Report - 2021 01 28 A28327 D225954 Bill Report 5315 Sbr Bfst Ta 21

Summary

A Senate Bill Report on SB 5315, an act relating to captive insurance, as of January 26, 2021, prepared by staff of the Senate Committee on Business, Financial Services & Trade; the sponsors are Senators Mullet and Dozier. The background states Washington State has no statutory framework for captive insurance companies and describes Office of the Insurance Commissioner enforcement, in which 16 captives self-reported. The summary of the proposed substitute sets up registration of eligible captive insurers with the OIC within 120 days, an initial registration fee of $2,500, and a 2 percent premium tax on Washington risks, with captives affiliated with public institutions of higher education exempt. The report closes with a staff summary of supportive public testimony, which states the ten-year look back is assumed to bring in $29 million.

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                            SENATE BILL REPORT
                                  SB 5315

                                      As of January 26, 2021

Title: An act relating to captive insurance.

Brief Description: Concerning captive insurance.

Sponsors: Senators Mullet and Dozier.

Brief History:
     Committee Activity: Business, Financial Services & Trade: 1/26/21.


                                     Brief Summary of Bill
           • Creates a framework for registering eligible captive insurers and
             imposing a premium tax on the risk covered by premiums allocable to
             Washington State.


SENATE COMMITTEE ON BUSINESS, FINANCIAL SERVICES & TRADE

     Staff: Kellee Gunn (786-7429)

     Background: Captive Insurance. A captive insurance company (captive) is one created
     and wholly owned by one or more non-insurance companies to insure the risks of its owner
     or owners. They may be formed to supplement commercial insurance, or to provide
     insurance for risk they are unable to cover with commercial insurance.

     A captive, once established, operates like any commercial insurer in that it issues policies,
     collects premiums, and pays claims. However, captives do not offer insurance to the
     public. There is no federal law regarding captive insurance and so captives are taxed and
     regulated at the state level. The ways in which states have approached regulating and taxing
     captives vary. The state, or country, where the captive is domiciled tends to be where the
     primary oversight of a captive insurer occurs. Federal tax advantages exist for captives.
     Premiums paid to a captive by a parent company qualify as an ordinary business expense



     This analysis was prepared by non-partisan legislative staff for the use of legislative
     members in their deliberations. This analysis is not part of the legislation nor does it
     constitute a statement of legislative intent.

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     and may be deducted from federal income tax.

     There are various types of captive insurance structures. Types of captive insurance
     structures include, but are not limited to, single-owner captives, also known as pure
     captives, group/association captives, rent-a-captives, and agency captives.

     Captive Insurance Companies in Washington State. There is currently no statutory
     framework to allow for the formation of captive insurance companies in Washington State.

     In 2019, the Office of the Insurance Commissioner (OIC) began investigating Washington
     State based companies who formed their own captives and pursuing unpaid premium taxes,
     interest, and penalties. As part of the OIC's investigation, 16 captives self-reported to the
     OIC. Two of the 16 settled prior to the 2020 legislative session.

     Legislation to set up a framework of taxation and regulation was considered in 2020, but did
     not pass. By legislative request, in March 2020, the OIC suspended litigation and
     enforcement action on captives to study and identify the number and type of captives that
     exist, the types of insurance being procured, and the volume of premium being held. The
     report's findings are expected in early 2021.

     Summary of Bill: The bill as referred to committee not considered.

     Summary of Bill (Proposed Substitute): A framework for registering and imposing a
     premium tax on eligible captive insurers is established.

     An eligible captive insurer is defined as an insurance company:
        • partially or wholly owned by a corporation, company, nonprofit, or a public
           institution of higher education;
        • that insures risk of their captive owner, the owner's affiliates, or both;
        • has one or more insureds whose principal place of business is Washington State;
        • has assets that exceed its liabilities by $1 million and can pay its debts when they
           come due, as verified by audited financial statements and prepared by an independent
           certified accountant; and
        • is licensed as a captive insurer by the jurisdiction in which it is domiciled.

     Eligible captive insurers must register with the OIC within 120 days of either the effective
     date of this bill or issuing a policy that covers Washington risks. An initial registration fee
     is $2,500, and a renewal fee may be set by the OIC not to exceed $2,500 per year. An
     eligible captive insurer who fails to register is subject to penalties and fines applicable to
     unlawful unauthorized insurers.

