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MGM Mirage is establishing a captive insurance program in the Silver State, the Nevada Department of Business and Industry's Division of Insurance announced in September. The new captive will be the largest in Nevada, and the program--the 45th to be licensed in the state--could be the first of many large players to cash in on the domicile's new captives laws.

Previously, says W. Randy Peppers, executive director of captive programs for the Division of Insurance, Nevada attracted small and midsize programs.

James Wadhams, president and chairman of the Nevada Captive Insurance Association, sees these changes more as "expansions and enhancements," rather than reforms. The Nevada system, he stresses, wasn't broken and in need of repair.

"What our legislation did was create some additional variations (of risk-assuming mechanisms) that the market seems to be looking at," he says.

For Peppers, the most important enhancement is the cap on the captive premium tax at $175,000 per year, which translates to a tax ceiling at about $113 million in premium transfers. The portion of a premium above that ceiling now does not get taxed.

Before, however, Nevada had no limit to the tax. Big players such as MGM Mirage--which can come to the table with premiums stacked higher than $113 million--saw no sense in opening a program in the desert.

"Our tax became onerous over $113 million," says Peppers.

The cap changes all that.

"A huge program would find significant financial benefit in that," Wadhams says. "I think the enhancements will be attractive," he adds. "It made sense, and the legislation agreed."

Not only will Nevada attract more captive business because of its recent legislation, Wadhams feels that Nevada and other captive domiciles could see more interest, as well, when insurance premiums increase from the capacity crunch caused by Katrina, Rita, Wilma and other recent disasters, and companies search out alterative risk mechanisms.

In MGM Mirage's case, it launched its Nevada captive program to manage the liability risks of the architects and planners on its CenterCity project, a $5 billion urban development destined for the Las Vegas Strip. CenterCity will be a mixed-use project--part hotel, part casino, part condo, part shopping mall.

The MGM Mirage captive handles construction-defect coverage, which Peppers says is "problematic" in Nevada.

"Several companies won't write new coverage in that area," he says. Those that do charge a pretty penny.

The captive will also serve MGM Mirage during the construction process if further coverage is required.

"They won't be at the mercy of reinsurers," says Peppers.

December 1, 2005

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