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Colorado enters the race to attract captives.

Colorado Enters the Race To Attract Captives

Colorado, with more licensed insurers than any other state and approximately 30 captive insurers, has been touted the "insurance hub" of the West. Because of the industry's integral role in Colorado's economy, insurance was one of several industries targeted for expansion by the state in 1986 under Gov. Roy Romer's economic development plan. Additionally, 1989 amendments to the state's captive insurance laws, as well as an innovative marketing campaign, have sparked a wave of optimism throughout the insurance community in the state.

In 1988, business and government leaders formed an Advisory Committee on Insurance and Economic Development under the auspices of Gov. Romer, chaired by State Insurance Commissioner John Kezer. The regulatory-legislative environment was deemed a focal point for the committee, in relation to specific concerns within the insurance community. Ultimately, recommendations presented to key staff at the state's insurance division resulted in the development of legislative proposals addressing specific issues. While the committee's efforts encompassed traditional insurance markets, as well as alternative market mechanisms, priority was given to captives because of their tremendous growth potential.

The committee, working with legislative sponsors, proposed and passed three pieces of legislation. The 1989 amendments, which fine-tuned previous legislation, will streamline and simplify the formation and regulation of captives in the state. Equally exciting is the possibility of Colorado acting as a "port-of-entry" state for off-shore insurers who wish to use the state for reinsurance operations or to establish a branch or subsidiary operation.

The 1989 legislative changes include:

* An amendment which clarifies that entities other than stock companies may set up a captive company.

* Exemption for pure captives from requirements to file rating data and policy forms.

* A bill adopting the NAIC Model Law on Redomestication, which also creates a "port-of-entry" allowance on a mechanism for establishing redomestication of alien and foreign insurance companies.

* Provisions allowing the division of insurance to request that applicants for captive or regular insurance company licenses, or licensed foreign companies, retain independent experts acceptable to the commissioner to conduct any or all aspects of an examination. This creates needed processing flexibility for the division.

The thrust of the legislative, regulatory and processing changes intended to sustain Colorado's reputation as a favorable domicile providing fair and effective regulation.

Sam Fisher, a member of RIMS Rocky Mountain Chapter and chairman of the society's Governmental Affairs Committee, says his group was instrumental in convincing Mr. Kezer and lawmakers to amend the state's captive laws to make Colorado a more attractive domicile. "In the past, Colorado had a reputation of being restrictive and over-regulated," Mr. Fisher says. "But these amendments have modernized and revitalized the state's captive laws and eliminated the bureaucratic red tape."

Although only a handful of captives have formed in the state in the last year, Mr. Fisher says risk managers preparing for the next hard market are doing feasibility studies. "There's been a tremendous increase in inquiries from risk managers as how to set up captives in Colorado," he says. "A lot of risk managers caught short by the hard market in 1985 are making long-range plans to get ahead this time.

While attracting captives to the state lends credence to Colorado's image as an insurance headquarters, the committee hoped to broaden efforts with the economic community by accentuating Colorado's advantages to the industry as a whole. "Colorado's economic development effort is moving fast. Our first order of business was to change Colorado's business image to tell the nation--and the world--that Colorado is open for business," Gov. Romer said during his state of the state speech in early January.

Colorado initiated plans for a new regional airport in 1988, broke ground on a convention center, put more dollars into colleges and designed a school finance act to meet the needs of diverse schools. Aggressively seeking steady growth, Gov. Romer believes transportation and telecommunications are keys to growth in the state. "This country follows transportation patterns," he observes. "Denver's new airport will be the second largest in the world next to Chicago. [Business should] look at major city airports other than those on the East and West Coasts: Chicago, Dallas and Denver. Why deal from the edge when you can deal from the center?"

Also attempting to improve the economy, a panel of executives, in fields such as energy, high technology, telecommunications and insurance, as well as public officials, established new business retention and development strategies. Building on the state's considerable natural assets and the positive regulatory environment, marketing plans were set in motion to promote Colorado, lure new companies to the state and encourage others to expand operations there.

