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Texas Passes Legislation Authorizing Formation of Captives

On June 14, 2013, Texas passed bill 734 which, for the first time, authorized the formation of captive insurance companies in the state.

09/19/2013 · 3 minute read

On June 14, 2013, Texas passed bill 734 which, for the first time, authorized the formation of captive insurance companies in the state. This legislation will provide a domestic option for Texas companies, and is anticipated to promote business development and job growth. According to the bill, the captives’ affiliates would be required to have "significant operations" in Texas in order for the captive to be licensed. The measure, which took on effect September 1, 2013, provides that licensed Texas captives may insure the operational risks of the parent company and its affiliates, as well as the risks of controlled unaffiliated businesses, in addition to employee benefits. However, a captive authorized in Texas may not insure the following risks:

  1. Life insurance.
  2. Annuities.
  3. Accident and health insurance for the company’s parent and affiliates not subject to the federal Employee Retirement Income Security Act (ERISA) of 1974.
  4. Title insurance.
  5. Mortgage guaranty insurance.
  6. Financial guaranty insurance.
  7. Residential property insurance.
  8. Personal automobile insurance.
  9. Workers’ compensation and auto liability insurance on a direct basis is not permitted (however, the captive may issue a contractual reimbursement policy to an affiliated certified self-insurer or to an affiliate for workers’ compensation and auto liability risk).

It is expected many Texas-based parent companies will strongly consider forming their captives in Texas, or moving their captives to Texas to take advantage of the following:

State Premium Tax Savings:

Insureds whose "home state" (as defined under Texas statute) is deemed to be Texas and who procure coverage through out-of-state captives are currently obligated to pay Texas a 4.85% self-procurement premium tax. Texas imposes this tax on an insured when procuring insurance on a direct basis from a non-licensed/non-authorized insurer in the state. If, going forward, the captive resides in Texas (whereby it is admitted and licensed), a Texas-based insured should no longer owe a self-procurement tax. Under the new captive law, the captive (not the insured) would be liable for premium taxes assessed at a rate of 0.5% on the captive’s total premium receipts (subject to a US$200,000 annual cap and annual minimum of US$7,500).

Competitive Statutory Provisions:

The Texas Department of Insurance recently stated that its goal is to create a flexible regulatory environment, which attempts to mirror the approach of other successful domiciles such as Vermont. This approach will help to ensure captive owners find Texas a favorable locale to operate their captives.

Some of the key items that are evidence of the competitive nature of the new captive law include:

  • The requirement that a captive maintain capital and surplus of at least US$250,000.
  • A competitive premium tax rate of 0.5% subject to a minimum of US$7,500 and annual cap of US$200,000.
  • The ability for an existing out-of-state captive to redomesticate to Texas.
  • The ability for a captive to make loans to its affiliates with the prior approval of the commissioner.
  • Permission to engage an outside captive management firm (not required to reside in the state).
  • A law limiting access of a captive’s confidential information to only certain entities who are acting in an official capacity.

Some additional requirements for captive owners to consider under the new Texas captive statute include:

  • Captive parents must maintain significant operations in the state of Texas, as determined by the commissioner.
  • Captive boards are required to meet at least once a year in the state.
  • Boards of directors or governing bodies must be comprised of three members or more, at least one of which is a Texas resident.
  • The commissioner can conduct an examination to ensure that captives are maintaining unencumbered capital and surplus.Those amounts to be determined by the commissioner.

The commissioner is required to adopt reasonable rules, as necessary, to implement the purposes and provisions of the bill governing the formation and operation of captive insurance companies on, or before, January 1, 2014. The organization or redomestication of a captive insurer will be delayed until this time.

Captive Solutions Newsletter, September 2013