Going Their Own Way
Led by the tribe that owns Foxwoods Resort Casino, others in Indian Country consider the captive alternative.
A Native American tribe domiciling and regulating its own captive insurance company isn't a new proposition for the Mashantucket Pequot Tribal Nation.
Five years ago, the tribe--owner of the Foxwoods Resort Casino in Ledyard, Conn.--moved its property insurance portfolio into the Mashantucket Insurance Service Co., a captive domiciled on tribal land in southeastern Connecticut.
Chief risk management officer Cynthia Sebastian-Welch said the tribe has shaved 7% to 10% annually from premium costs since making the move.
Now the tribe is readying plans to offer space within that captive to other tribal nations.
"That was always our intent and that's something that we have on the table for 2010," Sebastian-Welch said. "We've had calls from tribal nations about it."
The move is part of a larger ideological shift within Indian Country, as two decades of tribal gaming revenues continue to shape and fortify the business acumen of Native American tribes. Native gaming revenues eclipsed $26 billion in 2008, according to the National Indian Gaming Association.
The Mashantucket Pequot Tribal Nation has been a leader in this segment and raised in excess of $1 billion in private financing, according to the tribe's Web site. The tribe also has completed $1.5 billion in large and small projects through its development arm, the Foxwoods Development Co.
A growing appreciation for risk management practices within Indian Country has some considering whether a captive approach can not only yield savings on insurance, but have a role in the self-sustaining efforts sovereign tribes use to bolster their communities, culture and heritage.
Gabe Galanda, a Seattle-based attorney who specializes in tribal representation, thinks a larger discussion has just begun. He said tribes face a learning curve with respect to insurance markets, like they previously had in understanding the capital and securities markets.
Galanda maintains that tribes purchasing insurance through private carriers are indirectly subjected to state taxes that get priced into premiums. He also said tribes stand to jeopardize their sovereignty by purchasing insurance through private carriers--even more so if legal defense rights aren't properly addressed within insurance contracts.
"I think what we're going to see is increased attention to tribal insurance and risk management innovation like never before, be it property/casualty, general liability or more innovative insurance opportunities like captive self-insurance," Galanda said. "I think this is just a natural progression of things in Indian Country."
Right to Self-Govern
Sebastian-Welch, a member of the Mashantucket Pequot Tribal Nation, said that in her experience not many private carriers understand the importance of manuscripting coverage as it pertains to sovereign immunity, jurisdictional issues or even a tribe's court system.
"When we're placing policies through the captive, you don't get the basic boilerplate," Sebastian-Welch said. "You're the lead. You know what the risks are."
She remembered a broker once charging her tribe a surplus lines tax for property located on tribal land. She refused to pay and a dispute ensued. The Internal Revenue Service sided with the tribe.
"When we're writing these policies, we had to get insurance companies to understand that you're doing business in another country," she said.
The tribal captive's governing law is modeled directly on Vermont state law, which is the country's leading captive domicile state. International Risk Management Group, an Aon company, manages the Mashantucket Pequots' captive and provides an insurance commissioner. That captive handles property coverage for tribal businesses such as Foxwoods Casino, MGM Grand at Foxwoods, the tribe's emergency responders such as police and fire, its post office and a pharmacy.
Sebastian-Welch said a key step for the captive involves not only making segregated cells available to interested tribes, but providing risk management services, advising on loss-control and safety issues along with a third-party administrator for claims.
"My thought is to assist the tribes to the point we're at, to assist them along," she said.
She added that a captive may not be the best alternative for every tribe, and it's a sentiment shared within the broker space.
The Self-Insurance Question
Tribal First is a division of Alliant Specialty Insurance Services and has focused on Indian Country coverage since 1993. Sean McConlogue, president of Tribal First, said there are upsides to using self-insurance, such as more control over coverage and claims, as well as insulating against fluctuations in market price.
McConlogue said tribes larger than the Mashantucket Pequots have chosen not to form captives when considering the self-insurance question. The tax advantages of deducting premiums paid into the captive don't apply, given a tribe's tax-exempt status.
Another advantage of sovereignty is that tribes can manuscript exposure by crafting ordinances that define tort, as opposed to manuscripting a policy to define coverage.
"The policy is in response to the claims, the ordinance is the claim itself, how it arises, under what circumstances and up to what amount," McConlogue said.
McConlogue said captives can become overly complicated for tribes, requiring capitalization, formation documents, actuarial analyses and attorneys. "There's a lot of involvement in the creation of a captive, but it doesn't deliver any benefit that self-insurance doesn't already deliver to the insured," McConlogue said.
