael A. DiMayo
Michael A. DiMayo is co-founder of Oxford Risk Management Group and Affiliates, with responsi-bilities including marketing, strategic relationship development and best practices initiatives. Mike has extensive experience in all aspects of the captive insurance industry with emphasis on design, imple-mentation, ongoing management and regulatory oversight for Oxford’s captive clients.
Written byKevin E. Myers
Kevin E. Myers is co-founder of Oxford Risk Man-agement Group and Affiliates, and is the internal certified public accountant and tax advisor. Kevin has extensive experience in structuring captive insurance companies with respect to Internal Reve-nue Code Section 831(b) and related tax compliance.
Michael A. DiMayo and Kevin E. Myers, principals at Oxford Risk Management Group, discuss the importance of ensuring compliance and other things to consider for enterprise risk captives making an 831(b) election
KEEPING CAPTIVES COMPLIANT
29 TENNESSEE REPORT 2015 | WWW.CAPTIVEREVIEW.COM
OXFORD RISK MANAGEMENT | TENNESSEE
pany should view management of risk as
a process significantly more involved than
merely purchasing traditional insurance.
The risk management process generally
begins with the identification and quanti-
fication of all exposures, perils and hazards
existing in the organization. The risk man-
ager and insurance broker play an impor-
tant role in the identification of potential
causes of loss, which may adversely impact
the organization. The decision to transfer
or retain risk is a financial decision. The
risk manager must be knowledgeable about
all aspects of the organization’s operations,
in addition to the business and regulatory
environment within which they work.
Proper underwriting and pricingOne of the most important aspects of the
captive implementation process is under-
writing. Those individuals who understand
the risk profile and business operations
should be involved in the underwriting
process. That will include the owners of the
operating companies, and likely, upper-
level management and any internal risk
control employees. Underwriting is not a
“set and forget it” matter. An underwriting
plan must be reviewed annually to account
for changes in its related operating compa-
ny’s business conditions and/or property
and casualty pricing environment.
As part of the process, it is essen-
tial to obtain responsible pricing via
independent, third-party credentialed
actuaries. Whenever possible, pricing
should reflect rigorous peer-review
methodology, so the premiums paid by
the insured to the captive are sensible
and sound in every aspect.
Risk distributionIt is crucial that the captive insurance
company conforms to Internal Rev-
enue Code Section 7701(o) regarding
economic substance, and be structured
and managed as an insurance company,
providing true risk for appropriate pre-
mium levels. The IRS has frequently stated
in technical guidance that an insurance
contract must fall within the “commonly
accepted sense of insurance” based upon a
number of factual determinations. A captive
insurance company must be organized and
operated for bona-fide business purposes
and demonstrate both risk shifting and risk
distribution in order for the arrangement to
meet the requirements to qualify as insur-
ance in the commonly accepted sense.
In light of increased IRS attention
directed at 831(b) captives, it is crucial
every effort is made to comply strictly
with all available requirements and guid-
ance. Fortunately, there is a long history of
case law to guide the captive implementa-
tion and regulatory team throughout the
process, enabling the experts to design a
compliant captive insurance company for
both risk shifting and risk distribution.
Through a number of IRS “safe harbor”,
Revenue Rulings and tax court decisions,
risk shifting and risk distribution for
the captive insurance company can be
designed with a clear path for compliance.
It is equally important for the risk distri-
bution structure and claims management
to actually approve and pay appropriately
filed claims, thus resulting in claims expe-
rience distribution among all of the risk
distribution participants in a responsible
manner.
Checks and balancesA number of professionals should be pres-
ent to help develop, implement and admin-
ister a captive insurance company, which
is generally retained to coordinate the
activities of the other professionals, provide
claims review services, and manage daily
operations. It is ideal for the actuarial and
legal professionals, as well as the captive
management company service provider to
be independent organizations. Accordingly,
this involves providing independent checks
and balances throughout the captive imple-
mentation, administration and ongoing
management processes.
Appropriate investment planThe captive will submit an investment plan
to the insurance regulators as part of the
application process and can hold a variety of
investments as approved by the insurance
regulators in the domicile of choice. It is
important for the captive investment plan
to operate as a typical insurance company,
with a focus on conservative investments
which are liquid in nature to satisfy claims.
The captive should maintain appropriate
reserves to meet its potential claims liabili-
ties, and its implementation process should
include a review of the investment plan
opportunities with the business owner’s
independent financial services team.
