Arizona has made it easier for dealers to set up their own captive insurance companies in the Grand Canyon State, instead of taking them offshore.
To avoid domestic regulations, some dealers have established offshore corporations to handle credit life insurance and extended service plan business.
In legislation that took effect in August, Arizona lawmakers dropped many regulations that applied to dealer captives. That made it more attractive to establish a domestic captive.
'It eliminates the rigmarole you have to do to set these companies up,' said Lloyd Gearhart, president of Lyndon American Inc., a Riverwoods, Ill., insurance company that helps set up dealer captives and underwrites these programs.
The financial, record-keeping and state audit requirements have been reduced or eliminated under the revised Arizona statutes, Gearhart explained.
Dealers should be aware that the Internal Revenue Service has scrutinized U.S. companies to see whether they are using offshore affiliates to evade taxes, said Dave Robertson, executive director of the Association of Finance and Insurance Professionals.
Dealer captives, known as reinsurance companies, work with a conventional insurance company. The insurance carrier writes policies and issues a certificate of insurance for the dealer-backed program.
The premiums go to the dealer's reinsurance company, and claims are paid out of the reinsurance company's funds.
As long as the program is well-run and risks are kept to a minimum, the dealer stands to make more money since the dealer shares in the underwriting profit - the premiums that are not used to pay claims - instead of just collecting a commission on the sale of the credit insurance or extended service plan to a third party.
Gearhart said that dealer captives should not have to face stiff regulation because the insurers they work with already meet state requirements. He said the insurance carriers have a vested interest in seeing that dealer captives are well-funded.