New Ohio captive insurance market: Good for business development & industry growth

Captive insurance companies have existed for more than 100 years as a means for medium-to-large-sized businesses to manage a wide range of their risks through a form of self-insurance. Nearly all major corporations have formed captives, some even establishing more than one to serve a variety of needs. A company may have one captive primarily covering general and/or product liability risks, with a second captive for protecting employee healthcare and other benefits.Insurance
In 2013, there were 6,342 captives globally compared to 4,688 just 10 years prior—talk about growth! Ohio recently opened its doors to the captive insurance market, allowing Ohio businesses to form captives to help them protect their assets while providing additional tools to manage risk.
Here’s a look at what this means for the future of Ohio’s insurance industry and business development.

“Companies seem enthusiastic about these alternative risk management options now available to them,” says Tracy Snow, Chief of the Ohio Department of Insurance Office of Captive Insurance.

That’s how he assesses early reaction to the new law that allows captive insurance companies to be domiciled in Ohio.

A captive insurance company is one formed to insure the risks of its parent corporation. Captives are not used to insure personal lines products like auto or home.

When Governor Kasich signed House Bill 117 into law, Ohio became the 30th state to provide for this type of insurance. The law, which went into effect in September 2014, was the result of two years of discussions involving the Ohio Department of Insurance (@OHInsurance) and various interested parties. The Ohio Insurance Institute (@OIIOrg) supported the legislation.

Rep. Robert Hackett (R-London), who co-sponsored HB 117 with Rep. Michael Stinziano (D-Columbus) says, “This legislation takes a straight forward approach to providing Ohio businesses a tool to manage risk, potentially lowering their overhead costs and freeing up more capital to grow their businesses and to create jobs.”

Captives are essentially a form of self-insurance in which the insurer is owned wholly by the insured. The entities forming captives may range from multinational corporations to small nonprofit organizations.

About Ohio’s captive law

Ohio’s new law allows for three types of captives:

  • A”pure captive” that insures only the risks of its parent or affiliated companies of its parent
  • A “protected cell captive” that insures or reinsures risks of separate participants through a participant contract and that separates each participant’s liabilities into a protected cell
  • A “special purpose financial captive” that provides reinsurance of life insurance risks of a parent or affiliated company

Group or association-based captives are not permitted to domicile in Ohio.

How to form a captive; considerations for your insurance company

To form a captive, a company must select a captive manager to prepare the documents necessary for the license application. ODI also conducts an examination of the captive insurance company, including financial statement analyses and ratios, actuarial opinions and reports of independent CPA’s. The application fee is $500 and a $50 fee for operating each additional cell under a protected cell captive. The annual renewal fee is $500.

A captive insurance company must maintain Ohio as the principal place of business and its captive manager must reside in Ohio.

Once established, a captive operates like any commercial insurance company and is subject to state regulatory requirements. A pure captive is required to maintain a minimum of $250,000 in unimpaired capital and surplus. The requirement for a protected cell captive is a minimum of $500,000. Once licensed, captives will be examined by ODI every 3 or 5 years, depending on results of financial analyses.

While his office has yet to issue the first captive license, Snow says “We are excited about the meaningful discussions we are having with interested parties. We plan to begin licensing companies this year.” He adds that, with the law just a few months old, companies are still familiarizing themselves with the specific provisions and rules.

Snow, a 12-year veteran of the ODI who was formerly with Nationwide Insurance, says, “Giving companies the option to form a captive is another tool to help businesses thrive in Ohio. In situations where the coverage a company seeks is unavailable or unaffordable, the opportunity now exists for a company to form a captive to better control its own risk management needs.”

Commenting on the possibility of Ohio companies moving their existing captives from other states, Snow says Ohio’s new law and rules are “very competitive” with other states and that he’s confident companies will find Ohio “an attractive captive domicile.” Adds Snow, “Ohio companies now have an opportunity to reduce the expenditure of resources elsewhere by instead operating their captive in the company’s own home state of business.”

Snow says his office is taking a proactive position in helping those interested in forming a captive to understand the filing criteria. “We want to make the actual process as simple as possible,” he concludes.

Additional resources 

Posted: March 25, 2015