Choosing the right domicileDomicile selection is one of the most vital fac-
tors to consider when forming a captive insur-
ance company. Items to consider when select-
ing the most appropriate domicile will include:
• Captive statute
• Regulatory climate
• Taxation
• Infrastructure
• Compliance
• Investment objectives
• Overall perception of the structure
It is also important to analyze first year
implementation and ongoing management
costs to remain compliant in the jurisdiction
you select for your captive insurance com-
pany. There are many excellent jurisdictions
to consider and choosing the domicile
closest geographically to your operating
business may not be the best fit. That is
why it is so important to hire independent,
third-party professionals to analyze your
long-term risk management goals and
recommend the domicile that fits best with
your goals. Without question, Tennessee is
among the most attractive domestic domi-
ciles and worthy of serious consideration.
In closing, the decision to implement a
risk management plan and form a captive
insurance company should closely resem-
ble the decision making process reason-
able for the establishment of any new
business venture. In the case of a cap-
tive insurance company, the preparation of a
business plan must also include an analysis of
applicable insurance regulatory, tax and legal
requirements specific to a business organiza-
tion. As one of the nation’s leading providers
of captive insurance services, Oxford Risk
Management Group and its best-in-class team
of professionals will provide the expertise
needed to help develop a long-term plan for
the proper implementation, development and
ongoing management of captive insurance
companies.
“In light of increased IRS attention directed at
831(b) captives, it is crucial that every effort is made to comply strictly with all
available requirements and guidance”
At Keystone Risk Partners, we provide turnkey risk financ-
ing solutions by drawing on our extensive experience in
captive insurance operations and insurance underwriting.
We enable our partner network of agents and brokers to
pass on dramatic savings to their clients. In addition, cli-
ents who are unable to find appropriate insurance in to-
day’s market benefit from our creative financial solutions.
Helping clients satisfy their long-term fiscal goals is our top
priority.
Education | Partnership | Innovation
To learn more, visit us at keystonerisk.com.
Creative solutions for today’s market and tomorrow’s goals.
31TENNESSEE REPORT 2015 | WWW.CAPTIVEREVIEW.COM
CARR, RIGGS & INGRAM | TENNESSEE
Scott Schumpert, a partner at Carr, Riggs & Ingram, explains how the captive insurance model can help middle-market businesses expand their risk
management profi le
Written by
Scott Schumpert
Scott Schumpert has more than 25 years of experi-ence in providing accounting and auditing services to many businesses and organizations. He is accredited in business valuations and currently serves as serves as the partner-in-charge of the Nashville CRI offi ce.
EVALUATING RISK
“Most middle-market companies will price
shop their existing risk coverage thinking they
have a cost eff ective strategy and remain
exposed in other areas they do not even
consider”
Traditionally, the formation of
captives has been the domain
of Fortune 500 companies. In
recent times, however, we are
seeing a tremendous interest in,
and a business need for the for-
mation of captives in the middle market.
Many of these prospective middle-mar-
ket clients, however, are not entirely
aware of all the risk they must be covered
for. I like to see it like an iceberg: at the top
they have the risk that they are aware of
and are insured for. If you go down below
the surface of the water, there are all kinds
of underinsured and uninsured risks that
they have not even considered. These are
the types of risks that we are putting into
captives.
When fully evaluating risk, there are
three different perspectives to be consid-
ered; existing risk, underinsured risk and
uninsured risk. Most middle-market com-
panies will price shop their existing risk
coverage thinking they have a cost effec-
tive strategy and remain exposed in other
areas they do not even consider.
Existing risk These are the most common types of
risk. Generally, all middle-market clients
will be appropriately insured for these.
It includes risk such as:
• Property
• General liability
• Workers’ compensation
They will also obviously have the basic cov-
erage that a normal business has, such as:
• Stability insurance
• Errors and omissions insurance
• Directors’ and offi cers’ liability Insur-
ance.
Underinsured and uninsured risk‘Underinsured risk’ refers to areas in which
a company is exposed and does not realize
it. These risks can concern areas such as
supply chain, product liability and trans-
portation. ‘Uninsured risk’ refers to high
risks, where coverage is not available, par-
tially covered or very costly with commer-
cial carriers, such as loss of reputation.
What we are learning from our clients is
that there are a lot of uninsured, low-fre-
quency, high-impact risks that they are
unaware of. The most common examples
we have seen of underinsured and unin-
sured risks include:
• Administrative action
• Cyber-security
• Loss of employee
• Employment practices liability
• Wage and hour liability
• Employee fi delity
• Loss of key contacts/business inter-
ruption
• Reputational risk.
So very often in the middle market, cli-
ents are either uninsured or they do not
have enough coverage. Across a wide vari-
ety of businesses in the middle-market,
we are fi nding this to be the case. Whether
that be the construction industry, manu-
facturing, hotels, physicians, restaurants
or transportation, there is a large section
of the middle market that appears to have
been underserved.
