In conversation
Captive Insurance in Tennessee
How to Set Up a Captive Insurance Company in Tennessee
Mark Wiedeman runs the Captive Insurance Section at the Tennessee Department of Commerce and Insurance, joined by Michael Schulz, Jackson Wickham and Kevin Walters. In this conversation they walk through what the state competes on, what a regulator looks for before approving a captive, the capital required, what a captive files each year, how a dividend gets approved, and how to pause, close or move a captive out of the state.
Questions answered
Why would a captive choose to domicile in Tennessee?
Mark Wiedeman makes a service argument rather than a price one, and Michael Schulz builds on it. Wiedeman starts with the framework, describing a set of code, statutes and rules that has been structured since a modernization around 2011, and a team he puts at about sixteen people working only on captives, all of whom he says have gone through the ACI credentialing process. Schulz picks up the same thread from the business development side: every captive is assigned a staff member from the start, so there is an explicit point of contact rather than a queue. He then widens it to the state, describing Tennessee as a business friendly environment with an established network of lawyers, accountants and actuaries already in place.
Watch from 1:59What does a regulator look for before approving a captive?
Mark Wiedeman answers structurally rather than procedurally. The first test is whether the proposed program is insurance based and formed for insurance reasons, which he unpacks as whether there is transfer of risk and the other components of what you would consider to be insurance. The second is solvency: whether the companies sponsoring the captive can maintain the entity, pay the claims, and are willing to capitalize to the statutory minimum or higher if the program calls for it. From there he looks at funding, servicing and governance, and says compliance is a large factor. He is explicit that tax implications are a benefit of a captive program but should not, from a regulatory standpoint, be the only or main driver of it.
Watch from 5:04What are the minimum capital requirements for a captive in Tennessee?
Mark Wiedeman gives the figures by captive type. A standard pure captive is $250,000. In a sponsored cell program the core is responsible for $100,000 of minimum capital, and he says Tennessee has no statutory minimum for the individual cells. For a risk retention group he says, hedged, that he believes it is half a million, $500,000. He then makes the point that matters more than any single number: these are baseline statutory minimums, and where a feasibility study indicates a program should hold more because of its nature, the department will hold the captive to that higher amount. Michael Schulz adds a structural clarification, that an RRG in Tennessee is regulated by the traditional side of the department rather than through the captive office.
Watch from 8:01What does it cost to run a captive in Tennessee each year?
Mark Wiedeman's answer is that Tennessee does not charge much. He says there are really not very many fees, and names an application fee at formation, an annual reporting fee of $515, and the possibility of a fee attached to a material business plan change. What the answer does not cover, and what an owner should not read into it, is the rest of the annual cost: the captive manager, the auditor, the actuary and the legal work are the recurring spend, and they are set by the providers rather than by the state.
Watch from 9:46Do a captive's service providers have to be based in Tennessee?
Mark Wiedeman separates two things that owners tend to conflate. There is no requirement that a captive's service providers be actual in state Tennessee providers, so an owner can keep the manager, auditor and actuary they already work with. Separately, Tennessee does require an annual meeting to be held in the state. The two connect through an incentive rather than a rule: if a company happens to utilize two service providers that are in the state, it can get a waiver of the in state requirement for that annual meeting. He adds that the department tracks and vets auditors, actuaries and captive managers as approved in Tennessee, and corrects an earlier remark by noting that list is not currently published on the website.
Watch from 11:26What does a captive have to file with the state each year?
Mark Wiedeman describes a light annual cycle with one real decision inside it. Every captive files an annual statement, typically due around the middle of March, the fifteenth by statute. An audit is not actually required by statute in Tennessee. The choice matters because of what it changes downstream: a captive that does not audit is put on a three year examination cycle, while one that does can expand that exam cycle to five years, and the audit requirement then also includes a statement of actuarial opinion. He says the analysts use those reports to read governance and compliance status, solvency and liquidity, and whether the captive is still financially viable.
Watch from 13:43How does a regulator decide whether a captive can pay a dividend?
Mark Wiedeman describes the dividend process as pretty straightforward. The captive submits a request, the department typically asks for a copy of the financials to see where the captive stands from that snapshot position, and then runs the process, which he says usually takes a couple of days to turn around. What the department is checking is that the captive keeps enough to maintain its minimum capitalization and enough to cover loss if it needed to. He adds a preference rather than a rule: he believes they ask that a captive be in business for a year or so, and would prefer a captive trade for a little while before it starts asking for money back, though that is looked at case by case.
Watch from 15:23How do you pause, close or move a captive out of a state?
Mark Wiedeman says Tennessee can do both of the things the question asks about. A captive that wants to pause can go dormant: there is a provision that allows it, the owner provides the details of the situation, and the department processes the captive into dormancy. A captive that is finished can dissolve. And an owner who wants to keep the captive but not the domicile can pick it up and move it to another state, which he describes as redomesticating it. His framing is that there are options for the exit of a captive as well, which is the part a cautious owner wants to hear before forming one.
Watch from 16:43What kinds of captives and coverages are being formed in Tennessee?
Mark Wiedeman says Tennessee has seen a fairly steady uptick in cell captive programs, and reads it as middle market and smaller companies wanting to benefit from a captive without the upfront cost of standing one up alone. He describes a cell as a way to dip your toe in the water and see whether a captive is right for you. On industry he says there is a wide variety and would not name one over another, but on coverage lines he is specific: commercial auto, property coverages, especially with the hardening market in coastal areas, cyber, medical stop loss, and interest in holding employee benefit programs inside a captive. Michael Schulz adds that the department is not beholden to those lines, and describes working with new groups to try getting to a yes.
Watch from 18:56What do first time captive owners get wrong about being regulated?
Mark Wiedeman offers this unprompted, as another bit of advice for a new captive owner: sometimes to understand that they are in a regulated industry. His point is about pace rather than paperwork. There are certain things you may not be able to do as quickly as you could when you are just running your own business. He puts it next to the department's own posture, saying they want to do as much as they can to help the captives out while also maintaining the structure of governance and the rules and regulations they have to uphold. The two sit together: a helpful regulator is still a regulator.
Watch from 21:47What should you do before you form a captive?
Mark Wiedeman starts by drawing the line around his own role: as regulators they typically are not in a position to make recommendations or policy suggestions for a company, and cannot tell an owner what to put in a business plan. Inside that limit his advice is to do the diligence and start from the risk. Figure out what is keeping you up at night, understand your risks, understand what you are wanting to do, and when you talk with your managers, auditors, actuaries and lawyers about how to structure a program, go into it with your eyes wide open. He adds that an owner unsure whether something fits within a statutory provision is always welcome to call the department. Michael Schulz makes the harder point: a lot of people will be pulling for one thing or pushing for another, and in the end the owner has to go with what feels right to them.
Watch from 23:00The views expressed are those of the featured guest, drawn from a recorded conversation, and reflect their own professional experience. Nothing on this page is insurance, tax, legal, or investment advice. Consult your own advisors about your specific situation.
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