On June 10, 2011, the "Revised Tennessee Captive Insurance Act," 2011 Tenn. Pub. Acts 468, was signed into law by Governor Bill Haslam. The amended law will permit the creation, within the state of Tennessee, of special purpose captive insurance companies, cell captive insurance companies, and branch captive insurance companies. Previously, the laws of the state of Tennessee did not allow for the formation of sponsored captive insurance companies, branched captive insurance companies, or special purpose financial captive insurance companies.
A captive insurance company is a wholly owned subsidiary of a corporation that provides insurance or reinsurance services to its parent company and to its parent company's customers and suppliers. Captive insurance companies may be formed because the parent company cannot find an outside insurance company to insure against particular business risks or because the parent company simply wants greater flexibility or voice in determining the amounts and types of coverage, overseeing of claims handling, and settlement. Captives may also provide cost-effective insurance coverage at stable rates that cannot be otherwise found in the traditional insurance marketplace.
Besides permitting certain types of captives to be formed, the revised Tennessee law will further allow captives to offer workers' compensation coverage to employers and affiliates who would otherwise qualify as self-insured. Additionally, the captives will be granted the ability to write excess or stop loss workers' compensation insurance where employers would not be able to qualify as self-insured.
Moreover, this legislation also modified the tax provisions of the former law. Based upon the new statute, the minimum premium tax will be $5,000 annually, whereas the maximum annual tax under the law will be set at $100,000. With respect to protected cell companies, the maximum aggregate premium tax on an annual basis would be assessed against each cell individually, and not to the protected cell captive as a whole. The amended version of the law identifies an "incorporated cell captive insurance company" as a "protected cell captive insurance company" which is organized as a corporation or other legal entity distinct from its incorporated cells, which are also established as separate legal entities. Therefore, the aforementioned taxes will be levied on each "individual" cell insurance company rather than on the "total collection" of cell insurance companies taken together as a single entity.
Beyond these revisions, the overhaul to the law will require single-parent captives to have a minimum of $250,000 in capital and surplus. In comparison, the minimum capital and surplus amounts required for an association captive insurance company, protected cell captive insurance company, and industrial insured insurance company will be $500,000, with $1 million required for risk retention groups. These amounts may be increased by the state's insurance commissioner depending upon the type and volume of business of the captive.
The "Revised Tennessee Captive Insurance Act" is scheduled to take effect on September 1, 2011.
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