An example we have seen of this
recently involved a manufacturing com-
pany with $30m in revenues, paying
millions of dollars in taxes, and they had
numerous underinsured and uninsured
risks that management had not consid-
ered. So we have a company with a strong
cash-fl ow and signifi cant uninsured risks.
They now have the opportunity to develop
a new profi t center, structured as a valid
insurance business.
By forming a captive, clients will not
only insure themselves for these risks,
they may also retain some underwriting
profi ts, and in addition, there is the $1.2m
tax incentive.
33 TENNESSEE REPORT 2015 | WWW.CAPTIVEREVIEW.COM
PARETO | TENNESSEE
Captive Review (CR): What does an
employee benefit captive offer medi-
um-sized employers?
Andrew Cavenagh (AC): A benefit captive
allows a medium-sized employer to self-in-
sure their health plan with confidence. It
provides protection from much of the year-
to-year bumpiness that would occur if they
were not in a captive. Think of a benefit cap-
tive as the keel on the bottom of a sailboat
that prevents it from tipping over. Once
they have a risk financing structure that
allows them to self-insure comfortably, they
can then turn their focus to reducing claims
and improving health.
CR: Is this not possible with stop loss?
AC: Not really. A stop-loss policy only cov-
ers claims for a year and does not provide
protection for known ongoing claims. An
employer can purchase a “no laser” pol-
icy, but that only provides protection from
lasers for a one-year period and can involve
rate increases of 50% or more.
The captive is able to provide much more
protection. It fills a hole in the stop-loss
market.
CR: Is there not more risk involved in
being self-insured?
AC: That is a lie that many people in the
industry tell in an attempt to maintain the
status quo. The simple truth is that every
employer will pay the following over a mul-
ti-year period:
Andrew Cavenagh, managing director and founder of Pareto Captive Services, talks to Captive Review about what an employee benefit captive can offer medium-sized employers
Written byAndrew Cavenagh
Andrew Cavenagh is managing director and founder of Pareto Captive Services. He is a leading expert in group captives, and is on the Board of Directors of SIIA. Andrew has a BA in Economics.
REDUCING THE COST OF HEALTHCARE
34 TENNESSEE REPORT 2015 | WWW.CAPTIVEREVIEW.COM
TENNESSEE | PARETO
• Administrative costs
• Pooling charges or large-claim premium
• Their own claims below the pooling or
excess point
Anyone that tries to convince you that a fully
insured product miraculously removes the
possibility that you will eventually pay your
own claims is telling a tall tale. In reality, an
employer takes on more risk by remaining
fully insured as they cede much of their
control to someone else. That “someone
else” might not have the same goals as the
employer. The waters ahead are choppy and
turbulent, and it is much better to be at the
helm of the ship than sitting blindly in the
cargo hold.
CR: Why are your captives domiciled in
Tennessee?
AC: Pareto wanted a state that was friendly
to businesses, particularly young and inno-
vative ones such as ours. We wanted an
insurance department that was committed
to captives and we wanted engaged and
accessible captive regulators that did not
try to fit every program into a preconceived
mold. Tennessee fit the bill. The Department
of Insurance was receptive and encouraging
of our captive model and took an active
interest in seeing our programs succeed.
Tennessee has also helped us increase
participation in our client meetings. As it is
centrally located, is has direct flights to most
major cities in the country, is affordable,
and is a lot of fun.
Finally, Nashville has become a hotbed of
healthcare entrepreneurs and start-ups.
CR: Your clients come to Nashville every
year? Can you tell us about those events?
AC: For each of our programs, we host either
annual or biannual meetings in Nashville for
our clients and their insurance consultants.
The meetings include governance of the
captive but they also provide an opportunity
to share informative content with our cli-
ents. The best part however is the peer-to-
peer interaction of our clients. The owners,
CFOs, and HR managers get a chance to talk
to their peers to share and learn ideas. These
meetings are our favorite part of the cap-
tive program. And naturally, the meetings
contain enough free time to take in some
songwriter performances and a little time
on Broadway.
CR: How does Pareto’s offering differenti-
ate itself from the rest of the market?
AC: I think our focus is very different from
the rest of the market. We have three simple
but very important goals:
• Reduce risk and volatility, particularly on
a year-to-year basis
• Reduce the cost of healthcare
• Use data and metrics to drive increased
performance
We also have critical mass and scale that
others are lacking. This allow us to do things
that others cannot, like offer our prescrip-
tion drug consortium and provide a more
robust online data and analytics tool.
CR: Can you give me an example of how
you are using data or metrics?
AC: This year we created the Member Cost
Containment Index (MCCI). In its most
literal interpretation, the index provides
an absolute and relative measure of each
captive member’s cost containment efforts.
The relative score is used are part of renewal
pricing. The survey that leads to the index
provides information well past the index.
