Texas Joins Growing Number of States to Welcome Captive Insurers

Published September 26, 2013

For many years most states banned captive insurance companies, but now they are becoming increasingly popular and even used as tools of economic development. One example is in Texas, where a bill allowing their creation and state regulation became law earlier this year.

Gov. Rick Perry (R) signed the captive insurer bill in June, making Texas the 32nd state (including Washington, DC) to allow captive insurance companies. In 2003, 20 states allowed captive insurers.

Captives are insurance companies set up by a parent company or trade association to insure the risks of the owner. They are actual insurance companies usually created by a large corporation. For example, Walt Disney Company created the Buena Vista Insurance Company to insure Disney’s risks. Buena Vista Insurance Company, however, was not headquartered in Florida. Disney put the company in Burlington, Vermont because in 2002, when Disney created Buena Vista, Florida did not allow captive insurers.

Insurance Information Institute President Robert Hartwig said because captive insurers are relatively new in the industry, it took time for state governments to recognize them. He expects all states eventually will allow them.

Economic Advantage

According to the Texas Department of Insurance, there is an economic development advantage to allowing captive insurers in the state.

Many Fortune 500 companies in Texas that have wanted to self-insure through captives have had to form the captives out of state or outside the United States. That means hiring a management company and other professionals in the jurisdiction where the captive insurers are located. Board meetings also must be held in those out-of-state jurisdictions, with residents of those jurisdictions appointed to the captive’s board of directors.

“An opportunity exists to further enhance Texas’ pro-business climate. Allowing the formation of Texas domestic captive insurance companies could help attract new businesses and retain existing Texas companies,” the Texas Department of Insurance wrote in its report to the state legislature.

“If they can already go out of state to form these captives, why not amend the Texas law to allow captives in Texas?” said Kevin Brady, spokesman for the state insurance department. “Our governor and leadership have always been trying to attract new companies to Texas. We thought this might be a new selling point.”

Mostly Offshored Previously

Because until recently captive insurers were not allowed in the majority of states, most were founded outside of the United States. Bermuda has the most captive insurers in the world with 856, according to the Insurance Information Institute. The Cayman Islands have 586 captives. Vermont has the most captives in the United States with 586. Utah is No. 2 in the nation with 287.

The captive insurance market has become more popular since the September 11, 2001 terrorist attacks, which at the time were the largest insured loss from a single event in United States history, according to the Insurance Information Institute. The insured losses totaled approximately $32.5 billion when adjusted for inflation. Only Hurricane Katrina in 2005 has caused more insured damage.

Risks With Rewards

One big attraction of captive insurers is cost. Captive insurance companies generally allow the corporations or organizations that form them to pay lower premiums. They can cover such things as property, liability, workers compensation and employees’ benefits.

But captive insurers also come with risks, according to the III’s Hartwig.

“It’s possible for captives to ‘blow up,'” Hartwig said. “You just don’t hear about it that much.”

Dennis Harwick, president of the Captive Insurance Companies Association, said the general public is unaware of captive insurance companies because they don’t advertise.

“They are real insurance companies,” Harwick said. “They are regulated. You have to have claims departments and actuaries.”

Harwick said some organizations create captive insurers not to save money but because they have trouble securing insurance from other insurance companies.

“A lot of it was driven by the hard insurance markets where they couldn’t get insurance, so they formed captives,” Harwick said.