Illinois boasts several unique features in its regulatory environment for both captives and risk retention groups. As a well-respected regulartory jurisdiction and an established and mature insurance, reinsurance and financial center, the chartering of either a captive or a risk retention group starts from an excellent base.
Captives: Single Parent, Industrial or Group
- Any domestic, foreign or alien stock or mutual company may reorganize in Illinois as a captive insurance company or a commercial insurer.
- Stock companies are required to have $1 million in capital and $1 million in surplus. $2 million of surplus is required for a mutual company.
- Captives may provide stop-loss insurance or reinsurance of a single employer.
- Self-funded disability benefit plan or an employee welfare plan.
- May reinsure employer s liability risks.
- Illinois permits alternative methods for meeting the capital and surplus requirements. Funding can be satisfied with $300,000 cash or cash equivalents, the remainder of the $1 million backed by a letter of credit, or irrevocable contractual obligations of the members.
- Onshore and offshore captives may redomesticate and still maintain original date of incorporation.
Risk Retention Groups
As permitted by federal law, if a RRG is admitted in Illinois, it may underwrite risks in any state. Because Illinois is an accredited jurisdiction under the NAIC Accreditation program, once a RRG meets Illinois criteria, its financial information will be acceptable in all other jurisdictions. Furthermore Illinois regulators have achieved enormously wide respect within the NAIC. Specific features of regulation for a RRG include:
- Will be regulated as a traditional insurance company.
- Capital requirements are $1,000,000 and surplus requirements are $1,000,000.
- Reinsurance requirements are the same as for domestic companies. A risk retention group may net of reinsurance retain up to 10% on a single risk. Therefore, a risk retention group with $1 million in capital and $1 million in surplus may retain up to $200,000.
- Cannot insure life, accident and health, personal lines for motor vehicle and homeowner s liability or worker s compensation.
As of July 1995, risk retention groups must be organized under Illinois Domestic Insurer law, rather than the Illinois captive law, as summarized above. As an association captive, rather than a risk retention group, the federal exemption does not apply. If the RRG wishes to retain its federal authority, it must provide the same organizational capital and surplus as a domestic insurer and cannot use letters of credit for capital.
- Purchasing groups using admitted carriers are not required to file rates or obtain prior approval for form. Illinois is a file and use jurisdiction.
- For purchasing groups using nonadmitted carriers, Illinois does not have an eligible surplus lines list. However, the carrier cannot be on Illinois ineligible surplus line list.
- There are no extraordinary registration requirements of the incorporators like fingerprinting, financial statements, etc.
- For surplus lines utilization, proof of a denial for the group only is required; denials for individuals residing in Illinois are not necessary.
Illinois Insurance Exchange
As the only operating insurance exchange in the country, the IIE provides unique opportunities for both the formation of risk-bearing syndicates and the purchaser of insurance seeking a non-admitted surplus lines carrier. In contrast to utilizing a surplus lines carrier, however, the Exchange offers its own well-funded guaranty fund, now reflecting over $30 million in assets. A syndicate can be formed with $5 million in capital and surplus.
Utilization of Reinsurance
- Any pure or industrial insured captive insurance company may take credit as either an asset or deduction from liability for reinsurance ceded if the reinsurer meets certain basic requirements.
- An Illinois domestic fronting company also may take credit for reinsurance ceded to an alien company if the alien company has Illinois assets in trust.
- Alien companies are permitted to use Illinois as a state of entry to transact insurance in the United States if the alien company maintains a deposit of assets in Illinois in trust for the benefit of United States policyholders.
In addition to the above vehicles, worker s compensation pools are also available under their own statutory framework. Thus, Illinois offers a wide array of entry into the ART market. For both the well-capitalized and mature facility or the entry-level group purchasers, the regulatory framework and business infra-structure provide one of the better choices in the domestic market.
Captive Insurance Companies
As an accredited jurisdiction, captives in Illinois may transact nearly all lines of insurance business. Like most jurisdictions, they are only prohibited from writing life, accident and health, personal lines coverages for motor vehicle and homeowners liability or workers compensation. However, Illinois captives may provide stop-loss insurance or reinsurance of a single employer self-funded employee disability benefit plan or an employee welfare plan. Moreover, Illinois captives may reinsure employer s liability risks.