Each cost containment measure allows for
answers of “Yes”, “No”, “No, but plan to do
in six months” and “No and don’t know
enough about this particular cost con-
tainment effort to have an opinion”. The
answers to these questions allow us to very
quickly determine which clients need edu-
cation and which clients need resources to
effect change. This allows us to give our con-
sultant partners an individualized employer
“road map” and allows us customize content
at things like member meetings. Finally, we
will be giving annual awards to both captive
members and consultants based on best
absolute scores and most improved scores.
CR: What do you consider to be the
greatest challenges facing medium-sized
employers, which they might not be com-
pletely aware of?
AC: I think there are two things, one very
high-level and one very granular. On a high-
level, many medium-sized employers are
locked into a vicious cycle of taking a one-
year perspective on insurance “rates”. They
do not pick their head up and take a longer
term view and do not see the obvious solu-
tions that are there waiting for them.
On a granular level, I think the so-called
“super statins” have the potential to cause
significant financial damage to employers.
These drugs are just coming into the mar-
ket and will cost about $15,000 per person,
per year for the foreseeable future. One in
four adults have been prescribed a statin.
If 50% of the current statin users migrate
to a super statin, the employer’s costs will
increase by approximately 30% just from
this single class of drugs. We think many
employers are asleep at the switch on this
and we believe that employers must be in
a program that allows them to make deci-
sions surrounding these very expensive
medications. Most employers do not know
about this coming issue and do not realize
that they are letting someone else deter-
mine the outcome.
CR: Which industries are best-suited for
participation in a benefit captive?
AC: We do not care about industry as premi-
ums vary by industry. We would rather have
a motivated and engaged long-haul trucking
firm than an unmotivated and unengaged
advertising firm full of 25-year-olds.
CR: What does the future look like for
Pareto?
AC:We will continue to innovate and con-
tinue to do everything we can to drive down
the costs of healthcare for medium-sized
employers. We see an increase in things
like shared onsite clinics, pricing transpar-
ency, carve out networks for certain types
of care, and programs to control the costs
of specialty drugs in everything we do.
I suspect that we will end up setting up
something that looks like a turnkey product
or even mini-health plan in certain geo-
graphic areas.
Our ultimate goal is to be able to walk
into a medium-sized employer and say with
100% certainty “do this, and we will reduce
the cost of healthcare” thereby increasing
the value of our clients’ organizations.
“Anyone that tries to convince you that a
fully-insured product miraculously removes
the possibility that you will eventually
pay your own claims is telling a tall tale”
We are excited to work with you here in Tennessee.
Select Actuarial Services
Nashville, Tennesseewww.SelectActuarial.com615-269-4469Chris.Woodruff@SelectActuarial.com
We serve Captives from Hawaii to Bermuda
but there’s no place like home.
36 TENNESSEE REPORT 2015 | WWW.CAPTIVEREVIEW.COM
TENNESSEE | ARSENAL INSURANCE MANAGEMENT
Tennessee has made a strong
entry into the captive world
and is now a top captive dom-
icile. The domicile has proved
its quality by taking the lead in
several different areas of the
captive industry:
• Cell captives
• Medical stop-loss
• Consistently updated statutes and rules
Cell captivesTennessee has extended great support to
the establishment and regulation of cell
captives and has established a reputation
of high-quality cell regulation. Many of the
uses of cell captives have been innovative
and other domiciles are taking notice.
This is not lost on regulators from other
domiciles. At a recent captive conference,
a panel of regulators from other states was
asked about cell captives, to which the lead
regulator asked a Tennessee regulator in
the audience to please answer the ques-
tion, since “Tennessee is so good with cells”.
Medical stop-lossTennessee has a well-established health-
care industry and has applied its expe-
rience with the greater healthcare com-
munity in the state to medical stop-loss
captives. From the Commissioner’s office
to the Captive Section, Tennessee leads
with expertise, timeliness, and consistency.
Tennessee has established a laboratory
for medical stop-loss captives that allows
small and mid-size businesses to try inno-
vative approaches to address the require-
ments of the Affordable Care Act (ACA).
A favorable medical stop-loss market has
also helped make it possible for groups as
small as 25 to have access to the benefits
of self-insuring. We expect medical stop
loss to have significant continued growth
and Tennessee is definitely leading on this
issue.
Consistently updated statutes and rulesTennessee updates its captive statute every
year. In 2015, the focus was to broaden the
options for Tennessee employers in fund-
ing their workers’ compensation coverage.
It has also resisted any attempt to “race-
to-the-bottom” with overly-lax statues and
regulations. The regulatory environment
has been stable, but flexible.