The state's industrial growth was recently promoted in a nationwide advertising campaign in such publications as Business Week and The Wall Street Journal. Colorado companies were represented at seven foreign trade shows, generating export sales totalling more than $6.3 million, as well as $150 million in foreign investment.

But perhaps one of the best incentives for captives and other insurance companies to come to Colorado is the state's tax policies. Tax incentives for state-based insurers, in particular, provide a tremendous incentive, says Mr. Kezer. State-based insurers and those with regional offices in the state pay only 1 percent in premium taxes, while all other insurers pay the regular 2.25 percent.

Such tax policies alone already have helped the state to attract insurers and increase its tax rolls. "Just in direct costs alone, total taxes collected from the insurance industry in 1987 was $82 million," says Mr. Kezer. "That gives you a good idea of the economic impact the industry has in this state."

Insurance industry growth, however, is not Mr. Kezer's only concern. He is also concerned with the quality of the companies. "We don't want so much growth that this department can't handle the influx of companies," he says. "What we want is a supportive regulatory jurisdiction that maintains the reputation of Colorado by having the discretion to entice well-run companies here and the authority to keep poorly-run ones out."

How to Form a Colorado Captive

Recent updates to Colorado's captive legislation have streamlined the process for setting up a captive in that state. The following is a list of the basic steps required for the formation of a Colorado captive.

* State Insurance Commissioner John Kezer had his staff encourage interested parties to contact them and, if desired or appropriate, to schedule an informal conference to discuss the proposed captive and to provide an opportunity to address any particular questions or issues to facilitate the formal application and formation process. This process has greatly assisted the involved principals by expediting the processing of an application and reducing costs to a person or entity seeking to form a captive in, or redomesticate a captive to, Colorado.

* Any person seeking to form a Colorado captive should submit the application for a certificate of authority for a Colorado captive insurance company, as well as the required fee and supporting information described in the following paragraphs.

* The proposed articles of incorporation or association must be submitted, in triplicate, for review. In the case of a corporation, the articles of incorporation must be approved by the commissioner and the attorney general and then filed and recorded in the office of the secretary of state. A certified copy of the articles of incorporation must then be filed with the commissioner.

A copy of any proposed bylaws for the captive should also be submitted.

* The application must describe the type of captive structure--whether a pure, association or industrial insured--which includes a group formed under the federal Risk Retention Act--and should include an organizational chart and any other information needed to identify the membership or ownership of the proposed captive.

* The application should include a plan of operations which briefly describes: risks, hazards or liabilities to be insured. Proposed limits of liability, captive retention, named-insured deductibles, or other aspects of the insurance plan; forms; supporting documentation, such as previous loss history, actuarial studies and reserve requirements; accompanied by and proposed reinsurance with agreements provided in draft or final form, if possible.

* Provide details of proposed capitalization and a detailed five-year projection of financial conditions and operational results of the captive.

* Give information on the board of directors, officers and proposed management and administration of the captive. Additionally, any other information pertinent to the formation of the proposed captive should be submitted.

* Submit a fidelity bond covering all directors, officers and employees of the captive company who will have access to company funds.

* Submit a $200 nonrefundable application fee upon filing the application;

$300 licensing fee upon issuance of the certificate of authority;

$50 filing fee--upon filing a certified copy of the articles of incorporation or other organizational document.

Judith A. Spitzer is a staff writer for Western Insurance Information Service, based in Denver, CO.
COPYRIGHT 1989 Risk Management Society Publishing, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1989 Gale, Cengage Learning. All rights reserved.

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Title Annotation:includes related article; insurance companies
Author:Spitzer, Judith A.
Publication:Risk Management
Date:Jul 1, 1989
Previous Article:Amended bill takes pressure off directors and officers.
Next Article:Offshore captive taxation becomes more complex.

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