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By CYRIL TUOHY, managing editor of Risk & Insurance®

At the annual meeting of the Captive Insurance Companies Association in Indian Wells, Calif., last March, it was hard to avoid all the gloom about how delays in the hardening of rates in the traditional market were slowing new captive formations.

It's an impressive number, the kind of number typically posted by Vermont, the nation's leading captive domicile. It's an even more impressive number given the soft economy and the ease with which companies can hunt for favorable pricing in the traditional market to cover their risk.

Last year, though, was Kentucky's time to shine. It even outpaced Utah, which licensed 31 new captives in 2008.

Who's coming to Kentucky, and why?

"The secret to our success, I guess, is our service providers," said Russell Coy 2nd, the captive insurance coordinator for the Kentucky Department of Insurance, which is headquartered in Frankfort.

He cited the expertise of Steve Goodman, with the law firm of Lynch, Cox, Gilman and Mahan; Janet Craig of the firm Stites & Harbison; and Chaz Lavelle, a top tax attorney with Greenebaum, Doll & McDonald in Louisville.

Captive management companies Alta Holdings, Active Captive Management, USA Risk Group, and Marsh have also established footholds in the state and have the depth and breadth to serve local companies.

Stuart Ferguson, managing director of the Underwriters Group, a regional broker, and president of the Kentucky Captive Association, said people keep asking him why the state is growing so fast as a captive domicile.

His answer is always the same. "We don't have East Coast-type cost structures and we're out here in an area that's perhaps been underserved. Just by virtue of where we are, it has helped tremendously," he said.

In 2007 the total premium tax from captives came to about $350,000 on premium volume of about $85 million, according to Coy. A minimum tax of $5,000 is levied on captives looking to operate in the state.

The inviting economic environment means that the state had 67 captives registered to do business within its borders at the end of 2008. Between the first of the year and mid-October Kentucky had added another 17 captives for a total of 84 licensed active captives, according to department statistics.

Of the 84 licensed active captives, the state now counts a total of 68 pure captives, eight group or association captives, six risk retention groups, one special purpose captive and one branch captive, according to Kentucky Dept. of Insurance statistics.

The captive vehicles belong to smaller and midsize companies, usually privately held, added Coy. "We have a lot of midsize and large family-owned companies that have captives. We cater to that a little bit."

Kentucky wasn't always such a hot property in the captive marketplace. For years after a captive law was passed in 2000, the state languished as a domicile as other domiciles grew, some by leaps and bounds.

It all started about a decade ago when the Japanese automotive giant Toyota was looking for a new home for its North American headquarters. As part of the governor's incentive package, Kentucky added a captive enabling insurance statute.

Whether the new captive statutes ended up tipping the scales in favor of Kentucky, no one will ever know. What mattered was that Toyota ended up coming to the state but the captives didn't ? until the hard market in the wake of the Sept. 11, 2001, attacks.

That's when the automobile dealers were able to establish a branch of their captive in Kentucky to support their workers' compensation program, said Ferguson. Then a number of locally based businesses that owned captives decided to redomicile their captives to Kentucky to reduce travel time and operating costs.

Looking back, it is clear that it was the initiative of these local owners that provided a base from which the industry could develop. Other captive managers soon caught on to the geographic secrets of Kentucky: within 600 miles or about a day's drive of two-thirds of America's population.

In addition, three airports serve the region: Cincinnati/Northern Kentucky International Airport, Louisville International Airport and Lexington Blue Grass Airport.

Dennis Harwick, president of CICA, who was planning to attend the annual conference of the Kentucky Captive Association for the first time this year in early November, said he was looking forward to the trip "mint juleps and all."

Lavelle, the attorney with Greenebaum, Doll & McDonald PLLC, pointed to another reason for the recent torrid growth in the industry: Russell Coy 2nd himself, a lawyer with knowledge of the insurance industry.

Coy isn't your every day government employee. Come every year in December, Coy has been known to haul his staff into their offices over the weekend to process applications before the end of the year, according to Lavelle.

"He's what you want a regulator to be," said Lavelle. "He's accessible. He's very good, and if you give him a financially sound proposal he will help the applicant meet its business objectives."

Just as important as the number of applications he's let through are the number of applications he's turned down, and that's where Coy's knowledge of the insurance industry is paying off in spades.

"He has rejected a number of captives he thought should be declined," Lavelle added. "When one is trying to expand, there is a temptation to be too flexible, but Russ has resisted it."

After a decade working in the Kentucky Insurance Department's legal division, Coy in 2005 was appointed to head the captive unit. It was shortly thereafter that the state began making big gains in the number of captives registering to do business within its borders, noted Lavelle.

Those gains took place from 2006 to 2007, and then again from 2007 to 2008, and yet once more from 2008 to 2009.

With Coy at the helm, there's now more promise in growing the industry than there has ever been. Coy has about another dozen years left in the Kentucky pension system, said Lavelle.

That means Coy has incentive to stay in his current position. More important, perhaps, is that Coy appears palatable to both parties. When the state changed governors as well as political parties between 2007 and 2008, there was no drop in its licensing of captives, Lavelle also said.

It all sounds as if Kentucky's found their answer to Vermont's Len Crouse, the former deputy commissioner of captive insurance who ruled over the industry in Vermont for more than 20 years, helping the Green Mountain State become the leading U.S. captive domicile.

Kentucky captive officials say there's plenty of growth left in the industry. They point out that there are 5.7 million businesses in the United States, yet the number of captives registered with U.S. domiciles is less than 1,700.

"My point is that the overall captive penetration is still fairly shallow and there's plenty of room for growth in using these risk finance vehicles in business insurance programs," said Ferguson.

Kentucky captive officials admit the growth rate will eventually level off but when that will be nobody knows. For the moment Kentucky captive insurance experts are enjoying the captive derby while it lasts.

"Trees don't grow to the sky and we won't either," said Ferguson. "We'll get to a point where we will level off. Is it this year, or next year or the year after that? We'll still keep building up the infrastructure. We're still on a good uptick."

December 1, 2009

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