Because of the even-handed, busi-
ness-minded, fair regulatory approach,
Tennessee has become a high-quality dom-
icile by continuing to update and experi-
ment regarding key captive issues.
While it is great that Tennessee has
become a leader on many captive issues,
does Tennessee meet the basics, too?
WHAT MAKES A GOOD CAPTIVE DOMICILE?In our experience, domicile selection should
be evaluated on the following criteria:
• Service and commitment to the industry
• Good laws and a willingness to update
• Low taxes and consistent regulation
Service and commitment to captivesIs the domicile committed to captives?
Sometimes this is easy. If you call a captive
domicile about making a captive application
and you are referred to a different domicile,
you should probably take the hint — it is
probably not the domicile for your captive.
However, sometimes, it may not be so easy
to determine service and commitment.
When it comes to service from the regula-
tors in a domicile, look for these things:
• Does the domicile have staff dedicated
to captives?
• Is the domicile staff experienced with
captives?
• Is there a process to provide funding for
captive regulation?
• Are they responsive when you ask ques-
tions?
• How quickly does the domicile handle
new captive applications?
• Has the domicile appropriated funds to
market the domicile?
While this list is not all-inclusive, it should
give you a good indication of the mindset of
the domicile.
Good lawsOne of the biggest differentiators between
domiciles is the actual captive law. The type
Written by
Norman Chandler
Norman Chandler has vast experience in designing and managing insurance programs involving all types of coverages for various insurance entities. He also has directed auditing, accounting, compliance, and taxation engagements and served as the rein-surance specialist for the Tennessee Department of Commerce and Insurance.
Norman Chandler, co-founder of Arsenal Insurance Management, explains why Tennessee is a leading domicile for captive insurance companies
TENNESSEE: A LEADER IN CAPTIVE
INSURANCE
37 TENNESSEE REPORT 2015 | WWW.CAPTIVEREVIEW.COM
ARSENAL INSURANCE MANAGEMENT | TENNESSEE
of captive that you have or hope to form will
have a great bearing on which domicile has
the right laws for you. Generally, you want
your captive’s domicile to have a modern
captive law.
For example, if you want to form an asso-
ciation captive, you should make sure that
the domicile allows association captives —
not all do. Likewise, if you want to start a cell
captive, the requirements vary greatly. Some
domiciles require an insurance company to
sponsor a cell captive. Other domiciles have
done away with this requirement. Therefore,
the type of captive that you have or hope to
have may greatly determine your domicile.
Tennessee’s 2011 statute change included
good language for cell captives and the state
has continued to improve the language.
Initial capitalization is also a consideration
and varies widely. While offshore require-
ments are less strenuous than onshore dom-
icile requirements, US domiciles also vary
greatly with initial capital for a cell captive
varying from $250,000 to $1m or more. If
you prefer to stay onshore, then Tennessee’s
requirements are quite reasonable.
Low taxes and solid regulationWhen it comes to taxes on captives, gener-
ally taxes are higher onshore. Tax rates vary
by US domiciles from the rate itself to the
premium cap to which tax applies. Tennes-
see has a reasonable rate and a cap, which
should be a consideration in your domicile
selection. Also be on the lookout for low tax
rates but high fees.
In most US domiciles, the only state taxes
levied are premium taxes. Domiciles that
charge premium taxes or fees and other
income or franchise taxes may have a higher
cost of doing business.
One of the more overlooked aspects of
domicile choice is the domicile’s history
of regulation. Questions to ask to evaluate
solid regulation include:
• Has there been a consistent, positive
attitude towards captives?
• Does the regulatory environment
change when the domicile’s chief reg-
ulator changes?
• Have captive laws been consistently
interpreted and applied?
• Is there a commitment to being a top
domicile?
• Does the domicile stay modern by
updating its laws and regulations?
• Is there an active captive association
representing the interests of captive
owners?
You may also consider if the domicile is
growing. Lack of growth may mean fewer
resources designated to captives going for-
ward.
WHY CHOOSE TENNESSEE?So what about Tennessee in regards to the
basics of a captive domicile? Let us see how
it stacks up.
Service and commitment to captivesOne key component of the Tennessee leg-
islation includes a financial commitment
to captives. As a result, if you have been to
any of the large risk management or captive
conferences in the US since the passage of
the law, you have probably seen Tennessee
captive regulators promoting the domicile
at those events.
Tennessee has a full-time director of cap-
tive insurance and several staff that assist
with captives. The director and staff are
experienced US insurance regulators and
have been easily accessible via phone, email,
or in person.
Good lawsWhile Tennessee is a fairly new entrant to
the captive world, Tennessee’s captive act
was substantially overhauled in 2011. And
has been updated every year since.