But a self-governance structure can enhance a tribe's appeal to reinsurers, helping to formalize a detailed portrait of a tribe's financial outlook.
Jason Flaxbeard, senior managing director for Atlanta-based broker Beecher Carlson, believes strategic and economic perspectives will be the key drivers of growth within a tribal captive market, outweighing any sovereignty issue.
Beecher Carlson worked with the Mashantucket Pequots to activate the captive back in 2004. Last year the broker formed Tribal Nations Insurance Service and hired Pat Jewell, who spent 15 years working on risk-related issues for the tribe. The moves have laid the groundwork for a market play, though Jewell characterized the tribal captive market as being still in its infancy.
"We're starting to field a lot of questions from tribes now, asking how this would work," Flaxbeard said. "And it may not work for them, but the questions are starting to arise. They want to be better educated, they want to understand their own program and they want to see if they're buying the right amount of insurance."
Another benefit from a captive may involve managing the risks for off-reservation business holdings or enterprises. Jewell said tribes often decide to form a separate entity or limited liability corporation under state law. Any subsequent exposures could be run through the captive entity, provided that it meets the specified regulatory requirements where the business is operating.
Filling a Void
The mostly widely used risk-sharing program in Indian Country evolved from necessity 23 years ago. Amerind Risk Management Corp., domiciled with the Pueblo of Santa Ana tribe, fulfilled an insurance need that tribal housing authorities faced.
Kent Paul, Amerind's chief executive, said the nonprofit formed in 1986 as an alternative risk financing mechanism and used a pooling concept.
Amerind's risk-sharing plan counts 204 tribes, which through partnerships administer the plans for more than 450 tribes. Paul said that number includes coverage for 55,000 dwellings and other structures totaling more than $7.5 billion of coverage on reservations. Fire protection throughout Indian Country tends to be limited, due in part to scarce water supplies and firefighting equipment. There is also exposure due to Tornado Alley, an area that includes North and South Dakota, Oklahoma and Nebraska.
"The for-profit insurance industry doesn't look at Indian Country with profit in mind," Paul said. "We exist because the traditional marketplace hasn't chosen to provide us with affordable or sustainable insurance protection."
Amerind has evolved from operating one risk-sharing plan to operating four that serve the various insurance needs within Indian Country. To secure access to reinsurance, the corporation domiciled a reinsurance captive in the Cayman Islands in 2002. As reinsurance became more affordable at lower retentions, Amerind chose to close its offshore reinsurance captive and created its own insurance regulation system that is modeled from several segregated-cell captive laws.
Amerind finished 2008 with total assets of $61.9 million, down 9.2% from a year earlier. The corporation finished the year with net assets of $9.4 million, just shy of the $10 million benchmark that the Amerind board has targeted informally.
The bulk of the tribe's book of business is run through its Indian Housing Block Grant program, which is designed to protect the financial interests that tribes have in property financed through the U.S. Department of Housing and Urban Development.
Amerind also operates a program that covers renters, or homeowners where no federal funding is involved. A third program involves tribes with lending programs, and a final aspect covers workers' compensation.
"We can only do our business within the sovereignty and the authority of the tribes that participate in the programs," Paul said.
Paul sees two insurance alternatives for tribes moving forward in the absence of overriding federal legislation. He said the tribes can work among themselves to create an insurance industry and establish reciprocal agreements between tribes, or they can self-insure and even participate in captives.
He said Amerind anticipates moving its captive onshore, possibly to the District of Columbia, when the timing is right. "We never paid a claim out of our captive, and everybody in the marketplace, primarily Lloyd's and Munich Re America, indicated they were comfortable with our pooling program and management and implied that the reinsurance captive was not really necessary to support reinsurance arrangements," Paul said.
Three tribes now sponsor its federal corporation: the Pueblo of Santa Ana; the Confederate Tribes of Salish & Kootenai; and the Red Lakes Band of Chippewa Indians, he said. "Our sovereignty status enabled Amerind to adopt operating regulations and this led to the creation of the cell regulation, which separates the assets and liabilities of each risk-sharing plan we operate."
Paul said an independent six-member commission of professionals provides oversight and feedback to Amerind's board of directors regarding compliance.
He sees a potential hurdle for tribes setting up their own captive to benefit other tribes and their business enterprises.
"As independent sovereigns, tribes do not often pool financial resources or share privileged information," Paul said. "It's often difficult to get tribes to work together and this may be a stumbling block in creating inter-tribal insurance or captive agreements."
By Al Slavin, senior associate editor, Best's Review
