Captive insurance failed once,but Maine needs to try again
March 16, 2010 -
Insurance is important to businesses and individuals but it can be both dull and complicated. Despite this, I would like to provide readers with information on why "An Act to Create Economic Development in Maine by Modernizing Maine's Captive Insurance Laws," a bill I've sponsored, will be good for Maine and will improve Maine's existing captive insurance laws.
It isn't news that the Baldacci administration and Maine Legislature are focused on how best to stabilize and improve Maine's economy. In addition to finding ways to make government more efficient, the Legislature also should look for ways to help Maine businesses operate more efficiently.
That's why I have sponsored LD 1436.
Periodically, traditional insurance markets become "hard" -- that is, policies become expensive and coverage terms narrow for consumers. Captive insurance companies give businesses some needed leverage against hardening markets.
Thus, a captive insurer, or "captive," is a company that is owned or controlled by its policyholders and insures certain risks of its parent company, a group of companies, or members of a business association or industry group. The company owners, who are also the insured, can control the claims, risks, underwriting and investment decisions of the insurance company.
Captive insurers have been around for a long time. In the 1800s, New England textile manufacturers formed a mutual insurance group as an alternative to the high fire insurance rates in the region; that group was an early form of captive insurer. In the 1930s, the company that made Lifesavers candy formed its own insurer, based offshore in Bermuda. In the 1950s, the Youngstown Sheet & Tube Company owned several ore mines supplying only its mills. The business set up its own insurance company exclusively for its mines.
In 1997, the Maine Legislature passed its first law permitting captive insurance companies to be licensed. Unfortunately, the law was very restrictive in terms of the kinds of companies that could form a captive. That mistake has cost us. Today, Maine has no insurance captives, whereas worldwide there are more than 5,000 insurance captives. Our neighbor, Vermont, has more than 800 licensed captives, and a total of 29 states have captives laws in place.
Vermont first enacted its captive enabling legislation in 1981. Since then, the captives industry has generated about $220 million in tax revenues and $12 million in annual licensing and examination fees. Vermont financial institutions manage more than $1 billion in captives assets, and boast more than 300 private sector jobs supporting this industry. Most of these jobs (accountants, actuaries, legal, tax advisers, investment managers) pay wages well above state and national averages.
The good news is that the Maine law can easily be fixed. And it should be. Maine can provide its businesses with the same insurance options available in other states. We need only look at Vermont's experience to understand what is at stake. Vermont's captives increase state revenues, help businesses and the captive industry contributes about 2 percent of Vermont's gross state product. It is a clean industry that encourages risk management and helps businesses control costs.
There is no reason Maine cannot be a competitive market for businesses and organizations interested in forming captive insurance companies -- whether they are based here or in other states.
Passage of LD 1436 is an important first step in developing a successful and competitive captive industry. It will create significant long-term benefits to our state's economy by providing Maine businesses with cost-effective insurance options. It also will be an engine for growth, attracting companies that support and manage the captives industry, and generating tax and licensing revenues. We won't catch up with Vermont right away, but we certainly should try to learn from our neighbor.
There also is an interesting potential synergy between captives and Maine's great tourist industry. All captives are required to conduct annual board meetings, which will bring captive insurer's board members, executives and others to Maine. We know many of them will like what they see and want to return.
After we enact LD 1436, the next step will be to establish a public-private partnership to promote the captive insurance industry, develop a strategic focus for the industry and promote Maine as a captives domicile. This is an opportunity Maine cannot afford to pass up.
Democratic Sen. Justin Alfond of Portland is serving his first term in the Maine Senate. When he is not serving in Augusta, Alfond is a real estate developer who focuses on mixed income housing.
