83R6625 SCL-F

By: Carona S.B. No. 734

A BILL TO BE ENTITLED

AN ACT

relating to the licensing of captive insurance companies; authorizing fees.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS:

SECTION 1. Subtitle H, Title 6, Insurance Code, is amended by adding Chapter 964 to read as follows:

CHAPTER 964. CAPTIVE INSURANCE COMPANIES

Sec. 964.001. DEFINITIONS. In this chapter:

(1) "Affiliated company" or "affiliate" means an entity in the same corporate holding company system as the captive insurance company, including a parent entity.

(2) "Captive insurance company" means a company that insures the operational risks of the company's affiliates.

(3) "Operational risk" means any potential financial loss of an affiliate, except for a loss arising from an insurance policy issued by the affiliate.

Sec. 964.002. APPLICABILITY OF OTHER LAWS. (a) The following provisions of this code apply to a captive insurance company to the extent the provisions do not conflict with this chapter:

(1) Titles 2 and 3;

(2) Chapter 421, unless the commissioner by order allows a captive insurance company to establish reserves as prescribed by generally accepted accounting principles;

(3) Subtitle C, Title 4; and

(4) Chapter 401.

(b) A captive insurance company formed under this chapter is not subject to Chapter 823, except to the extent that the captive insurance company is part of an insurance holding company system as described by Chapter 823.

(c) A captive insurance company operating under this chapter is subject to the Texas For-Profit Corporation Law, as cited in Section 1.008, Business Organizations Code, and any other provision of the Business Organizations Code that governs for-profit corporations to the extent those laws do not conflict with this chapter.

Sec. 964.003. AUTHORITY TO WRITE BUSINESS. (a) Except as provided by this section, a captive insurance company may write any type of insurance, but may only insure or reinsure the operational risk of the company's affiliates.

(b) A captive insurance company may not issue or reinsure:

(1) life insurance;

(2) annuities;

(3) accident and health insurance;

(4) title insurance;

(5) mortgage guaranty insurance;

(6) financial guaranty insurance;

(7) residential property insurance;

(8) personal automobile insurance; or

(9) workers' compensation insurance.

(c) A captive insurance company may not issue or reinsure a type of insurance, including automobile liability insurance, that is required, under the laws of this state or any political subdivision of this state, as a prerequisite for obtaining a license or permit if the law requires that the liability insurance be issued by an insurer authorized to engage in the business of insurance in this state.

Sec. 964.004. AUTHORITY TO PROVIDE REINSURANCE. (a) A captive insurance company may only reinsure risks as described by this section.

(b) With the commissioner's prior approval, a captive insurance company may provide reinsurance on risks that it has authority to insure directly under Section 964.003.

(c) Not later than the 60th day before the effective date of a proposed reinsurance agreement, the captive insurance company applying to provide reinsurance under Subsection (b) must file with the commissioner the agreement and any other documentation and information necessary for the commissioner to determine that:

(1) the agreement does not violate a law; and

(2) the captive insurance company would be able to continue to operate in a sound manner.

(d) The commissioner by rule may authorize a shorter approval period under Subsection (c).

(e) A captive insurance company may not enter into an agreement filed under Subsection (c) if the commissioner disapproves the proposed agreement during the approval period.

(f) A change to a reinsurance agreement must be filed for prior approval under Subsection (c).

(g) Not later than the 30th day after the date a previously filed reinsurance agreement terminates, the captive insurance company shall give notice of the termination to the commissioner.

(h) A captive insurance company may take credit for reserves on risks or portions of risks ceded to reinsurers that comply with Subtitle F, Title 4.

Sec. 964.005. CERTIFICATE OF AUTHORITY REQUIRED. (a) An entity may not engage in business as a captive insurance company unless it holds a certificate of authority to act as a captive insurance company issued by the department. An insurance company, when permitted by its organizational document, may apply for a certificate of authority under this section.

(b) An entity does not qualify for a certificate of authority under this section unless:

(1) its affiliates have significant operations in this state, as determined by the commissioner;

(2) its board of directors holds at least one meeting each year in this state;

(3) it maintains its principal office and records in this state; and

(4) it complies with Section 804.102.

Sec. 964.006. FORMATION OF CAPTIVE INSURANCE COMPANY. (a) Any number of persons may form a captive insurance company for the purpose of engaging in the business of insurance under this chapter.

