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Jun 19, 2013

Missouri Allows the Formation of "Rent-A-Captive" Insurers

ABSTRACT: New Missouri laws taking effect on August 28, 2013 will allow the creation of "rent-a-captive" insurers and revise existing captive insurance laws to be more favorable to captive formation. This marks an aggressive move by Missouri to muscle in on the captive insurance market.

A captive insurance company is a risk-management organization that is formed by one or more non-insurer parent companies, usually to provide more affordable coverage for risk. Captives are a form of self-insurance, but with defined “policy terms” that can make it easier for the company to obtain affordable coverage (including more affordable layers of coverage through excess policies and reinsurance). With a captive insurer, the parent(s) can recover “premium” amounts that were not needed to pay claims.

There are two broad categories of captive insurers. “Direct” or “pure” captive insurers are owned by a single parent company and directly insures only its parent’s risk. Group captives will provide insurance to multiple companies, often affiliated companies or members of a shared industry.

Captive insurers are popular – estimates are that most Fortune 500 companies have some form of captive insurance. The vast majority of captives are domiciled off-shore, with Bermuda the leading destination for formation of a captive carrier. Vermont holds the title for U.S. state with the largest share of the captive business.

Missouri is looking to change that, by making existing captive regulations more favorable and by expanding the types of locally-domiciled captives to include “sponsored” captive insurers. Taking effect on August 28, 2013, Senate Bill 287 adopts a number of provisions favorable to companies looking to establish a captive carrier in Missouri. 

Missouri will now allow for the creation of sponsored, protected-cell captives (also known as “rent-a-captives”). A sponsored captive may be incorporated as one of four types of entity: (1) a stock insurer with its stock divided into shares held by the stockholders, (2) a mutual corporation, (3) a non-profit corporation, or (4) a member-managed limited liability company. 

The sponsor need not be an insurance company, but must be approved by the director of insurance in its discretion, after an evaluation of the financial stability and experience of the sponsor. Risk retention groups may not sponsor or participate in a captive insurer in Missouri.

Participants in a sponsored captive can include associations, corporations, LLCs, partnerships, trusts, and other business entities. The sponsor may also be a participant.

The capital requirement for a sponsored captive is only $500,000, and the minimum premium tax is $7,500 for the captive as a whole (not as to each protected cell). The maximum tax liability is calculated as an aggregate of each cell’s liability, however. The assets of two or more protected cells may be combined for purposes of investment, and this combination does not defeat the limited liability and segregation of assets for claims-processing and accounting purposes.

Missouri has historically seen a small market share of the captive business. Its move to allow rent-a-captives, particularly because sponsors need not be licensed insurers, is an aggressive move to increase Missouri’s participation in the captive insurer market.