II. Forming an Arizona Captive Insurer
The ADOI requires a pre-application submission, including a business plan,
a proposed governance structure, the name of the actuary who will be
performing the feasibility study and a list of the proposed service
providers, including the captive manager. The Department may or may not
request an in-person meeting following the review of the pre-application
materials; however, a face-to-face meeting is generally recommended.
[7]
When the application is submitted, it must include an initial license fee
of $1,000, an examiner’s revolving fund deposit of $100, a charter document
filing fee of $75 and articles of incorporation with a filing fee of $60
payable to the Arizona Corporation Commission. The application also must
include original biographical affidavits for all officers and directors.
Fingerprinting is not required. Bylaws, consistent with both Arizona
General Corporate Law and the Captive Statutes, should also be filed and
should include at least one Board of Directors’ meeting in Arizona
annually, as well as the identification of a principal place of business in
Arizona.
[8]
The latter can be the office of the captive manager, the attorney, or the
statutory agent.
The minimum capital surplus requirements are as follows:
- pure captive — $250,000
- group captive insurer — $500,000
- agency captive insurer — $500,000
- protected cell captive insurer — $500,000
- reciprocal insurer — $500,000
- pure or group reinsurers — only one-half of the above amounts.
[9]
It should be noted that the Department does have the authority to require
additional capital and surplus based upon the volume of premium and the
nature of the insurance coverage provided.
[10]
Officers and directors are required to provide Conflict of Interest
Statements, which should be updated annually thereafter.
[11]
An actuarial feasibility study is required to accompany the application and
must be prepared on the actuary’s letterhead and signed by him or her. It
should track the Business Plan and assume the risks, coverages, and
retentions the captive will write directly, cede, or assume. It should also
provide 3-5 years of the loss history specific to the risk insured and
identify the methodology used in the preparation of the feasibility study,
including confidence levels and worst and best-case scenarios.
[12]
The initial balance sheet of the proposed captive’s financial condition,
signed by the president and secretary (both offices must be held by
different individuals), is part of the application. It should specify the
amount and source of the initial capitalization.
[13]
The Department will approve the name of the captive and approve the form of
Articles of Incorporation, which must then be filed with the Arizona
Corporation Commission in order to formerly establish the corporate entity
or limited liability company.
[14]
Once an application is deemed complete, the Department has 30 days to
review and approve the application. Recent past history indicates that most
approvals occur 20-25days after the filing.
[15]
It is common for the Department to issue a Conditions Addendum to the
license, which addresses any specific requirements that the captive insurer
must follow. Confirmation of the bank balance supporting the capitalization
is required before the Certificate of Authority is issued. The effective
date of the license will be the date it is formally signed by the Director
or such later date as may be requested by the applicant.
[16]
III. Key Ongoing Requirements
Annual Report.
Non-RRG captives have to submit an Annual Report within 90 days after the
captive insurer’s fiscal year, which includes a statement of the captive’s
financial condition verified, under oath, by two of its executive officers.
The captive may use generally accepted accounting principles (GAAP) in
preparing its financial statements. However, the Director does reserve the
right to require the use of statutory accounting principles (SAP) or
modified GAAP principles based upon the type of insurance involved.
[17]
Audited Financial Statement.
The annual financial statement for each captive must be audited by an
independent certified public accountant, with a copy filed with the
Department, within 6 months of the captive’s fiscal year-end. Additionally,
an actuarial opinion on the adequacy of the captive’s loss and loss expense
reserves must accompany the annual financial statement.
[18]
Exemption for Small Non-RRG Captives.
An exemption for small captives, that write less than $1,000,000 of direct
plus assumed written premium during any calendar year and have less than
$1,000,000 direct and assumed loss and loss adjustment expense reserve as
of yearend, from having to submit an actuarial opinion is automatically
granted upon the submission of an affidavit under oath from an officer of
the captive indicating that the $1,000,000 threshold for premiums and loss
and loss adjustment reserves was not met. Additionally, if the captive
fails to have direct premiums of $1,000,000 and less than 1,000
policyholders as of the end of the calendar year, it is also exempt from
having to file an audited financial report.
[19]
Business Plan Changes.
All material changes in business plans shall be submitted for review and
approval prior to making the change.
[20]
Capital & Surplus Requirements.
The captive must, at all times, possess and maintain minimum unimpaired
paid-in capital and surplus in the amounts previously stated. Generally, a
cash account, held by a qualified financial institution, pay an amount of
the minimum capital surplus requirement suffices. The Department also
accepts letters of credit issued by qualified financial institutions naming
the Director as beneficiary in the amount of the capital and surplus
requirements.