(b) To form a captive insurance company, each incorporator must adopt and sign the articles of incorporation of the captive insurance company as provided by this section.

(c) The articles of incorporation of a captive insurance company must include:

(1) the name of the captive insurance company, which may not be the same as, deceptively similar to, or likely to be confused with or mistaken for any other existing business name registered in this state;

(2) the location of the captive insurance company's principal business office;

(3) the type of insurance business in which the captive insurance company proposes to engage;

(4) the number of directors of the captive insurance company;

(5) the number of authorized shares and the par value of the captive insurance company's capital stock;

(6) the amount of the captive insurance company's capital and surplus; and

(7) any other information required by the commissioner as necessary to explain the captive insurance company's objectives, management, and control.

(d) The board of directors of a captive insurance company incorporated in this state must have at least three members, and at least two of the members must be residents of this state.

(e) The articles of incorporation or bylaws of a captive insurance company must authorize a quorum of the board of directors to consist of not fewer than one-third of the fixed number of directors.

Sec. 964.007. CAPITAL AND SURPLUS REQUIREMENTS. (a) The department may not issue a certificate of authority to a captive insurance company unless the company possesses and maintains unencumbered capital and surplus in an amount determined by the commissioner by rule based on the type, volume, and nature of the insurance business transacted.

(b) The amount of capital and surplus determined by the commissioner under Subsection (a) may not be less than $250,000 or greater than $5 million.

(c) The minimum capital and surplus required under Subsection (a) must be in the form of:

(1) United States currency;

(2) an irrevocable letter of credit, in a form approved by the commissioner, naming the commissioner as beneficiary for the security of the captive insurance company's policyholders and issued by a bank approved by the commissioner;

(3) bonds of this state; or

(4) bonds or other evidences of indebtedness of the United States, the principal and interest of which are guaranteed by the United States.

Sec. 964.008. APPLICATION FOR CHARTER AND CERTIFICATE OF AUTHORITY. (a) To obtain a charter and certificate of authority for a captive insurance company, the incorporators must pay to the commissioner an application fee and file with the commissioner an application for the charter and certificate of authority, which must include:

(1) a financial statement certified by two principal officers;

(2) a plan of operation and projections, which must include an actuarial report prepared by a qualified independent actuary;

(3) the captive insurance company's proposed articles of incorporation;

(4) an affidavit by the incorporators or officers of the captive insurance company stating that:

(A) the capital and surplus are the bona fide property of the company; and

(B) the articles of incorporation are true and correct; and

(5) if the application provides for the issuance of shares of stock without par value, a certificate authenticated by the incorporators or officers stating:

(A) the number of shares without par value that are subscribed; and

(B) the actual consideration received by the captive insurance company for those shares.

(b) If the commissioner is not satisfied with the affidavit filed under Subsection (a)(4), the commissioner may require that the incorporators or officers provide at their expense additional evidence as described by Subsection (a) before the commissioner takes action on the application.

(c) The application fee required under this section is $1,500 or a greater amount set by the commissioner by rule as necessary to recover the cost of administering this chapter.

(d) Notwithstanding Subsection (c), for a complete application filed on or before December 30, 2018, the application fee may not exceed $1,500 unless the commissioner by rule has raised the filing fee. This subsection expires January 1, 2019.

Sec. 964.009. EXAMINATION BY COMMISSIONER. (a) After the application and application fee for a charter and certificate of authority under Section 964.008 are filed with the department and the applicant has complied with all legal requirements, the commissioner shall conduct an examination of the applicant to determine whether:

(1) the minimum capital stock and surplus requirements of Section 964.007 are satisfied;

(2) the capital stock and surplus are the bona fide property of the captive insurance company; and

(3) the captive insurance company has fully complied with applicable insurance laws.

(b) The commissioner may appoint a competent and disinterested person to conduct the examination required by this section. The examiner shall file an affidavit of the examiner's findings with the commissioner. The commissioner shall record the affidavit.

Sec. 964.010. ACTION ON APPLICATION. (a) The commissioner shall determine whether:

(1) the proposed capital structure of the applicant meets the requirements of this chapter;

(2) the proposed officers or directors of the applicant have sufficient insurance experience, ability, standing, and good record to make success of the captive insurance company probable;

(3) the applicant is acting in good faith; and

(4) the applicant otherwise satisfies the requirements of this chapter.