The Captive Act allows for various types
of captives, including incorporated cell
captives, the use of Series LLCs, and has
moderate capitalization requirements. Most
captives have initial minimum required
capitalization of $250,000. Of course, initial
capital required may be higher depending
on your captive’s business volume and type
of risks involved.
Low taxes & solid regulationTennessee matches other US domiciles with
premium tax rates that begin at 0.4% of pre-
miums with a maximum premium tax of
$100,000, one of the lowest in the US.
Tennessee captives are not subject to an
income or franchise tax and generally have
low fees with an initial licensing application.
SUMMARYTennessee has made a strong entry into the
captive world and is now a top captive domi-
cile and a leading voice in the industry. It has
shown tremendous growth in the number
of captives licensed since 2011. If you are
looking for a captive domicile, make sure
you look strongly at Tennessee.
“Tennessee has made a strong entry into
the captive world and is now a top captive
domicile and a leading voice in the industry”
TCIATennessee Captive Insurance Association, Inc.Attorneys & Counselors at Law
One Nashville Place | 150 Fourth Avenue, NorthSuite 1100 | Nashville, TN 37219
www.nelsonmullins.com | 615.664.5300
One Nashville Place | 150 Fourth Avenue, North Suite 1100 | Nashville, TN 37219
www.tncaptives.org
In 2011, there were two licensed captives in Tennessee. Today, there are 82 licensed captives and 218 approved cells. How did we get to 300 “risk-bearing entities” in just
legged stool” of the executive branch, the legislature, and the private sector.
After re-writing its captive insurance law in 2011 and amending it in 2013 and 2015, Tennessee now has one of the most cutting edge laws in the country. Combine that
most attractive domestic domiciles for captives.
The future is indeed bright for Tennessee captives. Come join us at the Fifth Annual Tennessee Captive Insurance Association, Inc. (TCIA) Conference in Nashville on November 17-18, 2015.
Kevin M. Doherty is president of the Tennessee Captive Insurance Association, Inc. and a partner at Nelson Mullins Riley & Scarborough LLP (Nashville, Tenn.).
Tennessee is a leader in the Captive Insurance industry
39TENNESSEE REPORT 2015 | WWW.CAPTIVEREVIEW.COM
SUMMARY | TENNESSEE
Nearly four years ago, the Ten-
nessee Captive Insurance
Section began its mission of
transforming Tennessee into
the domicile of choice for cap-
tive insurance companies.
Governor Bill Haslam of Tennessee’s
Department of Commerce, Insurance Com-
missioner Julie Mix McPeak and the staff of
the Captive Section knew that the bar was
set very high. However, with the support of
numerous areas of state government, mem-
bers of the Legislature and the business
community represented by the Tennessee
Captive Insurance Association (TCIA), we
have made the dream a reality. Tennessee
is now a Domicile of Choice (DOC) for the
formation of all types of captive insurance
companies.
Today, the measure of our success can
be seen in our statistics. As of 1 September,
Tennessee now can boast of having 302 risk
bearing entities comprised of 83 captive
insurance companies and 219 cell companies.
We earned the business of captive insur-
ance companies by forming captives for
companies of all sizes (for example For-
tune 100 companies to individual owners),
forming captives in all areas (medical,
transportation, construction and service
industries), forming captives of different
types (pure, protected cell, association, risk
retention groups), and perhaps most telling,
redomesticating captives from numerous
foreign and alien domiciles.
To use a Nashville metaphor, this is just the
fi rst verse of our song – and there’s plenty
more to come.
Our ability to attract new captive for-
mations and redomesticate existing cap-
tives from onshore and offshore domiciles
demands ever-improving legislation and
a well-trained regulatory staff capable of
meeting the needs of service providers and
owners. We are confi dent that these needs
are being met by our outstanding legal and
regulatory staff. With input from the busi-
ness community (TCIA) we are keeping pace
with the changing needs of the industry, and
we are committed to meeting those needs.
This Captive Review report spells out the
driving force in the explosive growth of
captive insurance in Tennessee: The ser-
vice providers in the captive space includ-
ing captive management companies, law
fi rms, actuaries, CPA fi rms, banking and
investment institutions, and third-party
administrations. These valuable groups are
the unsung heroes of Tennessee’s success
as a captive DOC. Many of these fi rms took
a chance on Tennessee when we were new,
and we are deeply grateful for their early
commitment.
Although we are barely four years into
our mission, we have earned the trust of
many. To maintain this trust, we must show
we deserve it every day. On behalf of Gov.
Haslam and Commissioner McPeak, the
Captive Section of the Tennessee Depart-
ment of Commerce and Insurance would
like to thank all those who have helped make
the dream a reality.
When you think of captive insurance,
THINK TENNESSEE!
