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MICHIGAN IS ABOUT TO TAKE THE CAPTIVE PLUNGE

By Monte D. Jahnke, Kerr, Russell and Weber PLC, Detroit, Michigan

February 25, 2008

Quiet efforts by a Michigan based life, annuity and mutual fund company are about to yield passage of comprehensive captive insurance legislation in the state. The enabling bills are in the final stages of legislative review. Sponsors expect no opposition and a signature from the governor. Final action could occur as early as mid-March.

Neither the regulator, the Office of Financial and Insurance Services (OFIS), nor the Michigan Economic Development Corporation have overtly promoted or opposed the legislation, at least to date. No efforts appear to be underway to staff OFIS for captive insurance oversight, although the bills provide for a Captive Insurance Regulatory and Supervision Fund earmarked to receive twenty per cent of all taxes collected from captives. A non-refundable $10,000 filing fee would apply. Additional charges of $2,700 for outside review could be levied by the commissioner. Annual license renewal fees would range from $5,000 to $25,000, depending on annual premiums written.

The principal lobbying argument for this legislation seems to be that passage will give Michigan something that several states and the District of Columbia already have. At this writing it does not appear that the state will aggressively enter competition for captive business. This might change once the bills become law and when the next state budget cycle emerges. The state’s dire economic circumstances my not bode well for such support, however.

The current Senate bills would add three new chapters to Michigan’s Insurance Code: a general enabling chapter on captive insurance company types and structures; a chapter on special purpose financial captives, and, a chapter on protected cell companies. The usual provisions concerning filing applications and business plans, specified certificates of authority, regulatory oversight, the power to issue regulations and to conduct periodic examinations and to levy sanctions, are included. It appears that the chapter on special purpose financial captives would be the primary vehicle for debt based securitizations that might be attractive to, among others, promoters such as the life company that has pushed the Michigan initiative.

Six types of captives are named in the bills: pure captives; association captives; sponsored captives, industrial insured captives; industrial insured group captives; and special purpose captives. The last type reflects current stateside regulatory efforts already manifest in Delaware and the District of Columbia for example, leaving open the possibility of licensing unique and flexible plans. The six captive types may exist as stock, mutual, and limited liability corporate forms, and will be allowed to seek licensure to write all lines except workers’ compensation, personal automobile, and homeowners insurance. Branch captives are also contemplated, and as such would be exempted from some of the examination and other requirements applicable to domestic Michigan captives. The statutory licensing provisions also require evidence of adequate loss prevention programs for each captive applicant. No Michigan captive would pay into or benefit from the state’s guaranty fund.

The protected cell language is comprehensive, reflecting state-of-the-art concepts. The legislation would prevent anyone other than existing licensed insurers from any state or the District of Columbia or their affiliates from forming a sponsored (protected cell) company. Neither Michigan state courts nor Michigan based federal bankruptcy courts have yet ruled directly on the integrity of protected cell structures in insolvency or bankruptcy settings. The new Michigan legislation will be a good base from which to start supportive arguments if the time ever comes. All business in sponsored captives must be fronted, reinsured, or secured by a trust fund supported by an acceptable letter of credit.

Minimum cash capitalization and retained earnings requirements would be: pure captives-$150,000; association captives-$400,000; association mutuals-$750,000; industrial insured captives-$300,000; sponsored captives-$500, 000 with risk, or $150,000 absent core risk, provided that cell risks insured are of a homogeneous nature and covered by activation of no less than ten cells within the sponsored captive. A captive incorporated as a nonprofit would need at least $250,000 if set up as a pure captive, with the OFIS Commissioner given discretion to set capitalization for special purpose nonprofit and other special purpose captives. Supplemental security via cash, cash equivalents, letters of credit and posted securities are contemplated the legislation.

Minimum annual premium taxes would be $5,000, capped at $100,000. Prorated amounts of taxes are contemplated for start ups. Premium taxes range from .225% against the first $20MM of premium to .025% for every dollar of premium written over $60MM annually.

Please feel free to call us if you have any questions about this legislation or related application efforts in Michigan. We are continuing to watch developments closely. See the contact information on our service directory page at www.captive.com , or on our firm site at www.krwlaw.com .