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Captives in the land of Lincoln.

ILLINOIS PROMOTES ITSELF as the "domicile of choice." However, that declaration would better fit the state's 470 property/casualty insurers incorporated there, rather than captives. It has been five years since Illinois passed its captive law, and only seven captives are incorporated in the state, including two captive risk retention groups, two association captives, two industrial-insured captives and one pure captive.

Illinois' fortunate location as an insurance center is not, however, irrelevant. As home base to insurance giants such as Allstate, Kemper, CNA and State Farm, the state is blessed with a sophisticated regulatory environment and well-developed captive insurance infrastructure.

Although the infrastructure is "not as mature as the domiciles of Bermuda," the state is not lacking in services provided by actuaries, insurance company managers, accountants, investment managers, claims managers, lawyers, brokers and reinsurance intermediaries, says Donald Urbanciz, executive vice president of Parker Risk Management.

Indeed, the Department of Insurance--with a staff of 230 employees--is well equipped to regulate captives, and turnaround time for incorporation can be as short as 30 days. The department is reputed to be tough but fair, says Etta Mae Credi, its assistant deputy director of corporate regulation. "We try to make the business climate as pleasant as possible and still enforce the statute."

According to Mr. Urbanciz, the single outstanding trait about Illinois as a domicile is that the approval process has been streamlined. "Speed and cooperation between the necessary regulatory bodies makes it a relatively quick, painless and comprehensive transaction," he says. Dennis Olsen, president of Health Providers Insurance Co., an illinois captive of the American Hospital Association, also notes the state's "overall credibility," pointing to the strict requirement that reinsurers have $5 million in capital before they can do business, and to the department's application of the rule that unreinsured individual risks may not exceed 10 percent of capital and surplus.

One reason Illinois has not attracted more captives, some say, is because of the state's half-hearted marketing effort. Unlike other state domiciles such as Hawaii, Illinois has no funds dedicated to publicizing its advantages as a haven for captives. Marketing has been left largely to industry groups such as the Illinois Captive Insurance Association.

According to Tomas Morgan Russell, a Chicago-based lawyer who drafted the state's captive law, the real reason Illinois has not welcomed a new captive in two years is because of the lingering soft insurance market. But there is considerable pre-application activity, he notes, and a host of other alternative mraket mechanisms in the state including risk retention groups, purchasing groups and other groups organized outside the insurance law. One captive manager, however, says neither a hard market nor a hard sell will cure Illinois' ills. The Prairie State's landscape falls flat when competing with the green mountains of Vermont and Hawaii's sandy beaches, he says. The state's size may also be a liability. "When you have a big state, companies are not sure it can turn things around, or give quick answers." In addition, the state requires a capital amount of $2 million, which often eliminates smaller players in the captive market.

Ron Onan, senior vice president of research and development at Willis Corroon, takes exception to the view that Illinois' hefty capitalization requirement, compared with Vermont's $250,000 limit, may put off some prospective captives. "If you set up a captive properly, then it will be capitalized adequately--no matter where the captive is located," he says. "Illinois has an active regulatory environment and a sound captive law that is neither too lenient nor too strict. Most companies can operate well under it if they are firmly structured and capitalized."

Mr. Onan concedes, however, that risk retention groups may have a tough time meeting the capitalization requirement. Mr. Olsen concurs that association captives might have difficulty meeting the state's capital requirements.

However, Mr. Russell believes that the high capital requirement can be offset since surplus and capital may be financed 80 percent by letters of credit, 67 percent by secured contractual obligation or 100 percent by subordinated debt.

"The state tends to be attractive to companies that want to insurer their own risk without a front, and perhaps loan back to the parent some or all of the assets," says Michael Epstein, senior vice president of the casualty department of Johnson & Higgins Co. in Chicago.

Other attractive aspects of Illinois include the fact that applicants do not need to file a certificate of public good, maintain a principal place of business in the state (so long as the management firm has offices there), or hold board meetings or annual meetings in the state. Moreover, there is no minimum premium requirement and no premium tax on risks located in other states if the principal or management office is located in Illinois. (There is, however, a tax of 6.5 percent on net income from insuring Illinois risks. In addition, there are no corporate franchise or local taxes.)

"Our niche is that of the pure captive concept because of the tax advantage and the fact that, theoretically, applicants can meet capital requirements with only $300,000 in cash or admissible securities and the rest in letters of credit," says Ms. Credi.

In addition, pure captives have no investment restrictions. They may even invest in their parents without first seeking approval. Although outside review of applications has been viewed as a positive development in other domiciles, Illinois' Department of Insurance has not embraced the practice. "There have been instances where business plans have been revealed to creditors, and the suspicion is that it was through peer review," says Mr. Russell.

Another Illinois advantage, he says, is that captives form under the Insurance Code (administered by the Department of Insurance) rather than the Business Corporation Statute (administered by the secretary of state). "You only have to deal with one law and one agency instead of two," Mr. Russell says.
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Title Annotation:A Guide to U.S. Captive Domiciles; Illinois
Author:Adler, Sam
Publication:Risk Management
Date:Apr 1, 1992
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