House Engrossed captive insurers; certificate of dormancy State of Arizona House of Representatives Fifty-seventh Legislature First Regular Session 2025 HOUSE BILL 2193 An Act amending sections 20-1098, 20-1098.01, 20-1098.03 and 20-1098.04, Arizona Revised Statutes; amending title 20, chapter 4, article 14, Arizona Revised Statutes, by adding section 20-1098.24; relating to captive insurers. (TEXT OF BILL BEGINS ON NEXT PAGE)
House Engrossed captive insurers; certificate of dormancy
State of Arizona House of Representatives Fifty-seventh Legislature First Regular Session 2025
HOUSE BILL 2193
House Engrossed
captive insurers; certificate of dormancy
State of Arizona
House of Representatives
Fifty-seventh Legislature
First Regular Session
2025
HOUSE BILL 2193
An Act
amending sections 20-1098, 20-1098.01, 20-1098.03 and 20-1098.04, Arizona Revised Statutes; amending title 20, chapter 4, article 14, Arizona Revised Statutes, by adding section 20-1098.24; relating to captive insurers.
(TEXT OF BILL BEGINS ON NEXT PAGE)
Be it enacted by the Legislature of the State of Arizona: Section 1. Section 20-1098, Arizona Revised Statutes, is amended to read: START_STATUTE20-1098. Definitions In this article, unless the context otherwise requires: 1. "Affiliate" has the same meaning prescribed in section 20-481. 2. "Agency captive insurer" means a captive insurer that is owned by one or more business entities that are licensed in any state as insurance producers or managing general agents and that only insure risks on policies placed through their owners. 3. "Alien captive insurer" means any insurer that is formed to write insurance business for its affiliates and that is licensed pursuant to the laws of an alien jurisdiction that imposes statutory or regulatory standards that are acceptable to the director on companies transacting the business of insurance in such a jurisdiction. 4. "Association" means any lawfully formed association of individuals or business entities that has been in existence for at least one year and that is organized for a primary purpose other than procuring or providing insurance for its members. 5. "Association captive insurer" means a captive insurer that is completely under the direct or indirect voting control of an association. 6. "Branch business" means any insurance business that is transacted by a branch captive insurer in this state. 7. "Branch captive insurer" means an alien captive insurer or a foreign captive insurer that establishes a business unit with a principal place of business in this state and that is licensed pursuant to this chapter to transact the business of insurance through the business unit. 8. "Branch operations" means any business operations of a branch captive insurer in this state. 9. "Business entity" means any legal entity other than an individual or sole proprietorship. 10. "Captive insurer" means any pure captive insurer, agency captive insurer, group captive insurer or protected cell captive insurer that is domiciled in this state and that is formed and licensed under this article. 11. "Controlled unaffiliated business" means an individual or business entity that satisfies all of the following: (a) Is not an affiliate of the captive insurer providing coverage or reinsurance. (b) Has a contractual relationship with an affiliate of the captive insurer providing coverage or reinsurance. (c) Whose risk management function that is related to the covered risk of loss is controlled by an affiliate of the captive insurer providing coverage or reinsurance. 12. "Deductible reimbursement" means insurance coverage that reimburses the insured for the deductible it paid under a separate commercial insurance policy issued to the same insured, without other conditions related to the underlying loss. 13. "Direct or directly", when used in this article to describe the transaction of insurance business by a captive insurer, means a transaction in which the captive insurer issues an insurance policy that provides primary coverage to the insured under the policy and that does not provide reinsurance coverage to another insurer. 14. "Dormant captive insurer": (a) Means a captive insurer that has both: (i) Ceased transacting the business of insurance, including issuing insurance policies. (ii) No outstanding liabilities associated with the business of insurance or has not issued any insurance policy before filing an application for a certificate of dormancy. (b) Does not include a captive risk retention group. 14. 15. "Foreign captive insurer" means any captive insurer that is domiciled in and licensed under the laws of another state that imposes statutory or regulatory standards on captive insurance companies in that state that are acceptable to the director. 15. 16. "Group captive insurer" means any of the following: (a) A risk retention group. (b) An industry group captive insurer. (c) An association captive insurer. 16. 17. "Industry group" means two or more business entities or persons that are engaged in businesses or activities similar or related with respect to the liability that they are exposed to by virtue of any related, similar or common business, trade, product, services, premises or operations. 17. 18. "Industry group captive insurer" means a captive insurer that is completely under the direct or indirect voting control of an industry group. 18. 