With a progressive new set of laws inviting captive formations in Tennessee, the state is moving quickly to establish itself as a legitimate contender for the title of the Deep South’s preferred domicile.

Presently, South Carolina with its roughly 150 captive licensees is well out front—a fact acknowledged by Michael Corbett, the Nashville-based director of the captive insurance division of Tennessee’s department of commerce and insurance. But he quickly notes that “the Southeast market is between Tennessee and South Carolina.”

No other states in Dixie have seemed interested in developing captive domiciles except for North Carolina, which in June successfully passed legislation to eventually allow them.

Tennessee completely overhauled its captive insurance regime in 2011 when Republican Gov. Bill Haslam signed HB 2007 after both houses of the legislature unanimously approved the measure. The overhaul came because the state’s existing captive structure, which was enacted in 1978, became outdated. In its heyday, Corbett said, Tennessee probably had about 20 captives, but that number withered to only a few.

The 2011 leg islation is an “amended and restated” version of existing law from 1978, according to Kevin Doherty, president and chairman of the Board of the Tennessee Captive Insurance Association, also in Nashville.  

Doherty, a partner with the law firm of Nelson Mullins Riley & Scarborough LLP, assisted in drafting the new legislation.

The revival has worked well so far. From having only a couple of active captives in the Volunteer State in the year prior to the new legislation’s approval, the state has added 18 newly formed captives, “and we should easily be at 30 [captives in operation] by the end of the year,” Corbett said.

He attributes Tennessee’s resurgence to a three-legged stool that’s worked well in Vermont and other successful captive domiciles: strong support from the governor and insurance commissioner on the regulatory side; from legislators in making changes as the market requires; and support and lobbying from the business community, via the TCIA.

Corbett also credits the agency’s captive insurance division for turning the state’s fortunes around. “We have an outstanding team of dedicated professionals committed to ‘best in class’ procedures for application approval, oversight analysis and examination practices regarding captive insurance companies.”

The 2011 revamping allowed Tennessee to permit many of the sophisticated alternative risk transfer products that the old set of laws simply couldn’t handle. Risk structures such as incorporated cells, branch captives, special purpose financial captives and self-insured workers’ comp funding via captives are now allowed.

Corbett and Doherty also noted that the legislature continues to be responsive. This past June, lawmakers passed a major “tweak” that lowered the capital and surplus amounts for protected cell captives from $500,000 to $250,000. The bill also favorably revised the taxation formula for protected cell captives by applying the maximum premium tax to the captive’s insurance company as a whole rather than to each cell.

Watching the Leaders

In deciding what to ask of the legislature from session to session, Corbett and Doherty watch what the leading states and countries— Vermont, South Carolina, Bermuda, the Cayman Islands—are up to.

“We looked around at the people we thought were being very successful in this space [and] what they clearly did was every year there was some kind of a change— rule change, statute amendment— which did a couple of things. It kept captives fresh in the minds of the legislators and it sent a very strong signal to the business community that we are focused on tuning and keeping our captive legislation crisp and fresh.”

Geography also plays a big role in the state’s appeal, Corbett said. Tennessee’s mid-South location is an ideal central hub; all the experts needed to establish a captive, from auditors, actuaries and CPAs to lawyers and professional captive managers are close by; the business climate is welcoming; and the quality of life emphasizes Southern values.

All these items matter, Corbett said. “The CEO’s already nervous enough that he’s about to start his own insurance company.”

As Doherty explained, “Our costs [to establish a captive] are comparable to any other state. We have a good business climate here and we don’t think we’re overpriced. We are a better bargain for folks here in Tennessee than some other states.”

Corbett previously was chief financial officer or treasurer for five publicly traded companies, including Purolator Courier and Macmillan Publishing. “I always had risk management reporting to me,” he explained. That means that he as well as Tennessee are dealing from a position of strength.

“We don’t spend a lot of time worrying about how we compare with other states,” he said. “We do make sure that we’re extremely accessible to those that are trying to set up captives; and the emissaries for the state are really the service providers. It gets back to that relationship between the three legs of the stool. It is a unique private-public partnership that I’m allowed to have with private enterprise, meaning the TCIA and myself as the government employee and the support of the governor, the economic development folks, the commissioner.

“We are open to the business development of captives with a regulatory environment that is very inviting.”

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Reprinted with permission from Best’s Review, August 2013