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Tennessee's lackadaisical approach.

TENNESSEE'S LACK OF enthusiasm in promoting captive formation appears to be working. Although the state has 21 captives--making it the third largest domestic domicile--it did not incorporate any new captives in 1991 and had no applications pending at the end of the year. Tennessee's luke-warm attitude toward captives may be rooted in the black eye the state received when one of its captives, which wrote pollution coverage for its parent, a marketer of petroleum products, went belly-up. The captive had certified that it had adequate reserves in the seventh quarter; but in the eighth quarter, an actuary found that the company was underreserved by between $28 million to $60 million.

Captive managers in the state had hoped a 1989 law allowing unaffiliated companies in different states to form group captives, called "industrial insureds," would stimulate captive growth in Tennessee, but no industrial insured captives have formed since the law was passed.

Dan Hite, a lawyer with Sedgwick James, one of only two management companies in the state, says there was a spurt of captive formation following the 1986 Risk Retention Act. Since Tennessee is a regional center for medical services, the state saw the formation of associations and purchasing groups between 1986 and 1990 when carriers were not willing to write medical malpractice coverage.

But the market has softened since then, and companies such as St. Paul Cos. and American International Group now underwrite these risks. Moreover, the Risk Retention Act was interpreted by many states as requiring that companies meet the same standards as a surplus lines carrier. "This has spelled a decline in risk retention groups in all domiciles," says Mr. Hite. "But since there are a disproportionate number of them in Tennessee, it took a greater hit."

"We have mostly received applications from people who wanted us to regulate their business in California or New York," says Bill Hosea, director of financial affairs for the state's Department of Commerce and Insurance. Since risk retention groups pay taxes in the state where they write the premiums, he adds, the minimal fees they pay to Tennessee do not cover the cost of regulating them.

In 1978, when Tennessee became the second state to enact its captive law, its purpose was not to create an industry for its own sake, but rather "to assist manufacturers and professionals in getting coverage," explains Donald Spann, chief examiner of the Insurance Department for the state of Tennessee. For that reason, Tennessee never marketed itself as a domicile to out-of-state business. The result, says Donald Heim, senior vice president of Willis Corroon, is that it has never achieved the critical mass of captives that would have encouraged the state to reach out for more business. Other states have benefited from the formation of captive management companies, but the small number of captives in Tennessee does not justify establishing a stand-alone management company there, he says.

In effect, the latest captives to form in Tennessee appear to satisfy the state's "local interest" litmus test. In 1990, Amherst, New York-based Columbus McKinnon, a manufacturer of welded chain, electric hoists and forgings, with a plant in Tennessee, formed CM Insurance Co. Inc. to write occurrence-based primary liability insurance. Also that year, DeRoyal Industries, a medical supplies manufacturer based in Tennessee, formed DeRoyal Insurance Co. to write product liability coverage.

Finding a Niche

IF TENNESSEE has a niche, it is as a domicile for health care captives. "Hospital Corporation of America (HCA) started us down the road to health care captives," says Mr. Hosea. The company formed Parthenon Insurance Co., which was the state's first captive.

In 1988, Beverly Patrick, president of Risk Management Service, steered the American Psychiatric Association (APA) to Tennessee to form a risk retention group. She says the fact that HCA had a captive there influenced her decision. "In dealing with doctors, you have to give reasons," says Ms. Patrick. One of the points that fell in her favor, she adds, was that a huge health care organization had a captive there. "It was obviously a good place to be."

Ms. Patrick says she perceives Tennessee as having a favorable attitude toward the health care industry. State regulators, she says, are "receptive to working with us and getting things done in a timely manner."

Since forming the APA's captive, Ms. Patrick has reviewed other domiciles as part of her fiduciary duty, but has found no reason to relocate the association's captive. Risk retention groups have to be onshore, she says, so domiciles such as the Cayman Islands were not an option.

Mr. Spann concedes that his department was not properly staffed for many years. However, now the department has 27 examiners--the most ever -- so Tennessee may be gearing up to ride the trend of the movement onshore.

Tennessee is also known to process applications faster than other domiciles because regulators are not dealing with a "barrage of applications," says Donald Heim, a Willis Corroon senior vice president, adding that the insurance department does not have an outside advisory committee reviewing applications to slow up the process.
COPYRIGHT 1992 Risk Management Society Publishing, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992 Gale, Cengage Learning. All rights reserved.

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Title Annotation:A Guide to U.S. Captive Domiciles
Author:Adler, Sam
Publication:Risk Management
Date:Apr 1, 1992
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