Morris Manning & Martin, LLP

Steps for Georgia to Become a Preferred Domicile

12.30.2013

There are now over thirty domestic jurisdictions in the U.S. that authorize captive insurance companies, but there are only a handful of states that are preferred within the industry.  Being a favored captive domicile can support the economic development of a state through building a captive servicing industry. 

Moreover, being a favored captive domicile has potential beyond creating a captive industry.  It is becoming a selling point among growth‑oriented states looking to attract business and capital.  Whether a state permits captives may be a basic standard for companies evaluating options for locating a headquarters or facility.  Over 90 percent of the Fortune 1000 companies have captives, and it is a material benefit to be able to allow companies to establish their captive in the same state as their corporate headquarters or major operations center. 

Georgia already has a captive industry with an infrastructure of captive managers, accountants, actuaries and lawyers, but the state is not a preferred captive domicile that attracts capital and new companies to the state.  While there has been some concern about a “race to the bottom” between captive domiciles racing to lower their capital requirements and premium taxes, being a favored captive domicile creates substantial benefits for a state.

Georgia has had a captive law since 1988, and approximately ten captives are currently domiciled in the state.  If the Georgia General Assembly wants to improve the state as a captive domicile, it should start by considering the following three actions:

1. Update the captive law.  Georgia’s captive law has not been updated substantially since it was passed in 1988.  It lacks many of the features of newer captive laws, such as segregated cells, special purpose vehicles and the flexibility to meet the goals of corporations forming captives.  Captives also receive no special tax treatment in Georgia and pay 4.75% premium tax.  The minimum surplus for a captive in Georgia is $500,000.

To be competitive and in line with other states, Georgia would need to reduce its premium tax and its surplus requirement.  Tennessee’s captive premium tax starts at 0.225% and decreases once premiums exceed $20 million.  Newer captive laws typically have lower capital requirements or include greater flexibility.  For example, the new captive statute in Texas sets a minimum of $250,000 in surplus and gives the commissioner the discretion to determine the appropriate surplus amount, if any, beyond that minimum based on the captive insurer’s business plan.  In addition, most domiciles permit the surplus to be in the form of a letter of credit rather than hard capital contributed to the captive.    

2. Dedicate resources at the Department of Insurance.  Preferred captive jurisdictions dedicate staff and resources exclusively to the formation and regulation of captive insurance companies.  The Georgia Department currently does not have staff dedicated to captives and would likely need to allocate resources for a captive director and staff whose primary purpose would be the regulation and examination of captive insurance companies.  This specialization has worked well in other states to facilitate the expertise necessary to regulate captive insurance companies and create a department that is responsive and easy to work with to match the fluid expectations of captive owners.

3. Actively enforce Georgia’s self-procurement tax.  Georgia imposes a 4% premium tax on insureds self-procuring insurance on risks located in Georgia.  In most instances, this tax would apply to captive owners insuring their risks located in the state.  If the premium tax rate for domestic captives was substantially lower than the 4% self-procurement tax, companies would have a stronger incentive to domicile their captive in Georgia.  Creating a critical mass of captives is imperative to justify the Department dedicating resources to captives and creating the expertise within the Department necessary to become a preferred captive domicile.  Increasing the number of captives in Georgia may also result in increased premium tax collections to the extent that captive owners weren’t paying the self-procurement tax through oversight, negligence or an argument that the tax did not apply to them due to constitutional limitations on taxing transactions that take place entirely outside of Georgia.  

The cost of the above three steps is relatively small.  Georgia has not historically been a preferred captive domicile, but that could change if the legislature adopted the goal of making Georgia a captive domicile of choice and addressed the issues discussed above.  Having a captive‑friendly business environment may soon be a requirement to attract capital and businesses to the state.