Illinois offers the opportunity to existing captives domiciled elsewhere to come to Illinois. Illinois offers both onshore and offshore captives the ability to easily redomesticate to Illinois. Any domestic, foreign or alien company may reorganize as a captive insurance company or a commercial insurer under Illinois law. Any company that takes advantage of the relatively simple procedure delineated in the Illinois insurance code is treated as the same legal corporation that was in existence prior to the redomestication. Therefore the date of incorporation for the new Illinois company dates back to its original date of incorporation. In addition, all contracts and franchises of the company survive the redomestication.
Captives interested in redomesticating to Illinois or incorporating in Illinois will be pleased to learn that the state allows alternative methods for meeting capital and surplus requirements. Stock companies are required to have $1 million in capital and $1 million in surplus. $2 million of surplus is required for a mutual company. The requirements can be satisfied in one of three ways. (1) Cash or cash equivalents; (2) 20% of the capital and surplus requirements in cash and cash equivalents with the balance backed by a letter of credit that meets certain conditions; or (3) 1/3 cash or cash equivalents and 2/3 in irrevocable contractual obligations of the members.
The members must pay their obligations in no more than three equal annual installments. The contractual obligations must be secured by a letter of credit or other form of guarantee or security acceptable to the Illinois Director of Insurance. The Illinois Department of Insurance has advised that a company could give a perfected security interest in its stock or if the company is large enough a corporate guarantee from itself. Captives are required to maintain at all times at least $300,000 of capital and surplus in the form of in cash or cash equivalents.
The Illinois Department of Insurance estimates that it takes thirty days to six weeks for applications approval. There is a $25 certificate of authority fee and a one-time filing fee of $3,500. Captives are required to complete a questionnaire for the formation of an Illinois captive insurance company and provide biographical affidavits for directors and officers of the captive. The applicant also is required to provide a plan of operation that includes information showing that the members of the captive are in a related or similar business, the type of policy to be issued, deductibles, limits, net retention limit, rates and rating classifications for each line of coverage, historical and expected loss experience, pro forma financial statements for at least three years, identification of management, underwriting and claims procedures, marketing methods, investment policies and reinsurance agreements. There is no specific requirement in Illinois that captives have reinsurance. However, the Illinois Department of Insurance will review whether or not a captive has reinsurance to determines the financial solvency of the captive applying in Illinois. If the captive intends to use a fronting company, the captive must provide the name and latest financial statement of the fronting company.
Illinois also has made tremendous strides in facilitating the business of captives by making its reinsurance laws more responsive to captives. Illinois permits any pure or industrial captive insurance company to take credit as either an asset or deducting from liability for reinsurance ceded if the reinsurer meets certain basic requirements. Among the requirements, the principal business of the reinsurer must be to accept reinsurance from captive insurance companies organized as domestic captives of which the reinsurer owns or controls more than 80% of the outstanding voting securities if a stock company or 80% of voting control if a mutual company. The reinsurer must be licensed to transact insurance or reinsurance in its jurisdiction of domicile and the reinsurer must maintain policy holder surplus of at least $20 million.
An Illinois domestic fronting company also may take credit for reinsurance ceded to an alien company if the alien company is using Illinois as a state of entry to transact insurance in the United States. Alien companies are permitted to use Illinois as a state of entry to transact insurance in the United States if the alien company maintains in Illinois a deposit of assets in trust for the benefit of United States policyholders. The United States branch of the alien company is required to maintain trusteed assets at least equal to the sum of its minimum capital and surplus and the amount of its liabilities to policyholders, net of reinsurance for which credit is allowed under Article XI of the Illinois Insurance Code. The alien company may deduct from this amount the sum of (I) the amount of all of its general state deposits, (ii) the amount of its special state deposits, (iii) the amount of its reinsurance recoverable on paid losses, (iv) the amount of its notes and bills receivable, taken for premiums, (v) with respect to companies writing property and casualty insurance, the amount of its agents balances and uncollected premiums; and (vi) the amount of its funds held by or deposited with reinsureds.
Send E-Mail to ICARFIA for more information
2003 Contact Information:
Gallagher Captive Services, Inc.
Two Pierce Place
Itasca, IL 60143