ARTICLES & NEWS
BY J.D. COLBERT
WHY YOUR TRIBE SHOULD FORM A CAPTIVE INSURANCE COMPANY
Captive insurance companies that are owned, controlled and managed by Indian tribes are a phenomenon that appears poised to sweep across Indian Country in the next few years. Many Indian tribes are discovering what thousands of private companies, large and small, have known for years: that a captive insurance company is a great way to turn an expense into a profit center. And the ability to custom write insurance policies to better fit the tribe.
Captive insurance companies are simply an insurance company that is wholly-owned by its parent company. In this case, the tribe. A captive insurance company is authorized to write insurance policies only to its parent or its affiliates. Unlike an admitted insurance carrier, captive insurance companies cannot write and sell policies to the general public. The term “captive’ is used to describe such insurance companies due to it having a captive market between its parent and its affiliates.
Thousands of captive insurance companies have been licensed and have operative successfully in the U.S. since 1962. No tribe, as of this writing, has moved forward with forming and owning a captive insurance company. However, there are many signs that indicate that is about to change in a big way. One pressing reason is that tribes have grown in size and complexity to a point where insurance provided by third-party insurance carriers do not provide adequate coverages nor
are premiums competitive with those of a captive.
Hence enter the notion of a tribally-owned captive. These companies will afford Indian tribal governments to realize significant improvement in their overall risk management efforts. The tribe effectively pays insurance premiums to itself. In addition, the tribal insurance captive makes its own decision as to what coverages and policies it will provide to its parent company and affiliates. Another compelling reason that tribes will move to captives in the coming years is that the tribe has much greater control over the insurance company’s administration, overhead and management.
Finally, tribes, as sovereigns, can form their own domicile and engage in self-regulation of the captive in much the same fashion as tribes do in gaming. Tribes can form their own regulatory body, the Office of the Tribal Insurance Commissioner, to license and regulate its captive. In so doing, tribes can further enhance their sovereignty.
Look for the notion of captive insurance companies to soon “captivate” Indian Country.
BY J.D. COLBERT
ANNOUNCING THE CAPTIVE INSURANCE ASSOCIATION FOR NATIVE NATIONS
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It is with great pleasure that I announce the recent formation of the Captive Insurance Association of Native Nations, or “CIANN” for short.
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CIANN has been formed for the purpose of raising awareness across Indian Country of the many benefits to tribes of forming and owning a captive insurance company. CIANN consults with tribes and conducts feasibility studies to ascertain the viability of a given captive as well as consulting with tribes in forming and operating a captive.
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CIANN also advises tribes in the formation of their own a domicile, an independent regulatory body that regulates their captive. Such a tribal domicile is very similar to tribal gaming commissions in that both are self-regulation and enhance tribal sovereignty.
A captive is an insurance company created and wholly-owned by one or more non-insurance companies to insure the risks of its owner(s). Captives are a form of self-insurance whereby the insurer (viz. the captive) is wholly owned by the insured. Captives are typically formed to meet the risk management needs of their owner(s). Captives are formed to cover a wide range of risks: practically every risk underwritten by a commercial insurance company can be provided by a captive.
Why pay premiums to a third party insurance company when you can pay premiums to your captive?
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Captives are licensed by many governmental jurisdictions. The captive’s primary jurisdiction is known as its domicile. Virtually every state in the U.S. has a regulatory body that will license captives. So too do many offshore jurisdictions such as Bermuda, The Cayman Islands and the Isle of Mann to name a few.
To my knowledge only two tribes have formed captives and their associated tribal domicile. Those are the Mashantucket Pequot and the Delaware Tribe of Indians. Thus these tribes have set legal precedent for the concept.
Kenny Tolbert (Choctaw) is serving as CEO of CIANN. Kenny brings with him a wealth of business experience and success. He has also worked with many tribes over the years. I am serving as Chairman of the Board of Advisers.
I strongly urge you to contact myself or Kenny to discuss the many possible benefits that will accrue to your tribe by virtue of forming a captive. You can find out more by visiting the website at www.ciann.org.
The time is now to form a captive!
Galanda and Robenalt: Holding
big insurance captive:
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Originally printed at http://www.indiancountrytoday.com/opinion/44585362.html
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Let’s pause to consider a few lessons for Indian country from the global economic crisis.
First, Wall Street cannot be trusted to manage its own, let alone another’s, cash and risk. Private insurers like AIG that purport to protect tribes against financial loss, and imminent threats to Indian sovereignty, cannot be trusted with that responsibility. Just last month, those insured by the First Nations program were notified to find new insurance because it was without sufficient liquidity to continue operations.
Second, although the U.S. recently allocated $3 billion for tribal economic stimulus, it channeled those funds through broken BIA and state block grant delivery systems, which will delay its infusion into reservation economies.
For too long, tribes have transferred their wealth to outside insurers that approach Indian country as a one-size-fits-all corporate conglomerate.
Third, many tribes stand ready, willing and able to manage their own finances and risk. Notwithstanding, most tribes continue to rely on outsiders to do so, like private insurers that tribes pay $250 to $300 million in insurance premiums annually for financial “protection.” That quarter-billion dollars leaves the reservation every year, never to return.