Written byMichael A. Corbett,
Director-Captive Section, Tennessee Department of
Commerce & Insurance
“This is just the fi rst verse of our song – and there’s plenty more to
come”
THINK TENNESSEE
PUTTING THE
POWERPOWERBACK IN THE EMPLOYER’S HANDS
Risk Solutions Captive, Inc. (RSC) is transforming health insurance
for employers through its unique captive insurance offerings.
William C. Beeler | bbeeler@risksolutionscaptive.com | 615.822.0483
www.risksolutionscaptive.com
41 TENNESSEE REPORT 2015 | WWW.CAPTIVEREVIEW.COM
SERVICE DIRECTORY
ARSENAL INSURANCE MANAGEMENT LLC Norman Chandler, CPA, CPCU, CFE, partner, Tel: +1 334 260 7774, email: nchandler@captivesusa.com5151 Hampstead High Street, Suite 200, Montgomery, AL 36117
We can help your organization develop a captive insurance company business plan, choose a captive domicile, navigate you through the captive formation process, and manage your captive insurance company, Risk Retention Group (RRG), or other Alternative Risk Transfer (ART) vehicle. Whether your captive need is to help manage current commercial coverages, formalize self-insured risks, and/or insure customers or clients, we offer a broad variety of services to fit most captives.
ASSURANCE PARTNERS, LLC Nate Reznicek, Client Services Coordinator, Tel: +1 785 493 4303, email: nreznicek@yourassurance.com210 E. Iron Ave, Salina, KS 67401
As one of the largest providers of risk management services in the Midwest, Assurance Partners specializes in partnering with business owners and their strategic advisors to help guide them through the process of determining risks that are unique to their organizations. Assurance Partners develops sustainable enterprise risk management strategies and programs designed to lower business owners’ total cost of risk, increase profitability and help ensure financial stability.
CARR, RIGGS & INGRAM, LLC. Scott Schumpert, Partner, Tel: +1615 760 1526, email: sschumpert@cricpa.com 3011 Armory Drive, Suite 190, Nashville, TN 37204
CRI’s insurance industry knowledge, insight, and responsiveness ensure the delivery of timely, high-quality, and cost-effective solutions. Core services include financial statement audits, internal audits, IT security, SOC reports, regulatory consulting, claims analysis, reinsurance review and assistance, captive insurance consulting and formation, and other specialized services.
CROWE HORWATH LLP Lynn McGuire, Partner, Tel: +1 615 515 5695, email: lynn.mcguire@crowehorwath.com720 Cool Springs Boulevard, Suite 600, Franklin, TN 37067-7260
Crowe Horwath LLP is one of the largest public accounting, consulting, and technology firms in the United States. Under its core purpose of “Building Value with Values®,” Crowe uses its deep industry expertise to provide audit services to public and private entities while also helping clients reach their goals with tax, advisory, risk, and performance services. 41
FIRST TENNESSEE BANK Deryl Bauman, Tel: +1 615 734 6301, email: djbauman@ftb.com165 Madison Ave, Memphis, TN 38103
First Tennessee Bank was founded during the Civil War in 1864 and has the 14th oldest national bank charter in the country and one of the highest customer retention rates of any bank in the country. First Tennessee and FTN Financial are part of First Horizon National Corp., which has 4,300 employees. First Horizon has been recognized as one of the nation’s best employers by Forbes, Working Mother and American Banker magazines.
www.captivesusa.com
www.yourassurance.com
www.CRIcpa.com
www.crowehorwath.com
www.firsttennessee.com/captives
IROQUOIS CAPTIVE SERVICES, LLC Andrew Rhea, Managing Director, Tel: +1 615 467 7211, email: arhea@iroquoiscs.com401 Commerce Street, Suite 740, Nashville, TN 37219
Iroquois Captive Services, LLC is a consultant and manager for captive insurance companies. Our team of professional advisors, with years of experience in the insurance, legal and accounting industries, builds customized programs which provide substantial risk management and financial benefits to our clients. www.iroquoiscs.com
KRP MANAGERS, LLC Joel Pina, CFO, Tel: +1 610 572 1012, email: jpina@keystonerisk.com
KRP Managers specializes in domicile management of middle market captive insurance companies. KRP combines deep accounting, tax, regulatory and insurance expertise with efficient business processes and rigorous internal controls, and broad experience to provide efficient, secure and client-focused captive management services. KRP is a wholly-owned subsidiary of Keystone Risk Partners, which specializes in establishing captive and alternative risk solutions to bring the highly successful solutions of the Fortune 500 business to a wider audience of middle market insureds.www.keystonerisk.com
42 TENNESSEE REPORT 2015 | WWW.CAPTIVEREVIEW.COM
SERVICE DIRECTORY
OXFORD RISK MANAGEMENT GROUP Ashley DiMayo, COO, Tel: +1 410 472 6490, email: ADiMayo@OxfordRMG.com 954 Ridgebrook Road, Suite 100, Sparks, Maryland 21152
Oxford Risk Management Group specializes in conducting captive feasibility analysis and coordination of turn-key captive insurance company arrangements, both domestically and internationally. As an alternative risk and captive insurance research and consulting company, we focus on coordinating design, implementation, regulatory approval and management of new captive insurance companies. We have earned a reputation as one of the premier providers of conservative captive insurance structures in the industry.