(b) In evaluating the application, the commissioner shall consider:

(1) the amount and liquidity of the applicant's assets relative to the risks to be assumed;

(2) the adequacy of the expertise, experience, and character of each individual who will manage the applicant;

(3) the overall soundness of the applicant's plan of operations and the projections contained in that plan;

(4) the adequacy of the loss prevention programs of the applicant's parent;

(5) whether the applicant's affiliates have significant operations located in this state; and

(6) any other factors the commissioner considers relevant to determine whether the proposed captive insurance company will be able to meet its policy obligations.

(c) If the commissioner determines that the applicant has not met the standards set out by Subsection (a), the commissioner shall deny the application in writing, giving the reason for the denial. On the applicant's request, the commissioner shall hold a hearing on a denial. Not later than the 30th day after the date the commissioner receives the applicant's request for a hearing, the commissioner shall set a hearing date.

(d) If the commissioner does not deny the application under Subsection (c), the commissioner shall approve the application and:

(1) issue to the applicant a certificate of authority to engage in business as proposed in the applicant's articles of incorporation or application;

(2) certify and file the approved documents with the department; and

(3) issue certified copies of the charter and certificate of authority to the applicant's incorporators.

(e) A certificate of authority issued to a captive insurance company under this section may not be sold.

Sec. 964.011. ORGANIZATION AND CORPORATE PROCEDURE. A captive insurance company may be incorporated as a stock insurer with its capital divided into shares and held by the stockholders.

Sec. 964.012. ANNUAL REPORT. (a) A captive insurance company licensed under this chapter is not required to file any report, except as provided by this section.

(b) A captive insurance company that holds a certificate of authority to engage in captive insurance business in this state shall file with the commissioner:

(1) on or before March 1 of each year, a statement of the company's financial condition, verified by two of its executive officers and filed in the annual statement format adopted and published each year by the National Association of Insurance Commissioners for the lines of business written by the captive insurance company; and

(2) on or before June 1 of each year, a report of its financial condition at last year-end with an independent certified public accountant's opinion of the company's financial condition.

(c) A captive insurance company may make a written application to the commissioner for filing its annual report required under this section on a fiscal year-end. If an alternative filing date is granted, the captive insurance company shall file:

(1) the annual report not later than the 60th day after the date of the company's fiscal year-end;

(2) the report of its financial condition at last year-end with an independent certified public accountant's opinion of the company's financial condition not later than the 150th day after the date the annual report is due; and

(3) its balance sheet, income statement, and statement of cash flows, verified by two of its executive officers, before March 1 of each year to provide sufficient detail to support the premium tax return.

Sec. 964.013. INVESTMENTS. (a) A captive insurance company is not subject to a restriction on allowable investments, except as provided by this section.

(b) A captive insurance company may make loans to its affiliates with the prior approval of the commissioner. Each loan must be evidenced by a note approved by the commissioner. A captive insurance company may not make a loan of the minimum capital and surplus funds required by this chapter.

(c) The commissioner may prohibit or limit an investment that threatens the solvency or liquidity of a captive insurance company.

Sec. 964.014. AMENDMENTS TO CHARTER OR ARTICLES OF INCORPORATION. A captive insurance company may not amend its charter or articles of incorporation unless the amendment has been filed with and approved by the commissioner.

Sec. 964.015. NOTICE OF DIVIDENDS. A captive insurance company shall notify the commissioner in writing before issuing policyholder dividends.

Sec. 964.016. PROHIBITION ON JOINING OR CONTRIBUTING TO CERTAIN ENTITIES AND FUNDS. A captive insurance company may not join or contribute financially to any plan, pool, association, or guaranty or insolvency fund in this state, and a captive insurance company, its insured, or any affiliate is not entitled to receive any benefit from a plan, pool, association, or guaranty or insolvency fund for claims arising out of the operations of the captive insurance company.