[21]
Captive Manager.
A captive must engage a captive manager doing business at a location in
Arizona to maintain the captive’s books and records at a location in
Arizona accessible to the Director. A change in captive manager is a
material change and is subject to the Department’s prior approval.
[22]
Dividends.
The captive must obtain prior approval to pay any dividends prior to
accruing or paying same.
[23]
Confidentiality of All Filings.
Arizona has a broad confidentiality provision that restricts the Department
from providing information to any other person without the written consent
of the captive. Exceptions to the confidentiality provision include using
the information for the Department’s regulatory purpose, producing
information pursuant to a subpoena and permitting production of information
to a party to a civil action or contested case in which the captive is also
a party subject to discovery.
[24]
Investments.
As part of the captive’s business plan, the captive must adopt an
investment policy and file same as part of its business plan. A pure
captive insurer is not subject to restrictions on allowable investments,
except that the Director may prohibit or limit any investment that
threatens the solvency of the pure captive insurer. Investment policies and
practices of a group, agency, and protected cell captives must comply with
both qualitative and quantitative limits for investments generally
applicable to full legal reserve insurers.
[25]
Affiliate Loans.
Pure captives may make loans to one or more of its affiliates. Such loans
are frequently characterized as “loan-backs.” The note must evidence the
loan and the captive must obtain prior approval before funding any loans or
investments in an affiliate entity.
[26]
Reinsurance Agreements
. All reinsurance agreements and material changes thereto must be filed
with the Department as a change in the captive's business plan. Agreements
with reinsurers that meet the Department’s accreditation or licensing
standards require only the filing of a detailed term sheet of the
reinsurance transaction. Agreements involving unauthorized reinsurers must
be filed and approved by the Department before taking place.
[27]
Directors and Officers.
There is no prior approval required to appoint or change a captive's
officers and directors; however, before appointing a new officer or
director, an original biographical affidavit must be filed with the
Department. Captives must adopt policies to periodically update conflict of
interest statements from officers and directors.
[28]
Service Provider Contracts and Agreements
.
Written contracts are required for all service providers
even if the provider isn’t an affiliated entity. The service agreements
should be submitted for prior approvals to the Department at least 30 days prior to the agreement taking effect. All captive
manager agreements, renewals and amendments, all related party or affiliate
agreements, renewals and amendments, and material service provider
agreements, renewal amendments fall into this category.
[29]
IV. Benefits of an Arizona Captive
The Arizona captive insurance law offers the following benefits:
- Unlike most captive jurisdictions, no premium tax is required to be paid
by a captive insurer. After licensing, the only fee charged is an annual
renewal fee for $5,500 payable to the ADOI.
[30]
- Small-company exemption from annual actuarial opinion and audit
requirements are available. Essentially, captives with less than $1,000,000
in direct or assumed premium and $1,000,000 in loss reserves and loss
expenses are exempt from providing annual actuarial opinions and
independent financial audits.
[31]
- There is no regularly scheduled statutory examination for pure captives.
While the Director reserves the right to conduct an examination at any
time, from a practical standpoint, such examinations are rare and only
triggered under extraordinary circumstances.
- Arizona has a strong confidentiality law that protects all information
filed with or made available to the ADOI. By statute, the Director can only
identify the name of the captive insurer, the date of its licensing, the
type of captive insurer, including the business or industry of the owners
or member and the captive’s licensed status. Information may be
discoverable by a party in a civil action in which the captive insurer has
previously submitted information to such party and the Director is required
to provide information other governmental agencies in connection with any
civil or criminal investigation as may be required by a subpoena issued by
such agency.
[32]
- Approval of the application for a captive license should take place
within thirty days after submission of an application deemed complete. The
average time for license review and approval is generally 25–30 days.
[33]
V. Arizona’s Captive Program
The Arizona captive program has been in existence for over sixteen years.
As of this writing, there are 117 licensed Arizona captive insurers,
ranging from some of the largest and most technically complex financial
entities in the United States to smaller niche entities that qualify for
the small company exemptions. As a mature captive program, Arizona is
ranked as the 10th largest captive jurisdiction in the United
States.
[34]
Over the years, the program has seen a steady and consistent growth in the
number of captives due to both the provisions of the captive law and the
support of the ADOI. The expectation is that that trend will continue.