In 2001, Montana became the 16th state to pass legislation opening existing insurance regulations to the captive insurance industry. Under Montana captive insurance law, a company or association of companies may form a wholly owned subsidiary to insure the parent entity. By using a captive, the parent company retains part of the insurance risk within the corporate umbrella and the captive company collects the premiums and handles the claims.

There are many different legal issues involved in forming and operating a captive insurance company including:

• What types of captives are allowed in Montana and how much capital & surplus is required?
• What are the investment limitations under Montana law?
• What fees and taxes are applicable?
• What are the regulatory requirements?

TYPES OF CAPTIVES AND CAPITAL & SURPLUS

A captive insurance company may not be issued a license unless it possesses and maintains unimpaired paid-in capital and surplus of:

a) pure captive insurance company: $250,000.
b) industrial insured captive insurance company or RRG: $500,000.
c) association captive insurance company: $500,000.
d) special purpose captive: Amount determined by the Commissioner based on a business plan.
e) protected cell captive: $500,000 (or $250,000 if less than 11 cells & homogenous risk).
f) special purpose series LLC captive: $50,000 in the core and not less than a 4-to-1 premiums to surplus ratio in each series business unit.
g) reinsurance captive: Half the capital requirement for the same type of direct-writing captive.

The Commissioner may require additional capital and surplus based on the type, volume, and nature of the insurance business transacted.

Capital and surplus may be in the form of cash or an irrevocable letter of credit issued by a bank chartered by the state of Montana, or a bank chartered by another state if approved by the Commissioner.

A captive insurance company may be formed as a corporation, LLC, reciprocal, Series LLC/SBU, or a protected cell formed as an LLC or corporation. The officers, directors, and controlling beneficial owner(s) of the captive must provide a biographical affidavit that shows the character and reputation of the individuals controlling the captive. The controlling beneficial owner(s) of the captive must provide a signed financial statement of the owner(s) as well as of the insured entity(ies).

Montana domiciled captive insurance companies are required to also have a Montana Resident Director/Manager/Subscriber Committee Member depending on the captive type or form.

INVESTMENT LIMITATIONS

For pure captives, Montana law does not have any restrictions on allowable investments, except that the Commissioner may prohibit or limit investments that threaten the solvency or liquidity of the Company. Captive risk retention groups and association captives shall comply with the investment requirements for traditional domestic property & casualty insurers. Loan-backs are permitted to parent or affiliates subject to prior approval of the Commissioner.

FEES AND TAXES

$200 application fee and the $300 license fee, both due at the time of application. Annual $300 license renewal fee. Premium tax of .4% for direct premiums and .225% for reinsurance premiums, in both cases on the first $20 million in premiums. Tax rates are lower for premiums that exceed $20 million. There is a minimum premium tax of $5,000 and a maximum tax of $100,000. The maximum tax on SBUs is assessed individually on the Series LLC premium tax return. There is no maximum tax on protected cell structures. The premium tax return is due March 1 for all entities.

REGULATORY REQUIREMENTS

Montana’s regulatory requirements are similar to other states. Captives other than RRGs must file an annual financial report on a Commissioner-prescribed form, whereas RRGs and association captives file their annual reports on the NAIC convention statement. Financial statements audited by an independent CPA are due six months after the fiscal year-end. GAAP reporting is acceptable for captives and Risk Retention Groups and approved letters of credit are recognized as assets. Normal reporting deadlines are March 1 for RRGs and April 1 for all other captive types on the annual financial report, and the audited financial reports are due June 1 for RRGs and June 30 for all other captive types. Fiscal year reporting periods can be used instead of calendar year periods when approved by the commissioner.

LOSS RESERVE REPORTING REQUIREMENTS

Montana administrative rules require that a captive’s loss reserves and loss expense reserves be certified by a Fellow of the Casualty Actuarial Society, a member in good standing of the American Academy of Actuaries, or an individual who has demonstrated his competence in loss reserve evaluation to the Commissioner. A captive must select an actuary that meets the requirements of the administrative rule, and the Commissioner must approve the actuary. The statement of actuarial opinion is due with the captive’s audited financial statements.

EXAMINATION REQUIREMENTS

Examinations of captive risk retention groups (RRG) will occur every 5 years unless the Commissioner establishes a quicker examination cycle for a particular RRG. For examinations of all other types of captive insurers, there is no standard periodic examination cycle and an examination will only be conducted if the Commissioner deems it necessary. Costs of examination shall be borne by the captive.

Montana is a great place to do business. And the captive insurance industry has flourished inside the state.Montana-based captives enjoy the benefits of autonomy, tax deductions, and regulatory efficiency. A cooperative and helpful state Insurance Department and knowledgeable elected officials make licensing and operating captive insurance companies within the state an enjoyable business venture. To read, in full, Montana's adopted captive law, click here.

Benefits of Doing Business in Montana

• Montana Captives have the privilege of writing property, casualty, workers' compensation, life, health, and disability coverages
• Montana allows the formation of branch captives (for off-shore captives who wish to maintain an on-shore presence), RRGs, reciprocals, sponsored protected-cell, and association captives for groups
• Montana law and tax policies are competitive with other domiciles
• Montana's captive support infrastructure is mature and established
• Captive Regulators in Montana are responsive and readily available to answer the questions of captive owners.

Tax Information

Premiums for captives are taxed at the rates in the table below, and paid by March 1 based on premiums from prior years.

Two or more captives under common ownership and control will be taxed as though they were a single captive insurance company

• The minimum annual premium tax is $5,000
• Tax rates are accessed on the captive's collected premiums (after deductions)