Key Takeaways
- Tennessee offers business-friendly captive insurance regulations.
- Captive growth in Tennessee continues to accelerate.
- Responsive regulators strengthen Tennessee’s captive environment.
As the Grateful Dead famously sang, “Tennessee, Tennessee, there ain’t no place I’d rather be.” With the natural beauty of the state, friendly people, and historic music culture, Tennessee is a great place to live. With its business-friendly environment and progressive insurance regulations, it is also a great place to domicile your captive insurance company.
What Is a Captive Insurance Company?
A captive is a licensed insurance company owned and controlled by those it insures. The National Association of Insurance Commissioners (NAIC) defines a captive as “a wholly owned subsidiary created to provide insurance to its non-insurance parent company (or companies).” Captive insurance companies are an option for many corporations and groups that want to take financial control and manage risks by underwriting their own insurance rather than paying premiums to third-party insurers.
When is a Captive Insurance Company a Great Fit?
Companies may consider forming a captive if they are financially stable, have a strong claims history, maintain a low loss ratio, and demonstrate sound risk management practices.
What are the Steps to Set Up a Captive Insurance Company?
There are four key steps to forming a captive.
1. Pre-Feasibility
This is where stakeholder education takes place. The company’s owners need to define and create its goals and objectives. The key to successful completion of this goal is to assemble a team of qualified service partners to strategize and explore different ownership structures and other captive insurance company details, like where to set up the domicile for the captive.
2. Feasibility
The company will do a captive feasibility study to check financial stability, compliance, and alignment with the parent company’s business goals. Depending on where the corporation has chosen to domicile the captive, regulators may need a feasibility study.
3. Implementation
Once a business has opted to set up a captive, it needs to be legally set up in the location it has chosen. Depending on where the captive has chosen to live, this phase needs documentation and applications completed. A qualified service partner will know how to deal with the rules and regulations.
4. Management and Operations
The captive is ready to start doing business once all the documentation and contracts are signed and the applications are submitted and accepted. The captive will set up its own processes for accounting, handling claims, reinsurance agreements, and reporting. It will maintain its solvency and capital requirements as well as file annual reports, conduct audits, and comply with regulatory requirements.
Key Service Providers
Captive insurance companies depend on experts to ensure efficient operations and regulatory compliance. These include:
- Captive Manager/Consultant: Helps with day-to-day operations and works with regulators and service providers.
- Actuary: Sets reserves by looking at claims liabilities, figures out pricing premiums, and writes year-end reports.
- Attorney: Helps the captive set up its business, file the right paperwork with the government, and run the company.
- Financial and Investment Advisor: Provides the captive with asset management, investment strategies, trust services, and other financial services that are tailored to their needs.
- Auditor and Tax Advisor: An auditor conducts financial audits to provide transparency and regulatory and financial compliance. A tax advisor helps structure the captive to optimize tax efficiency and ensure compliance with applicable tax regulations.
Why Tennessee?
Here are four reasons to domicile your captive insurance company in Tennessee.
1. Business-Friendly Laws
Tennessee passed its first captive insurance law in 1978 and changed it in 2011 to allow seven kinds of captives to be formed. It also lowered the minimum amount of capital and surplus that captives need to have, and allowed them to be set up as corporations, limited liability companies, or partnerships.
2. Regulatory Responsiveness
The Tennessee Department of Commerce and Insurance provide regulatory oversight of captive insurance firms. Tennessee’s captive rules were changed again in 2021 to allow for parametric insurance coverage and lower the amount of capital that protected cell captive insurers must have.
3. Strategic Location and Infrastructure
Tennessee lies in the middle of the United States and is a significant transportation hub. It is easy to get to and has a business-friendly atmosphere.
4. Strong Industry Growth
Tennessee is home to many industries, such as healthcare, transportation, manufacturing, and higher education. In 2024, the state reported its fifth consecutive year of captive growth, with 182 total captives and 657 active cells calling Tennessee home resulting in $2.9 billion in premiums.
Tennessee: A Reliable Home for Your Captive Insurance Firm
When deciding where to base your captive insurance firm, keep in mind that Tennessee has a great mix of financial benefits, regulations, location, and support from the industry. Its updated laws, responsive regulators, and growing captive community make it a beneficial long-term solution for firms that want to improve their risk management techniques. By picking Tennessee and working with LBMC’s insurance experts, you get a good business climate for your captive along with the experience and knowledge to make sure all filing needs are fulfilled and delivered.
Are you ready to bring your business to Tennessee? Contact LBMC to find out how we can help you through the process and get the most out of your captive insurance firm.
Content provided by LBMC Senior Audit Manager Jimmy Bowles.