85R11296 SCL-D

By: Hughes S.B. No. 915

A BILL TO BE ENTITLED

AN ACT

relating to captive insurance companies.

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

SECTION 1. Section 964.001(a), Insurance Code, is amended by adding Subdivision (1-a) to read as follows:

(1-a) "Captive exchange" means a reciprocal or interinsurance exchange formed under this chapter. The term includes the attorney in fact as defined by Section 942.001 through which a reciprocal or interinsurance contract as defined by that section is exchanged.

SECTION 2. Section 964.051(b), Insurance Code, is amended to read as follows:

(b) A captive insurance company may not issue:

(1) life insurance, except to insure employee benefits that are subject to the Employee Retirement Income Security Act of 1974 (29 U.S.C. Section 1001 et seq.);

(2) annuities;

(3) accident and health insurance for the company's parent and affiliates, except to insure employee benefits that are subject to the Employee Retirement Income Security Act of 1974 (29 U.S.C. Section 1001 et seq.);

(4) title insurance;

(5) mortgage guaranty insurance;

(6) financial guaranty insurance;

(7) residential property insurance;

(8) personal automobile insurance; or

(9) workers' compensation insurance.

SECTION 3. Section 964.052, Insurance Code, is amended by adding Subsection (f) to read as follows:

(f) A captive insurance company may cede risks to or take credit for reserves on risks ceded to a nonaffiliated reinsurer if the reinsurer:

(1) holds a certificate of authority to transact insurance or reinsurance in a jurisdiction that is:

(A) on the list of qualified jurisdictions of the National Association of Insurance Commissioners; and

(B) acceptable to the commissioner;

(2) maintains minimum capital and surplus, or the equivalent, of $250 million as of the end of the preceding year; and

(3) maintains a financial strength rating of B+ or its equivalent from a national or international rating agency that:

(A) has registered with the Securities and Exchange Commission;

(B) is designated as a nationally recognized statistical rating organization;

(C) is on the list of Credit Rating Providers by the Securities Valuation Office of the National Association of Insurance Commissioners; and

(D) is acceptable to the commissioner.

SECTION 4. Sections 964.053(b), (d), and (e), Insurance Code, are amended to read as follows:

(b) A captive insurance company may be formed and operated as a captive exchange in accordance with Subchapter C or in any form of business organization authorized under the Business Organizations Code except a risk retention group or general partnership. A captive exchange [insurance company] may only be formed as a nonprofit corporation if it is controlled by a nonprofit corporation.

(d) The board of directors or governing body of a captive insurance company formed in this state must have at least three members, and at least one of the members must be a resident of this state. If the captive insurance company is a captive exchange, the principal office of the attorney in fact must be in this state.

(e) The certificate of formation, [or] bylaws, or governing document of a captive insurance company must authorize a quorum of the board of directors or governing body to consist of not fewer than one-third of the fixed number of directors or members of the governing body.

SECTION 5. Section 964.055(a), Insurance Code, is amended to read as follows:

(a) An entity may not engage in business as a captive insurance company domiciled in this state unless it holds a certificate of authority issued by the department to act as a captive insurance company. A captive insurance company, when permitted by its certificate of formation or governing document, may apply for a certificate of authority under this chapter.

SECTION 6. Section 964.056(c), Insurance Code, is amended to read as follows:

(c) The capital and surplus required by 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 and not secured by a guarantee from an affiliate, 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 a county or municipality 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.

SECTION 7. Section 964.057(a), Insurance Code, is amended to read as follows:

(a) To obtain a certificate of authority for a captive insurance company, the incorporators or organizers must pay to the commissioner an application fee and file with the commissioner an application for the 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 certificate of formation or other documentation demonstrating the captive insurance company's valid formation;

(4) an affidavit by the incorporators, organizers, 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 certificate of formation or other documentation demonstrating the captive insurance company's valid formation is true and correct; and

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

(A) the number of shares or other type of equity instrument without par value that are subscribed; and

(B) the actual consideration received by the captive insurance company for those shares or other type of equity instrument.

SECTION 8. Sections 964.059(a) and (d), Insurance Code, are amended to read as follows:

(a) The commissioner shall determine whether:

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

(2) the officers or members [directors] of the applicant's governing body [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.

(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 provided for in the applicant's certificate of formation or other governing document;

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

(3) issue a certified copy of the certificate of authority to the applicant's incorporators or officers.

