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Is Captive Insurance Good For Arizona?

insurancegoodAn Arizona legislator wants to make his state a captive insurance domicile that would have instant bragging rights as home to more captives than any other domestic domicile.

Rep. Ted Carpenter, R-Phoenix, is proposing that Arizona adopt legislation that would allow the formation of captive insurers while also converting about 400 existing credit life and disability reinsurers in the state to captive status.

Vermont, which currently is the largest onshore domicile, had 334 captives at year-end.

A captive insurance bill introduced by Rep. Carpenter recently died in the Legislature, but the first-term representative hopes to reintroduce the proposal as a means of boosting the Phoenix economy.

Since 1977, Arizona has allowed companies to set up facilities that 100% reinsure fronted credit life and disability risks. Many automobile dealers and some managed care companies have created such facilities, which are similar to captive insurers.

The reality is, Arizona has been doing it since the 1970s; they just really never marketed themselves to the captive industry, even though this is very well suited to a number of (potential Arizona) captives,” said Marc J. LaPointe, managing director for Aon Insurance Managers in Phoenix.

But alternative market experts outside the state say Arizona would have a tough time distinguishing itself from other states struggling to reap premium taxes and other economic benefits from captive insurance.

They point to states such as New York and Delaware that have found it difficult to encourage the formation of captives.

Arizona also would face potential competition from a growing number of other states, including Nevada, that are evaluating legislation to create their own captive industries.

Within Arizona, the push to establish a captive domicile has encountered road bumps, and some officials are uncertain how the owners of credit life and disability reinsurers will react to changes in the law.

Rep. Carpenter in February introduced a bill, H.B. 2633, that outlined proposed regulations for the formation of captives.

He later amended his bill so that, rather than creating a law, it would form a nine-member committee to study the adoption of a captive law.

The new version of his bill cleared the House but died in the Senate because of opposition from a senator who dislikes study committees, according to Rep. Carpenter. He plans to revive the legislation, possibly by attaching it to another bill.

Rep. Carpenter, who currently is in the first year of his first term, said he is pursuing the captive legislation to boost Phoenix’s economy.

Operating captives in Arizona would be a natural industry for the state, as many business people already travel there to conduct conferences and play golf, he said.

Arizona Insurance Commissioner Charles R. Cohen said he had concerns about certain technical and conceptual aspects of the bill.

However, he added that he agrees that Arizona would be suitable for captive insurance facilities.

“Based on what I know about captive insurers, Arizona is a natural environment,” he said. “We have a tourism-based economy here and elected officials who have it high on their priorities to attract new business.”

Under Rep. Carpenter’s legislation, the insurance commissioner would be a member of the captive study committee.

The biggest immediate obstacle to the legislative effort is likely to be ignorance about captives among state lawmakers, Rep. Carpenter said. To educate his colleagues, he has sent them a 14-page pamphlet on captives.

The legislation is backed by a group of businesses that provide services for Arizona’s credit life and disability reinsurers, said Mr. LaPointe of Aon.

Credit life and disability insurance typically is offered by car dealerships, and the reinsurers thrive in Arizona because the state exempts them from numerous insurance regulations.

In recent years, managed care organizations have formed reinsurers under the law because in Arizona, disability coverage is broadly defined to include health risks, Mr. LaPointe said. The managed care companies use the reinsurance facility to indemnify losses stemming from health plan members that go out of network for medical care.

Mr. LaPointe noted that a captive law could also enable those managed care companies to self-insure their professional liability risks.

Mr. LaPointe said that if an Arizona captive law emerged that defined as captives the credit life and disability reinsurers, the state would have a competitive marketing advantage just by being able to say it has 400 captives.

But how the law will shape up and whether the credit life and disability reinsurers will want to participate remains to be seen. This could depend on the outcome of other legislation currently being weighed, Commissioner Cohen said.

This other legislation would further lighten regulation for reinsurers writing credit life and disability coverage if they are not affiliated with another insurer. With that legislation tailored just for them, they might not want to subject themselves to broader captive regulations, the commissioner said.

It is difficult for states to spawn a thriving captive industry, said Gary Osborne, senior vp of USA Risk Group in Montpelier, Vt. To be successful, a state needs the supporting infrastructure and market expertise. They also need to offer something entirely new, such as Hawaii did in 1986 when it became the first West Coast domicile and offered California businesses an alternative to Vermont.

“They are all thinking this is easy, all you have to do is pass a bill,” Mr. Osborne said of states wanting to host captives. “Just by putting a law on your books doesn’t make you a domicile.”

Yet Mr. Osborne doesn’t want to discourage Arizona-or any other state- from hosting captive insurers. The more competition the better, he said.

In fact, he supports current legislation in Nevada aimed at making the state a captive haven, and he is eager to conduct business there. Nevada, more than Arizona or other states, is likely to allow maximum flexibility in captive licensing, he said.

Still, Mr. Osborne said he wouldn’t expect Nevada to emerge as home to a significant number of captives.

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