Extras on Excise: Texas Captive Insurance Companies Await Changes to Insurance Law

Captive insurance companies in Texas may soon be able to participate in risk pooling arrangements and take credit for reinsurance risk under legislation recently passed by the state legislature. S.B. 667 received unanimous support from Texas legislators and now awaits Gov. Greg Abbott's (R) signature. Once signed, the bill would become effective immediately.

The amendments to Texas’ captive insurance laws would “expand the capacity to domicile single parent captives to a greater portion of Texas business and industry,” according to a press release from the Texas Captive Insurance Association (TxCIA) available at Captive.com

The bill, S.B. 667 would authorize Texas-domiciled captives to accept or cede risks, or take credit for reserves on risks ceded to, a captive reinsurance pool or to an affiliated captive insurance company. In order to participate in a pool, the captive may have to provide the Texas Department of Insurance (TDI) with evidence that the reinsurance pool is composed only of other captive insurance companies and that the pool would be able to meet its financial obligations. The TDI would also have to approve a captive's participation in the pool.

Additionally, the bill would authorize Texas captives to issue dividends or distributions to its equity interest holders, in addition to policyholders.

S.B. 667 is the first piece of legislation to amend Texas's captive insurance laws since they were enacted in June 2013.

Prior to 2013, Texas businesses that wanted to utilize captive insurance had to form a captive in a location other than Texas, and those businesses were subject to a 4.85 percent tax on gross premiums, called a self-procurement tax, paid to the out-of-state captive.

After passage of Texas's captive-enabling legislation, S.B. 734, in 2013, a company can now form a captive in-state, or re-domicile an existing captive to Texas, and the captive is subject to a 0.5 percent tax on its taxable premium receipts for the calendar year instead of the 4.85 percent self-procurement tax. However, a company that chooses to continue using an out-of-state captive remains subject to the self-procurement tax.

The TxCIA plans to pursue other changes to the state’s captive laws. Issues that may be addressed include credit for reinsurance for risks ceded to non-admitted reinsurers, allowing the TDI to incorporate captives instead of the Texas Secretary of State, and authorization for reciprocal structures for captives within the same economic family, as well as modifications to investment provisions in Texas’ captive laws. However, changes will have to wait until the state legislature reconvenes in 2017 (the legislature meets every two years). 

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Will this legislation make Texas a more competitive captive domicile? 

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