PARETO CAPTIVE SERVICES, LLC Andrew Cavenagh, Managing Director, Tel: +1 484 362 0225, email: cavenagh@paretocaptive.comCira Centre, 2929 Arch Street, Suite 1175, Philadelphia, PA 19104-7342
Pareto Captive Services forms and manages employee benefit group captives that allow employers to reduce costs and increase control over employee benefit programs. We offer employers with between 50 and 500 employees access to group captives. We work with captive members to develop and execute multi-year plans, providing support and resources to measure progress. We serve as the management team for the captive, representing the interests of the group.
PRO GROUP Robert Vogel, Tel: +1 775 283 4211, email: info@pgmnv.com575 S. Saliman Road, Carson City, NV 89701
Pro Group offers a comprehensive suite of award-winning services specializing in the analysis, design, implementation and ongoing management of captive insurance companies and self insured plans. Strong with a diverse, extensive and experienced team for business owners who demand the best, we provide services to individual companies, employers, agencies, associations, and groups that require a sound solution for their insurance needs. The Power of the Right Partner begins with Pro Group.
RISK SOLUTIONS CAPTIVE, INC. William C. Beeler, Tel: +1 615 822 0483, email: bbeeler@risksolutionscaptive.com100 Bluegrass Commons, Suite 200, Hendersonville, TN 37075
Risk Solutions Captive, Inc. (RSC) provides innovative solutions for companies with 50 or more employees in the self-funded arena. RSC’s partnership with Health Cost Solutions (HCS), the TPA, provides the foundation for RSC with a variety of services including claims payment, cost containment, billing, reporting and COBRA services. By partnering with a highly rated reinsurance carrier and Health Cost Solutions, Risk Solutions Captive offers risk protection from high-dollar claims exposure and the highest quality TPA services.
www.OxfordRMG.com
www.paretocaptive.com
www.ipfs.com
risksolutionscaptive.com
SELECT ACTUARIAL SERVICES Mary Frances Miller, Chief Actuary & Partner, Tel: +1 615 269 4469 ex. 110, email: MaryFrances.Miller@SelectActuarial.com28 White Bridge Road, Suite 205 Nashville, TN 37205
Select Actuarial Services is an independent consulting firm serving a vital role in helping you measure your organization’s cost of risk, and, ultimately, achieve your risk management and business objectives.www.selectactuarial.com
NELSON MULLINS RILEY & SCARBOROUGH LLP Kevin Doherty, Tel: +1 615 664 5307, email: kevin.doherty@nelsonmullins.comOne Nashville Place, 150 Fourth Avenue North, Suite 1100, Nashville, Tennessee 37219, United States
Nelson Mullins Riley & Scarborough LLP offers the strength and resources of attorneys and professional staff experienced in a range of services. Our attorneys provide advice and counsel in litigation, corporate, economic development, securities, finance, intellectual property, government relations, regulatory, and other needs of clients ranging from private individuals to large businesses, including many publicly held companies. For more information, go to www.nelsonmullins.com. www.nelsonmullins.com
MIJS CAPTIVE MANAGEMENT, LLC Matthew J. Howard, Partner & Captive Manager, Tel: +1 770 795 5022, email: mjhoward@mijs.com326 Roswell Street, Suite 100, Marietta, GA 30060
MIJS manages over 100 micro captives in eight US domiciles for privately held businesses throughout the US. MIJS owns and operates a reinsurance captive that facilitates sharing of risks for its client’s captives. MIJS also assists captives with IRS audits, trust and estate issues, and corporate governance, all within the flat fee.www.mijs.com/captive/
The Power of the Right Partner
Manage Your Risk, Reap The Benefits
Pro Group offers a comprehensive suite of award-winning services specializing
in the analysis, design, implementation and ongoing management of captive
insurance companies and self insured plans. Our diverse, extensive and experienced
team is ready to assist business owners who demand the best. We provide
services to individual companies, employers, agencies, associations, and groups
that require a sound solution for their insurance needs. The Power Of The Right
Partner begins with Pro Group. Call us today!
“If You Own It... You Control It”™
pgcaptives.com | 800.859.3177
“If You Own It... You Control It”™
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