State looks to regain spot as captive insurers' home

Legislative changes may jump-start Nevada's efforts to be among the nation's leading homes for corporations' captive insurance operations.

Captive insurance companies are created by companies to insure their own risks, and are most commonly used to cover liability or property risks.

The parent company pays premiums to the captive and, in return, takes dividend payments if the captive manages its risks wisely and remains profitable.

Nevada is home to 117 active captive insurers insurance operations that have been established in Nevada by parent companies located throughout the United States.

Not long ago, Nevada ranked third among the states that provide domiciles for captivate insurance companies, but aggressive programs by other states dropped Nevada to a No. 8 ranking.

Nevada Insurance Commissioner Brett Barratt says a 96-page bill approved by the Legislature this spring may help get the state back into a leading position.

A key portion of the measure eliminates the requirement for a full-blown audit of a captive insurance company once every three years. Each of those audits cost captive insurers $8,000 to $20,000, says Barratt.

Instead, the state continues to require an audited financial statement annually from each captive insurer. Regulators can order a complete audit if they suspect problems.

The new legislation also will reduce costs for captive insurers by allowing pro-forma financial data in applications for new captives to be prepared by accredited actuarial firms. In the past, the law required preparation by a certified public accountant, even though the work usually was done by an actuary, says Michael Lynch, deputy commissioner of the Nevada Division of Insurance.

A third element of the legislation eliminates a near-duplication of reports required by the state, once in March and once in June. Now, only the June report is required.

After the Nevada Legislature in 1999 authorized formation of captive insurance companies in the state, the number of captives based in Nevada grew by 15 to 20 a year. But the number of captives domiciled in the state has been nearly flat for the past couple of years.

"It's become more competitive as other states have jumped on the bandwagon," says Barratt.

Utah, for instance, now is home to 188 captive insurance companies, up from only two in 2004. Vermont leads the nation with more than 900 captives calling the state home at the start of this year.

A soft insurance market during the recession also contributed to the slow growth of captives in Nevada, Lynch says. When companies are able to get favorable pricing on insurance coverage from traditional coverage, they are less interested in setting up a captive.

But Nevada officials expect the price of traditional coverage will begin to rise as the nation's economy rebounds, and that will boost creation of captives.

Despite the recent legislation, Barratt says the state will exercise care with captives.

"We're not in a race," he says. "We're not going to open the door to just anyone."

A small cadre of professionals lawyers, CPAs, insurance plan administrators and actuaries in Reno, Las Vegas and Carson City provides services to captives domiciled in the state.

Those professionals have banded together in the Nevada Captive Insurance Association to help market the state as a domicile.

The state's reputation as a friendly location for the formation of business helps win some captives who call the state home, Barratt says.

Because captives are required to conduct at least one meeting a year in Nevada, they provide a bit of business to the state's tourism industry, the insurance commissioner says.

The state levies a tax of 0.4 percent on the premiums charged by captives. In the state's most recent fiscal year, that generated about $1 million in total revenues, with 75 percent of the money headed for the state's general fund. The other 25 percent goes to the Division of Insurance, which then provides 2 percent to the Nevada Commission on Economic Development to promote the state as a home for captives.