Nevada has moved to improve its position in the insurance market by creating incentives for a greater captive insurance market with the nactment of captive reform legislation. Insurance Commissioner Brett Barratt said the captive property casualty insurance reform legislation recently signed into law by the state's governor will ease administrative burdens on captives incorporated in Nevada and will make the state a more competitive player in the captive insurance marketplace.
Barratt, according to Insurance News Net, said that despite being at the forefront of the captive insurance industry 12 years ago when the state enacted legislation allowing captives to incorporate in Nevada, the state has lost ground in recent years as more states entered the market.
Among Nevada's chief rivals in attracting captives is Utah, which was among the fastest growing captive domiciles in the country in 2010. With 188 captives, Utah is now second only to Vermont in terms of states with the most captive insurance entities Nevada is usually ranked around No. 8 in most studies of the captive industry, Barratt said.There are now approximately 24 US States that are Captive Insurance Company Domiciles and well over 35 foreign countries or Territories with Captive Insurance Company legislation that serve as excellent Captive Insurance Company Domiciles.
But with the "business friendly" changes included in A.B. 74, which was signed into law by Gov. Brian Sandoval, a Republican, the state is positioning itself to be more attractive to companies looking to form a captive.
Background on Captive Industry
A captive is an insurance company that insures the risks of its parent company. It is owned by a parent or, at times, by the shareholders of the parent company. The operating entity insures all or part of its risks with its captive company. The captive may reinsure some or all of such risks, or may retain such risks. The benefits of a captive may be many, but the primary goal is to retain the profit that would have been made by an outside third-party insurance company or to provide coverage where coverage would not be available.
There are many different types of captives depending on the needs of the parent company or its owners are, including Single Parent Captives, Association Captives, Group Captives, Agency Captives, and even Rent-a-Captive, among others.
Captives, like all insurance companies, have specific tax rules that allow them special benefits not available to other companies. An insurance company receives premiums, pays it expenses, and then invests the money it has retained, known as reserves, to pay for future claims. An insurance company receives an income tax deduction for almost all of its funds deemed reserves, and can invest and accumulate these funds. A regular corporation pays income tax on the funds it retains as profits. Yet, as the business of insurance requires the payment of future claims, the accumulation of funds is a necessity for being able to pay such claims.
The amount of reserves that a company can accumulate is determined by an actuarial calculation of the nature and amount of risks it covers, combined with the insurance rules as to the types of allowable investments for company reserves. There are restrictions upon what types of investments and what percentage of assets per investment may be made. The jurisdiction or state of the insurance company's license will also have an effect on its operations and retentions.
Nevada's AB 74 Details
Nevada's New capitve law, A.B. 74 focuses on the elimination of a requirement that every captive in the state be examined once every three years. Barratt said those examinations could cost companies between $8,000 and $20,000, which was enough to keep some from considering Nevada when forming a captive.
"Nevada has some of the most business friendly laws in the country, including not having a corporate income tax," Barratt said. "But when we examined our captive insurance statute, we determined that we were being held back by having each captive go through an examination once every three years. The cost of those examinations combined with a relatively high premium tax was a real barrier to companies incorporating a captive here."
To ensure that captives are meeting minimum capital requirements, the new law maintains the requirement that each entity submit an audited financial statement each year. The new law also allows actuaries to help companies put together their incorporation application, changing existing laws which required those applications to be assembled by certified accountants--another change Barratt said would make Nevada's captive insurance system more "administratively efficient" and attractive to companies.