SECTION 9. Section 964.060, Insurance Code, is amended by adding Subsection (d) to read as follows:

(d) A captive insurance company is exempt from the requirement to file an actuarial report with the company's annual report if the company:

(1) has less than $1 million of total direct written premium or reinsurance assumed; or

(2) has been in operation for less than six months as of the end of the previous calendar year.

SECTION 10. Section 964.062, Insurance Code, is amended to read as follows:

Sec. 964.062. AMENDMENTS TO CERTIFICATE OF FORMATION OR GOVERNING DOCUMENT. A captive insurance company may not amend its certificate of formation or other governing document unless the amendment has been filed with and approved by the commissioner.

SECTION 11. The heading to Section 964.063, Insurance Code, is amended to read as follows:

Sec. 964.063. DIVIDENDS AND DISTRIBUTIONS.

SECTION 12. Section 964.063(a), Insurance Code, is amended to read as follows:

(a) A captive insurance company shall notify the commissioner in writing when issuing policyholder dividends or distributions to policyholders.

SECTION 13. Section 964.065, Insurance Code, is amended to read as follows:

Sec. 964.065. SUSPENSION OR REVOCATION OF CERTIFICATE OF AUTHORITY. 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 964.060;

(3) failure to comply with the provisions of its own charter, [or] bylaws, rules, or other governing document;

(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 books and records from this state without prior approval of the commissioner;

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

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

SECTION 14. Subchapter B, Chapter 964, Insurance Code, is amended by adding Section 964.073 to read as follows:

Sec. 964.073. ADJUSTER LICENSE NOT REQUIRED. Notwithstanding Section 4101.051, a person who acts as an adjuster, as defined by Section 4101.001, solely on behalf of a captive insurance company in adjusting a claim of an affiliate or controlled unaffiliated business insured by the company is not required to hold a license under Chapter 4101.

SECTION 15. Chapter 964, Insurance Code, is amended by adding Subchapter C to read as follows:

SUBCHAPTER C. CAPTIVE EXCHANGES

Sec. 964.101. DEFINITIONS. In this subchapter, a term defined by Section 942.001 has the meaning assigned by that section.

Sec. 964.102. APPLICABILITY OF OTHER LAW. (a) A captive exchange is subject to:

(1) this chapter; and

(2) Sections 942.051, 942.053, and 942.054.

(b) To the extent of a conflict, this chapter controls over other law applicable to a captive exchange under this section.

Sec. 964.103. STATUS OF CAPTIVE EXCHANGES. A captive exchange is formed as an exchange as provided by this subchapter and, except as provided by this subchapter, shall operate as a captive insurance company as provided by this chapter.

Sec. 964.104. ATTORNEY IN FACT REQUIREMENTS. The attorney in fact of a captive exchange must:

(1) be:

(A) a corporation organized in this state in accordance with Section 942.051; or

(B) a limited liability company organized in this state;

(2) on the date of the captive exchange's formation, have an existing affiliation with all subscribers of the captive exchange regardless of any affiliation relationship created by the captive exchange;

(3) have its principal office in this state; and

(4) have at least three members in the governing body of the attorney in fact and at least one of those members must be a resident of this state.

Sec. 964.105. ATTORNEY IN FACT POWERS AND DUTIES. (a) The attorney in fact of a captive exchange shall:

(1) supervise the finances of the captive exchange;

(2) supervise the captive exchange's operations to ensure the captive exchange's conformity with the captive exchange's subscriber declaration and power of attorney; and

(3) obtain, as necessary, an audit of the account and records of the attorney in fact at the expense of the captive exchange.

(b) The attorney in fact of a captive exchange has any additional powers and duties conferred by the captive exchange's subscriber declaration and power of attorney.

Sec. 964.106. RELATIONSHIP REQUIREMENTS. (a) On the date of the captive exchange's formation, each subscriber of a captive exchange must have an existing affiliation with each other subscriber regardless of any affiliation relationship created by the captive exchange.

(b) On the date of the captive exchange's formation, a controlled unaffiliated business of the captive exchange must have an existing contractual relationship with an affiliate that qualifies as a subscriber.

Sec. 964.107. SUBSCRIBER DECLARATION. A captive exchange shall file with the department a subscriber declaration that includes:

(1) the information described by Section 942.053;

(2) the amount of the captive exchange's initial surplus; and

(3) a provision to authorize a quorum of the governing body of the captive exchange's attorney in fact to consist of not fewer than one-third of the fixed number of members of the governing body.

SECTION 16. This Act takes effect September 1, 2017.