Captive Domiciles Continue To Fine-Tune Their Captive Statutes

Editor's Note: This article has been updated from its original version and now reflects Kansas legislation that was signed into law on April 12, 2018. This article will be updated periodically to reflect new activity. Most recently, updates were made on May 22 to the Delaware and South Carolina article sections and on July 24 and November 9 to the Delaware section. The North Carolina section was added August 6, 2018, and the Illinois section reflects changes as of August 26, 2018.

Legislators in states with captive insurance company laws are continuing their drive to modify their states' captive insurance company statutes to stay competitive with other domiciles.

North Carolina

In North Carolina, lawmakers approved in June—overriding vetoes by Governor Roy Cooper—broader measures that include several captive insurance company-related provisions.

Tucked into one of those bills, H.B. 382, is a provision specifying that any change a captive makes to its executive officers or directors will be automatically approved by the state insurance commissioner unless it is disapproved within 30 days after completion of the commissioner's review of the individuals' biographical affidavits.

The other measure, S.B. 99, includes provisions making it clear that captives licensed in other states are exempt from North Carolina taxes, such as premium taxes, even if they do business in North Carolina.

Vermont

Lawmakers in Vermont, whose 566 captives at year-end 2017 made it the largest US captive domicile, gave final approval this month to legislation, H. 694, that makes several changes to the state's 1981 captive law.

Vermont captives now generally will have until March 15 to pay their annual state premium taxes, compared to the end of February under prior law.

That change will not only give captives a little more time to pay the premium tax, but it will also allow them to coordinate their premium tax payments with the March 15 deadline for filing their annual financial reports to state regulators.

"It makes life a little easier for captives," said David Provost, Vermont's deputy commissioner of captive insurance in Montpelier, Vermont.

The measure also makes clear that reinsurance premium taxes do not apply on loss portfolio transfers to a captive of risk previously retained by the parent in a self-insurance arrangement.

Finally, the new law also makes a reporting change involving risk retention groups (RRGs).

Under Vermont's captive statute, a majority of an RRG's board of directors are required to be independent. The board has to make an annual determination on whether a director is independent, as well as maintain records of those determinations and, if requested by state regulators, provide a copy of determinations to Vermont's insurance commissioner. The new law will require the determinations to be automatically provided to the commissioner.

Delaware

In Delaware, whose 391 captives at the end of 2017 made it the third-largest domestic domicile, lawmakers have approved and Governor John Carney has signed two measures earlier approved by state legislators amending the state's captive law.

One of those measures, HB 289, which Governor Carney signed May 24, will give captives 6 more weeks—until April 15—to file annual statements and pay premium taxes.

"This is something that will be very welcomed by the captive industry. They will not be so rushed. We are trying to be responsive" to their needs, said Steve Kinion, director of Delaware's Bureau of Captive and Financial Insurance Products in Dover.

Under the other measure, HB 334, which received final approval by lawmakers on June 20 and was signed October 16 by Governor Carney, the state insurance commissioner can issue conditional certificates of authority to enable new captives to operate while their applications are being reviewed by regulators.

To gain conditional authority, captives would have to meet Delaware's minimum capital and surplus requirements and pay a $100 fee.

However, the insurance commissioner could revoke a captive's conditional certificate of authority if regulators find that the captive failed to meet Delaware's captive licensing requirements.

Hawaii

In Hawaii, another large domestic domicile with 230 captives in 2017, up from 208 the year before, two measures, HB 2347 and SB 2774, are pending that would give the state insurance commissioner additional authority to supervise or liquidate a captive rather than simply suspending or revoking its insurance license.

South Carolina

In another major domicile, South Carolina, which reported 172 captives at the end of last year, legislation, H 4675, earlier approved by the state House and Senate and signed into law on May 18 by Governor Henry McMaster, will allow captives, with the approval of state regulators, to make loans to their parent companies and affiliates, as well as allow regulators to reduce capitalization requirements for inactive captives.

"This is a good cleanup bill," Bryan Hudson, president of the South Carolina Captive Insurance Association and a shareholder with accounting and consulting firm Bauknight Pietras & Stormer PC in Columbia, South Carolina, said earlier.

And lawmakers in smaller domiciles, such as Kansas and Illinois, which together have only a handful of captives, also are taking action to amend their captive statutes.

Kansas

In Kansas, Governor Jeff Colyer on April 12, 2018, signed SB 410 into law, raising the minimum capital and surplus requirements for single-parent captives to $200,000, up from the previous $100,000 requirement. The measure also allows captives to seek approval from the state insurance commissioner to insure risks of unaffiliated businesses—up to 5 percent of total written premiums.

Illinois

In Illinois, legislation, S.B. 1737, passed by the state Senate and the state House, was vetoed by Governor Bruce Rauner on August 26, 2018. In his veto message, Governor Rauner said that he supported the captive provisions in the legislation. Updating Illinois's captive law would make Illinois "more attractive to companies that use this insurance option," Governor Rauner said.

The measure, though, is not dead yet. The Illinois Assembly will meet again for several days in mid-November, during which lawmakers will have the option to try to override gubernatorial vetoes.

Among other things, the bill would set new minimum captive capital and surplus requirements with a $250,000 minimum for pure captives—those insuring the risks of parents and affiliated companies; $500,000 for industrial insured captives; and $750,000 for association captives.

By contrast, under current Illinois law, captives generally have to maintain at least $1 million in capital.

The measure also would give Illinois-licensed captives the ability—after first securing the approval of the director of the Illinois Department of Insurance—to provide loans to affiliated companies as well as pay dividends to equity holders.

The bill also includes a provision that would reduce the industrial insured (self-procured insurance) premium tax from 3.5 percent to 0.5 percent of gross premium. The reduction is supported by a number of large Illinois businesses with large captive insurance companies based outside of the state.

Observers say that the legislation, if enacted, would significantly boost Illinois's appeal as a captive domicile. "The bill, if enacted, will be a positive step forward and will certainly warrant consideration by Illinois-based enterprises that have previously had no real option but to locate their captives elsewhere," according to an analysis by Tom Jones, Lisa M. Kaderabek, and Mary Kay McCalla Martire, attorneys with the law firm McDermott, Will & Emery L.L.P. in Chicago.