ILLINOIS CAPTIVE & ALTERNATIVE RISK FUNDING INSURANCE
ILLINOIS: DOMICILE OF CHOICE
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
- 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
- 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
- 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
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.
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2003 Contact Information:
Gallagher Captive Services, Inc.
Two Pierce Place
Itasca, IL 60143