Washington State
House of Representatives
Office of Program Research
BILL
ANALYSIS
Consumer Protection & Business Committee
2SSB 5315
Brief Description: Concerning captive insurance.
Sponsors: Senate Committee on Ways & Means (originally sponsored by Senators Mullet and Dozier).
Brief Summary of Second Substitute Bill
  • Requires eligible captive insurers to register with the Office of the Insurance Commissioner.
  • Imposes insurance premiums tax on the risk covered by captive insurance premiums allocable to Washington.
Hearing Date: 3/22/21
Staff: Serena Dolly (786-7150).
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.  A captive may be formed to supplement commercial insurance or to provide insurance for risk it is unable to cover with commercial insurance.  Once established, a captive operates like any commercial insurer in that it issues policies, collects premiums, and pays claims, but it does not offer insurance to the public. 

 

A captive is not regulated as a traditional insurer, and some states have enacted separate regulatory frameworks for captives.  The primary oversight of a captive occurs where it is domiciled.  Captives enjoy certain tax advantages, and premiums paid to a captive by a parent company qualify as an ordinary business expense and may be deducted from federal income tax.

 

No statutory framework currently exists to allow for the formation of captives in Washington.

 

Insurance Taxation.
All net premiums collected and received by authorized insurers are subject to the state's insurance premiums tax except for title insurers and fraternal benefit societies.  The insurance premiums tax rate is 2 percent, except for ocean marine and foreign trade who pay 0.95 percent.  For property and casualty insurance in which Washington is the insured's home state, the tax is computed upon the entire premium regardless of whether the policy covers risks or exposures that are in this state.  For all other lines of insurance, the tax is computed upon the proportion of the premium that is properly allocable to the risks or exposures located in this state.
Summary of Second Substitute Bill:

A framework for registering and imposing the insurance premiums tax on eligible captives is established.

 

An eligible captive is defined as an insurance company that:

  • is wholly or partially owned by a corporation, company, nonprofit, or public institution of higher education;
  • insures risk of its captive owner, the owner's affiliates, or both;
  • has one or more insureds whose principal place of business is Washington;
  • 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 captives must register with the Office of the Insurance Commissioner (OIC) within 120 days of either the effective date of the act or the issuance of a policy that covers Washington risks.  The initial registration fee is $2,500, and the OIC may set a renewal fee not to exceed $2,500 per year.  Eligible captives who fails to register are subject to penalties and fines applicable to unlawful, unauthorized insurers.

 

Registered captives may only provide property and casualty insurance to a captive owner or to the captive owner's affiliates.  Registered captives also may obtain or provide reinsurance for ceded or assumed risks regardless of location.   

 

On or before the first day of March, registered captives must pay the 2 percent insurance premiums tax for insurance directly procured by and provided to its parent or affiliate for Washington risks during the preceding calendar year.  Registered captives affiliated with public institutions of higher education are not subject to the insurance premiums tax.  Insurance premiums taxes are credited to the General Fund.

 

If not previously paid to the OIC, insurance premiums taxes are due from registered captives for any period after January 1, 2011, but are not subject to penalties and fees.  Beginning July 1, 2021, penalties, interest, and fees may be imposed on registered captives.  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 must not determine Washington risks.  Methodology to determine Washington risks by eligible captive insurers must be shared with the OIC.
Appropriation: None.
Fiscal Note: Available.
Effective Date: The bill contains an emergency clause and takes effect immediately.