tennessee captive 2015 report

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.


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 [email protected] // CAPTIVE REVIEW EDITOR Richard Cutcher +44 (0)20 7832 6659 [email protected] // 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 [email protected] // PUBLISHING ACCOUNT MANAGERS Jessica Ramella +44 (0)20 7832 6631 [email protected] // Lucy Kingston +44 (0)20 7832 6637 [email protected] // DATA/

CONTENT SALES Nick Byrne +44 (0)20 7832 6589 [email protected] // Alex Blackman +44 (0)20 7832 6595 [email protected] // HEAD OF EVENTS Beth Hall +44 (0)20 7832 6576 [email protected] // EVENTS MANAGER Jessica Jones +44 (0)20 7832 6517 [email protected] //

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

[email protected]

www.captive.tn.gov

Justin MillerTennessee Captive Insurance Association150 Fourth Avenue North, Suite 1100

Nashville, TN 37219888.668.3188

[email protected]

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


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


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.


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.

410.472.6490

Learn more by calling or visiting us online.

www.OxfordRMG.com

• 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:

The Only Captive PartnerYou Will Ever Need


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?”


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.


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”


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


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


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”


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


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.


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.

GIVE US A CALL TODAY AT 615-734-6301 OR VISIT FTB.COM/CAPTIVES TO LEARN MORE.

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 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


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.


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


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.


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.


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


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.


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


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


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 | [email protected] | 615.822.0483

www.risksolutionscaptive.com


SERVICE DIRECTORY

ARSENAL INSURANCE MANAGEMENT LLC Norman Chandler, CPA, CPCU, CFE, partner, Tel: +1 334 260 7774, email: [email protected] 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: [email protected] 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: [email protected] 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: [email protected] 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: [email protected] 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: [email protected] 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: [email protected]

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


SERVICE DIRECTORY

OXFORD RISK MANAGEMENT GROUP Ashley DiMayo, COO, Tel: +1 410 472 6490, email: [email protected] 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: [email protected] 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: [email protected] 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: [email protected] 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: [email protected] 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: [email protected] 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: [email protected] 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”™