     Registered eligible captive insurers may only provide property and casualty insurance to a
     captive owner or to the captive owner's affiliates and obtain or provide reinsurance for
     ceded or assumed risks insured in this state or elsewhere. They may assume or cede risks to


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     other insurers through reinsurance without regard to those limitations.

     On or before the first day of March, registered eligible captive insurers must pay a 2 percent
     premium tax for insurance directly procured by and provided to its parent or affiliate for
     Washington risks during the preceding calendar year. Eligible captive insurers affiliated
     with public institutions of higher education are not subject to the premium tax. Premium
     taxes are credited to the general fund.

     If not previously paid to the OIC, premium taxes are due from an eligible captive insurer for
     any period after January 1, 2011, but are not subject to penalties and fees. As of July 1,
     2021, penalties, interest, and fees may be imposed on registered eligible captive insurers.
     Penalties and fees are credited to the general fund.

     Washington risks are defined as the share of risk covered by premiums allocable to this
     state, based on where underlying risks are located or where the losses or injuries giving rise
     to covered claims arise. Whether paid directly or by reimbursement, the timing or nature of
     a captive insurer's payment shall not determine Washington risks. Methodology to
     determine Washington risks by eligible captive insurers must be shared with the OIC.

     Appropriation: None.

     Fiscal Note: Available.

     Creates Committee/Commission/Task Force that includes Legislative members: No.

     Effective Date: The bill contains an emergency clause and takes effect immediately.

     Staff Summary of Public Testimony On Proposed Substitute: PRO: There was a lot of
     good faith negotiation that occurred this interim to get this bill to where it is.

     The Washington Insurance Code does not recognize or authorize captive insurance in this
     state. Because of this, having a captive insurance company is an unlawful activity subject
     to taxes, fees, and penalties. In 2018 and 2019, the OIC began enforcement actions on
     unauthorized captive insurance. This interim, enforcement action was halted and Milliman
     was hired to conduct a survey on captive insurance while OIC and other stakeholders began
     work on this legislation. This new framework provides regulatory authority over captive
     insurance and ensures there are important consumer protections. This bill is good for
     Washington. The ten-year look back is assumed to bring in $29 million to the general
     fund. Going forward, the revenue is dependent on how many captives register. A little
     more than $2.5 million per year is anticipated.

     Captive insurance is akin to self-insurance. This bill allows corporations to properly reserve
     for future losses. Captives are used when commercial or surplus lines insurance are
     unavailable or unaffordable. This is good for customers, shareholders, companies, and


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     employees as it ensures safe and reliable insurance. Captives are voluntary. Businesses can
     reserve those losses on their balance sheet. This bill authorizes the use of captives and
     allows for appropriate oversight and taxation. After passage of this bill, the revenue
     assumptions may increase as companies reinstate their captive.

     The good standing requirement for eligible captive insurers should be defined. Each
     domicile should certify to the OIC that the captive is in good standing. In the mid-1970s,
     the University of Washington (UW) was provided the ability to self-insure through any
     combination of arrangements. In 2002, the UW Board of Regents approved the use of a
     captive, Portage Bay, to cover certain risks. This self-insurance program will be allowed to
     proceed with this bill and provide the OIC transparency. For True Blue, captives are not
     optional. No one likes new tax, but this is fair and equitable and based on Washington
     activity. With this compromise as written, True Blue can focus on jobs which will be
     important as we move out of this recession.

     The Department of Revenue has found some ambiguous language which could be clarified.
     The committee should clarify language regarding the B&O tax reduction on premiums
     received. This would help the department with collections and consumers who pay this tax.

     Persons Testifying: PRO: Senator Mark Mullet, Prime Sponsor; Rob Mitchell, K&L
     Gates; Denny Eliason, Alliances Northwest; Steven Beeghly, Kreger Beeghly, PLLC;
     Candice Myrum, Office of the Insurance Commissioner; Ellen Range, Office of the
     Insurance Commissioner; Joe Dacca, University of Washington; Michael Bailey,
     Department of Revenue; Garrett Ferencz, TrueBlue, Inc..

     Persons Signed In To Testify But Not Testifying: No one.




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