Arkansas Insurance Department Eager for Creation or Re-Domicile of Captive Insurance Programs
By Haley M. Heath and Samuel C. Baber
I
t has been two years since Governor Hutchinson signed Act 370, which improved the regulatory environment for captive insurance companies domiciled in Arkansas, into law. However, as of January 2019, only six captive insurance companies are domiciled in Arkansas.1 In the 2019 session, the Legislature further expanded the state’s insurance captive law to make the state’s regulatory environment even friendlier to insurance captives. In light of the changes to the regulatory scheme, both the state and many of its businesses would benefit from lawyers recommending that their clients consider whether the creation of a new captive insurance program is right for the business and consider whether any existing captives should be brought home to Arkansas.
Heath
Baber
Haley M. Heath is an attorney with Fuqua Campbell, P.A. in Little Rock where her practice focuses on commercial litigation with an emphasis on intellectual property law. Samuel C. Baber is an attorney with Fuqua Campbell, P.A. in Little Rock. His primary areas of practice are general litigation, family law and real estate transactions and disputes. 24
The Arkansas Lawyer
www.arkbar.com
What is a Captive Insurance Program? Before being able to advise clients regarding the benefits of a captive insurance program, Arkansas attorneys must know what a captive insurance program is. Captive insurance programs are a tax-deductible form of self-insurance available for businesses. Insuring losses through a captive provides businesses with huge tax incentives and also allows the business to save, invest, and at times distribute, a portion of its premiums not paid for its own losses. Essentially, a captive insurance policy is one in which a company purchases insurance from a subsidiary that it owns and controls. Through a captive, a business can pay money to its subsidiary in the form of premiums to insure the parent business’s losses. If done correctly, premiums paid into the captive are tax deductible. In order for the premiums to be tax deductible as an insurance expense, the captive must be able to prove that it is a valid insurance company. To be a valid insurance company, the captive must obtain an insurance license and actually provide insurance to the parent company or its affiliates. The Supreme Court has long held that to be considered an insurance company for tax purposes, insurance must include elements of risk shifting and risk distribution.2 Captive insurance makes sense for businesses on two different ends of the insurance loss perspective: (1) for businesses who have real insurable risk but historically low losses and (2) for businesses whose losses are so high so as to make the risk uninsurable in the common market other than through reinsurance. For this second category of business, a business can