Sec. 964.017. SUSPENSION OR REVOCATION OF LICENSE. The commissioner, after notice and an opportunity for hearing, may revoke or suspend the certificate of authority of a captive insurance company for:

(1) insolvency or impairment of required capital or surplus to policyholders;

(2) failure to submit an annual report, as required by Section 964.012;

(3) failure to comply with the provisions of its own charter or bylaws;

(4) failure to submit to examination as required by Chapter 401;

(5) failure to pay the cost of examination as required by Chapter 401;

(6) failure to pay any tax or fee required by this code;

(7) removal of its principal office or records from this state;

(8) use of practices that render its operation detrimental to the public or its condition unsound; or

(9) failure to otherwise comply with laws of this state.

Sec. 964.018. CONFIDENTIALITY. (a) Any information filed by an applicant or captive insurance company under this chapter, including an application filed under Section 964.008, is confidential and privileged for all purposes, including for purposes of Chapter 552, Government Code, a response to a subpoena, or evidence in a civil action. Except as provided by Subsections (b), (c), and (d), the information may not be disclosed without the prior written consent of the applicant or captive insurance company to which the information pertains.

(b) The commissioner may publish all or any part of the information described by Subsection (a) in the manner that the commissioner considers appropriate if the commissioner, after notice to the applicant or captive insurance company and its affected affiliates and an opportunity for hearing, determines that the interests of the public will be served by the publication of the information.

(c) If the recipient of the information described by Subsection (a) has the legal authority to maintain the confidential or privileged status of the information and verifies that authority in writing, the commissioner or another person may disclose the information to any of the following entities functioning in an official capacity:

(1) a commissioner of insurance or an insurance department of another state;

(2) an authorized law enforcement official;

(3) a district attorney of this state;

(4) the attorney general;

(5) a grand jury;

(6) members of a supervisory college described by Section 823.0145;

(7) the National Association of Insurance Commissioners and its affiliates and subsidiaries; or

(8) another state, federal, or international insurance agency or analogous financial agency if the entity is operating in its official capacity and the applicant, captive insurance company, or corporate system to which the information relates operates in the entity's jurisdiction.

(d) The commissioner shall enter into written agreements with the National Association of Insurance Commissioners that must:

(1) specify procedures and protocols regarding the confidentiality and security of information shared with the National Association of Insurance Commissioners and its affiliates and subsidiaries under this section, including procedures and protocols for sharing by the National Association of Insurance Commissioners with other state, federal, or international regulators;

(2) specify that ownership of information shared with the National Association of Insurance Commissioners and its affiliates and subsidiaries under this section remains with the commissioner, and that use of the information by the National Association of Insurance Commissioners is subject to the direction of the commissioner;

(3) require prompt notice to an applicant or captive insurance company whose confidential information is in the possession of the National Association of Insurance Commissioners under this section that the information is subject to a request or subpoena to the National Association of Insurance Commissioners for disclosure or production; and

(4) require the National Association of Insurance Commissioners and its affiliates and subsidiaries to give consent to intervention by an applicant or captive insurance company in any judicial or administrative action in which the National Association of Insurance Commissioners and its affiliates and subsidiaries may be required to disclose confidential information about the applicant or captive insurance company shared with the National Association of Insurance Commissioners and its affiliates and subsidiaries under this section.

(e) The commissioner may use information described by Subsection (a) in the furtherance of a legal or regulatory action relating to the administration of this code.

Sec. 964.019. PREMIUM AND MAINTENANCE TAXES. (a) A captive insurance company is subject to premium taxes under Subtitle B, Title 3, as applicable to the individual lines of business written by the captive insurance company, provided that the premium tax rate imposed on all business written by the captive insurance company is one half of one percent of the business.

(b) The total amount of premium tax assessed each year may not exceed $200,000.

(c) A captive insurance company is subject to maintenance taxes under Subtitle C, Title 3, as applicable to the individual lines of business written by the captive insurance company.

Sec. 964.020. RULEMAKING AUTHORITY. The commissioner may adopt reasonable rules as necessary to implement the purposes and provisions of this chapter.

SECTION 2. As soon as practicable after the effective date of this Act, but not later than January 1, 2014, the commissioner shall adopt rules and procedures necessary to implement Chapter 964, Insurance Code, as added by this Act.

SECTION 3. This Act takes effect immediately if it receives a vote of two-thirds of all the members elected to each house, as provided by Section 39, Article III, Texas Constitution. If this Act does not receive the vote necessary for immediate effect, this Act takes effect September 1, 2013.