With all of that in perspective, what if tribes could harness and reinvest that money in premiums they expend annually? Cease paying tens of millions of dollars to private insurers for states taxes? Reassert control over their financial and risk management? More directly defend against attacks on Indian sovereignty? And, almost immediately create new wealth and jobs back home?
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Indian country stands ready to do all of the above. Yes we can, and should.
The time is now for many tribes to enter the self-insurance business. More specifically, certain tribes should create captive insurance companies, which are wholly-owned by its “parent company” and can write policies to its parent and its affiliates. In other words, the parent entity creates an insurance company to insure itself.
In the non-Indian world, captive insurance companies are typically set up as “off-shore” subsidiaries for domestic companies wishing to self insure and thereby save millions of dollars in premiums they would otherwise pay private insurers annually. Off-shore governments such as Bermuda and the Cayman Islands, which, like tribes, enjoy sovereign rights, have attracted captive insurance business by lowering capitalization requirements and tax rates.
“On-shore” tribal governments can likewise create captive insurance companies, which can, in turn, insure tribes and tribal affiliates against loss and litigation. A tribal captive can write policies for a tribe’s casino, businesses, administration, clinic and housing authority, as well as all of its related property, vehicles and personnel. It can offer the tribe’s affiliates (and members) all of the insurance being purchased from outside insurers – property, home, auto, casualty, liability, life, health and workers’ compensation.
Consider the sovereign and economic advantages a tribe would enjoy by operating a captive insurance company:
Many tribes stand ready, willing and able to manage their own finances and risk.
Tribal Savings. While tribes receive an insurance “product” in return for the $250 to $300 million they pay annually, the premium costs for some tribes are grossly disproportionate to their actual losses (especially for 638 tribes that enjoy Federal Tort Claims Act defense and indemnity). Under a captive insurance arrangement, a tribe could more closely align its premium-to-loss ratio, capture the difference, and reinvest in the tribe. The tribal captive would still need to buy reinsurance – insurance provided by private insurers for other insurers’ risks of catastrophic loss. Still, a tribe’s reinsurance premiums could be significantly less (perhaps by as much as 90 percent) than its current premiums. Some tribes may want to self-reinsure some risk, but still contract with private carriers to insure other risk.
New Jobs. Forming a tribal captive would generate significant employment for reservation Indians, as executive managers, salespersons, claims administrators, etc. The Indians filling these jobs would require insurance industry education and training, which would provide them far more career upside and self-determination than card dealing. While a tribal captive wouldn’t require a significant influx of personnel for its start up, the new professional opportunities on the reservation would be profound.
Anti-State Taxation. Federal law clearly says that states cannot tax Indians in Indian country. Because the vast majority of a tribe’s insured activity is by Indians, in Indian country, tribal insurance should not be state taxed. Private insurers pay state excise and other taxes on the insurance they sell and, in turn, pass on those “hidden” state taxes to tribes through premiums. One industry expert believes that state taxes constitute as much as 25 percent of the premiums paid by tribes to outside insurers. In Washington state, some tribes pay around $1 million annually for property and casualty insurance, meaning nearly $250,000 in state taxes per year. Creating tribal captive insurers will help stop one of the largest and most egregious forms of state taxation – revenue sharing – in Indian country.
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A tribal captive can write policies for a tribe’s casino, businesses, administration, clinic and housing authority, as well as all of its related property, vehicles and personnel.
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Sovereignty Defense. Most private insurance policies waive tribal sovereign rights, in multiple ways: Insurers retain the right to assign attorneys to defend the tribe, namely non-tribal “discount” lawyers who do not understand Indian jurisdiction and immunity issues and the significant legal, political and social implications of litigating those issues. The policies may allow an insurer to deny coverage to the tribal insured if it decides against asserting immunity for public policy reasons. Arbitration language may divest a tribe’s court of jurisdiction, and waive tribal immunity from countersuit against its insurer. Through tribal captives, tribes can draft its own policies and retain control over its sovereignty.
Tailor-made Policies. Captive insurance would otherwise allow tribes to provide coverage that is consistent with core Indian values. Tribes could ensure consistent claims management at a low cost by creating a single all-risk policy, with clearly and narrowly defined exclusions that fit everyday reservation life and business.
Incorporation. To maximize sovereignty protection and tax immunity, a tribe should probably charter any captive insurance company under tribal law or Section 17 of the federal Indian Reorganization Act – but not state law. Favorable tribal business forms include the corporation or LLC. If the tribe requires a business partner to begin a captive company, a carefully created joint venture partnership arrangement might be appropriate.
The time is ripe for tribal captive insurance. For too long, tribes have transferred their wealth to outside insurers that approach Indian country as a one-size-fits-all corporate conglomerate. Tribal captive insurance companies will reduce costly premiums, increase reinvestment in reservation economies, and enhance tribal sovereignty protection.
Gabriel S. Galanda and James L. Robenalt are lawyers in Seattle with Williams Kastner’s Tribal Practice Group. Galanda, a firm partner, is enrolled with the Round Valley Indian Tribes.
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