THE REBIRTH OF A CAPTIVE DOMICILE

Tennessee was one of the first US captive insurance domiciles but was left behind by other states. Not any more. Kevin Doherty of Dickinson Wright explains why Tennessee is back on the map.

Not everybody knows that Tennessee was one of the first US domiciles to enact captive insurance legislation, way back in 1978. Tennessee started and continued at a slow, but steady, pace and reached a peak of 16 captives in 1990. By 2010, however, the number of active captives in Tennessee had dwindled to just four.

In Vermont, the legislature passed a brand new captive law in 1981, largely based on Tennessee’s, but, unlike Tennessee, Vermont made captives a priority. By 2010, Vermont had licensed more than 900 captives, including captives owned by 42 of the Fortune 100 companies.

Meanwhile, Tennessee was focused on economic growth generally, and Nashville became one of the fastest growing cities in the country by 2010. Emblematic of its growth in the 1990s, Nashville built a downtown arena in 1997 and attracted the National Hockey League expansion franchise Predators in 1998.

Now known at Bridgestone Arena, this venue is one of the top grossing concert venues in the country and continues to be the home of the Nashville Predators. Nashville also welcomed the Houston Oilers (now the Tennessee Titans) to town in 1998 and built them a National Football League stadium that opened in 1999.

Early in 2010, Nashville doubled down on the convention trade and began construction on the $623 million Music City Center, which was completed in 2013. Nashville has become home to headquarters of major corporations such as Nissan, Bridgestone, and Alliance Bernstein, and it recently attracted major investment from companies such as Amazon and Oracle.

In the midst of all this growth, Tennessee elected Bill Haslam as its 49th governor in 2010, and he agreed to support the revision of Tennessee’s captive insurance law, which was then more than 30 years old. Thanks to commissioner Julie McPeak and captive director Michael Corbett (as well as many others), Tennessee then embarked on a rapid expansion of its captive insurance business under the revised law, which is now in its 11th year and has continued unabated since Bill Lee was elected as Tennessee’s 50th governor in 2018, commissioner Carter Lawrence was appointed, and Jonathan Habart recently took over as captive director.

“Tennessee has all the necessary elements to be successful as a domicile.”

The three-legged stool

Since 2011, Tennessee has licensed almost 800 risk-bearing entities (230 captives and 561 cells), and 153 captives and 341 cells are still active. Almost $1 billion is currently invested with captives in Tennessee, and annual direct spending in Tennessee from the captive insurance industry is now more than $30 million.

Annual premium for captives in Tennessee is now more than $2 billion, and more than 100 high-paying white collar jobs have come to Tennessee to serve the industry.

What accounts for Tennessee’s success? There are a number of factors. Here in Music City, there is an expression that every country song contains three chords and the truth. There is also an expression in the captive insurance industry that a three-legged stool is the strongest of chairs and is necessary for the success of any captive domicile. The similarity of these expressions is not entirely coincidental: Nashville and Tennessee have a rich tradition of music and insurance working and existing together.

Everyone knows that Nashville is the home of country music, and nearly everyone knows that the Ryman Auditorium is the mother church of country music and the iconic home of the Grand Ole Opry. But not everyone knows that an insurance company founded the Grand Ole Opry in 1925.

National Life and Accident Insurance Company purchased a radio station, 650 AM WSM, in 1925, only five years after the advent of commercial radio in 1920. National Life used the radio station as a way to send messages to its agents in the field and to advertise its insurance products to the public. In those early days of radio, the AM signal routinely reached as far as Chicago, Detroit, Atlanta, New Orleans, and even Los Angeles on a clear day. More than two-thirds of the US population lives within a 600-mile radius of Nashville, and National Life and WSM were able to use this geographic advantage to their benefit.

The Grand Ole Opry filled out the programming with local bluegrass and country music, which became extremely popular, changed the course of music history, and helped put Nashville on the map as Music City USA. To this day, the Grand Ole Opry program is broadcast daily on 650 AM WSM, whose call letters have always stood for “We Shield Millions”. Thus, at least here in Tennessee, the businesses of music and insurance have been inextricably intertwined for almost 100 years!

Country music has always been about telling true stories about real people and their loves, lives, and losses. It seems that the most natural way to communicate these songs musically is by using just three chords.

Likewise, in order to be successful, a viable and strong captive insurance domicile needs all legs of the three-legged stool, namely 1) the executive branch of government (the governor, the commissioner, and the captive director); 2) the legislative branch of government (the General Assembly that makes the laws); and 3) the private sector, led by the Tennessee Captive Insurance Association (TCIA), which includes captive managers, attorneys, actuaries, accountants, bankers, and other insurance professionals.

All legs of this three-legged stool have been strong in Tennessee since 2011. Lee, Lawrence and Habart have continued the strong support for captives that began under Haslam, McPeak, and Corbett.

Regulations

The Tennessee General Assembly has been active in passing cutting-edge laws, including:

• Permitting parametric insurance in captives;
• Reducing the minimum capital for protected cell captives from $250,000 to $100,000;
• Allowing captives to operate in a foreign currency;
• Allowing protected cell captives to establish both incorporated and unincorporated cells;
• Allowing cells to merge with each other;
• Integrating the series limited liability company (LLC) formation option (which only a limited number of domiciles have) into the captive law, allowing cells to be formed as series by contract without registering with the Secretary of State;
• Creating a one-year tax holiday for offshore captives re-domesticating to Tennessee; and
• Allowing cells to insure companies and individuals who are not participants in the cell.

In short, from the beginning in 2011, Tennessee has had, and continues to maintain, one of the most flexible, responsive, and business-friendly captive insurance laws in the country.

The third leg of the stool, led by the TCIA, also has been active and necessary for the growth of the domicile. In addition to being the home for substantial industry professionals, in December 2021 the TCIA held its 10th annual conference in Nashville with more than 150 participants.

This was the first such meeting since 2019 because of the COVID-19 pandemic, and it highlighted the strength and potential of the domicile.

Tennessee benefits from other advantages such as Nashville as its capital, a favorable business climate, temperate weather, and being located close to the geographic center of the country. In short, Tennessee has all the necessary elements to be successful as a domicile, and these advantages, coupled with a lot of hard work, have led to its success over the last 11 years.

The future is bright for captive insurance in Tennessee, and Tennessee will continue to be supportive and welcoming to the captives industry.

To find out more visit: www.tn.gov/commerce/insurance/captive-insurance.html and www.tncaptives.org

Kevin Doherty is a member at Dickinson Wright. He can be contacted at: kdoherty@dickinson-wright.com