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Texas Passing Legislation Allowing for Captive Insurance Options

Posted on: June 20, 2013 by Caitlin Morgan

Texas Passing Legislation Allowing for Captive Insurance Options

Texas Passing Legislation Allowing for Captive Insurance Options

In our May blog, we wrote about North Carolina considering legislation for captive insurers to operate in the state. Now the Texas legislature has passed a bill allowing the formation of pure captive insurance companies in the state. The measure, signed by Governor Rick Perry on June 5, allows Texas businesses to form, license and operate captives within the state.

Specifically the legislation allows for licensed Texas captives to insure only the operational risks of the parent company and its affiliates and the risks of controlled unaffiliated businesses. What’s more, Texas captives would be allowed to reinsure coverage of affiliates’ or controlled unaffiliated businesses’ operational risks that the captive would be allowed to insure directly, as well as employee benefits offered by affiliates, required liability insurance and workers compensation and employers liability coverage. Captives’ affiliates in order to get licensed would be required to have “significant operations” in Texas, according to the bill. Texas captives’ boards would be required to meet at least once a year in the state.

The legislation sets the captive premium tax at 0.5% with an annual minimum tax of $7,500 and an annual maximum of $200,000.

Why allow for captives? It makes good business sense for the Lone Star State. According to Texas Insurance Commissioner, Eleanor Kitzman, in her 2012 Biennial Report, she stated: “An opportunity exists to further enhance Texas’ pro-business climate. Allowing the formation of Texas domestic captive insurance companies could help attract new businesses and retain existing Texas companies. In addition to touting the current benefits that Texas has to offer, Texas-based Fortune 500 and other corporations could benefit from reduced costs and administrative burdens related to their captive operations.”

Kimberly A. Yelkin, executive partner in the Austin office and leader of the government affairs practice group of law firm Gardere Wynne Sewell L.L.P, also agrees, stating that: “We think it [the legislation] will bring some economic development here and a lot of captives may re-domesticate to the state.”

The Benefits of Captives

Texas joins more than 30 other states that permit the formation and operation of various types of captive insurance companies. Captive insurance companies are created by a parent company or group of related entities specifically for the purpose of insuring that company or group’s risks. Captives domesticated in the United States and offshore have proved to be popular with numerous corporations for a number of key reasons.

  • Some types of necessary insurance are not available, or are available only at prohibitive prices in the traditional insurance market, which a captive can provide at reasonable cost.
  • Captives can serve as a centralized vehicle that specializes in: (1) providing claims services under the control of the parent and affiliated businesses, (2) investigating and funding the corporate family’s claims-related payments, and (3) providing greater control over the entire insurance and risk management operation from a cost perspective.
  • They provide a company with a vehicle to access the reinsurance markets, which typically are unavailable to business corporations that traditionally only purchase insurance in “direct” markets.
  • Some companies may find additional benefits in tax deductions for premiums paid to their captives for the purpose of managing the captive and paying out claims.

Caitlin-Morgan specializes in providing captive solutions, and can help you assess whether your clients would benefit from a captive. Please give us a call at 877.226.1027.

Sources: Forbes, Business Insurance, MONDAQ

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Posted in: Captive Solutions