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Confusion persists over a federal law that was intended to apply to surplus lines insurance business but has been interpreted by some to apply to captive insurance company premium taxes.
At issue is whether the Nonadmitted and Reinsurance Reform Act, enacted in 2010 as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, applies to captive insurance—and more specifically whether the NRRA's nonadmitted insurance provisions allow home states of captive parents to apply premium taxes to captives domiciled elsewhere.
While the NRRA was intended to apply to surplus lines insurance, according to those who crafted it, it doesn't specifically exclude captive insurance, which has allowed cash-strapped states seeking extra revenue—or those looking to drive captives of home-state companies domiciled elsewhere to redomicile to within their borders—to look to apply the law to captive premium taxes.
The issue is seen as a potentially significant one for states such as Vermont and Hawaii that are home to numerous captives whose parent companies are based elsewhere.
“Everything is happening and nothing is happening,” said Charles J. Lavelle, chair of the federal tax and insurance industry teams at Bingham Greenebaum Doll L.L.P. in Louisville, Ky. “I think everybody's taking different positions. Those that were involved in the legislation will say that it was never meant to apply to captives, but there's not a specific exclusion.”
David F. Provost, deputy commissioner in the Captive Insurance Division of the Vermont Department of Banking, Insurance, Securities and Health Care Administration, said confusion has been one of the most significant results of the NRRA thus far.
“Confusion's probably the biggest one,” Mr. Provost said. “We have seen a couple of companies move.” In those cases, the captives were doing most of their business in their parent company's home state and decided to redomicile there, “especially if the home state was a good captive domicile,” he said.
In some cases, he's seen companies “decide to form a captive in their home state and cede everything to Vermont,” Mr. Provost said.
“We certainly haven't seen a mass exodus to home states, but there have been a few,” he said. “And, of course, there are some companies where they're too big for it to matter.”
George W. Sumner III, deputy commissioner and captive insurance administrator in the Insurance Division of the Hawaii Department of Commerce and Consumer Affairs, said the NRRA issue is “still up in the air, and that could really affect captives because of the premium tax” issue.
While it's taken no action, Hawaii is considering the NRRA's potential impact, he said, and officials are brainstorming potential alternatives such as whether the domicile might replace captive premium taxes with an annual fee if the NRRA ultimately is held to apply to captive premium taxes.
The Hawaii captive operation is funded through premium taxes, along with sources such as fees and licensing charges, Mr. Sumner said. Losing a portion of the premium tax revenue if home states are allowed to claim it could have an impact on the state's captive regulatory operation, he said.
But, he said, the state likely would not have to make a move for several years. “We're flexible enough and have a surplus, so it wouldn't be something that would affect us right away,” Mr. Sumner said. “We wouldn't be in a panic mode.”
In October, the Vermont Captive Insurance Assn. released a white paper by Washington law firm McIntyre & Lemon P.L.L.C. that concluded that the NRRA never was meant to apply to captive insurance. The Captive Insurance Cos. Assn. and the National Risk Retention Assn. agreed with the white paper's findings.
Robert H. Myers Jr., managing partner of the Washington office and co-chair of the insurance and reinsurance practice at Morris, Manning & Martin L.L.P., noted that adding to the confusion over the NRRA is the varying approaches states are taking to the issue.
“The states are adopting different laws,” Mr. Myers said. “There is a possibility—at least some discussion—about trying to blend the laws together so it becomes a uniform whole.”
He noted that the issue was scheduled to be discussed at the National Assn. of Insurance Commissioners meeting that runs through the early part of this week.
There are no efforts to clarify the law at the federal level, he said.
Mr. Lavelle noted there are competing plans for compacts that would provide a mechanism to share premium taxes among states. Meanwhile, “some states would keep all the money,” he said.
While several factors prompt captive insurance owners to redomicile their facilities, surplus lines regulations in the Dodd-Frank Wall Street Reform and Consumer Protection Act eventually could drive that activity inappropriately, captive experts warn.