19. "Manager" means a person who is experienced in the field of captive insurance and who maintains all documents relating to a captive insurer's operations, transactions and affairs in this state and assists the captive insurer in its management and compliance with this article. 19. 20. "Member" means any individual or business entity that belongs to a group captive insurer. 20. 21. "Participant" means an entity and any affiliates of the entity that are insured by a protected cell captive insurer pursuant to a participant contract. 21. 22. "Participant contract" means a contract by which a protected cell captive insurer insures risks of one or more participants and limits losses under the contract to the assets of a protected cell. 22. 23. "Protected cell" means a separate account that is established and maintained by a protected cell captive insurer pursuant to a participant contract. 23. 24. "Protected cell captive insurer" means a captive insurer: (a) In which the minimum capital and surplus required by applicable law is provided by one or more sponsors. (b) That is formed and licensed under this article. (c) That insures the risks of participants through participant contracts. (d) That segregates liability under a participant contract through one or more protected cells. 24. 25. "Pure captive insurer" means a captive insurer that insures only the risks of its affiliates and controlled unaffiliated business. 25. 26. "Risk retention group" means a captive insurer that is organized pursuant to the liability risk retention act of 1986 (15 United States Code sections 3901 and 3902) and chapter 14 of this title. 26. 27. "Sponsor" means an entity that meets the requirements of section 20-1098.06 and that the director has approved to provide all or part of the capital and surplus required by applicable law to operate a protected cell captive insurer. END_STATUTE Sec. 2. Section 20-1098.01, Arizona Revised Statutes, is amended to read: START_STATUTE20-1098.01. Licensing; authority A. If allowed by its articles of incorporation, bylaws or other organizational document, an applicant may apply to the director for a license to transact captive insurance, except that: 1. A pure captive insurer shall not insure risks other than the risks of its affiliates and controlled unaffiliated business. 2. A group captive insurer, other than a risk retention group, shall not insure risks other than the risks of its group members, its affiliates and controlled unaffiliated business. A risk retention group shall insure only the risks of its group members. 3. An agency captive insurer shall not: (a) Insure any risks other than those placed by or through its owners. (b) Directly insure life or disability insurance risks without the approval of the director. The insurance risks that the director may approve are limited to employer group term life insurance, employer group disability income insurance and reimbursement of employer health plan deductibles. The director may require the business written by an agency captive insurer to be any of the following: (i) Fronted by an insurer that holds a certificate of authority under the laws of any state. (ii) Reinsured by a reinsurer authorized, accredited or approved by the director. (iii) Secured by a trust fund in the United States for the benefit of policyholders and claimants or funded by an irrevocable letter of credit or other arrangement that is acceptable to the director. The director may require the agency captive insurer to increase the funding of any security arrangement established under this item. If the form of security is a letter of credit, the letter of credit shall be issued or confirmed by a bank approved by the director. A trust maintained pursuant to this item shall be established in a form and on terms approved by the director. 4. A protected cell captive insurer shall not insure any risks other than those prescribed in its participant contracts. B. The following apply to the transaction of insurance by a captive insurer on a direct basis: 1. A captive insurer shall not directly insure any of the following types of insurance business: (a) Hospital service corporations, medical service corporations, dental service corporations, optometric service corporations or hospital, medical, dental and optometric service corporations as defined in section 20-822. (b) Health care services organizations as defined in section 20-1051. (c) Prepaid dental plan organizations as defined in section 20-1001. (d) Prepaid legal insurance contracts as defined in section 20-1097. (e) Business of title insurance as defined in section 20-1562. (f) Personal motor vehicle or homeowner's insurance coverage or any component of that insurance coverage. (g) Mortgage guaranty insurance as defined in section 20-1541. (h) Workers' compensation or employers' liability insurance policies except in connection with a self-insurance program as prescribed in this subsection. 2. A pure captive insurer shall not provide direct coverage of workers' compensation or employers' liability in this state unless the coverage is provided under a self-insurance program that is approved by the industrial commission of Arizona pursuant to section 23-961. A captive insurance program that is authorized by section 23-961 is subject to and shall comply with all requirements of title 23, chapter 6 that are applicable to self-insurance. 3. A pure captive insurer shall not provide direct coverage of workers' compensation or employers' liability insurance in another state unless the coverage is provided under a self-insurance program that is qualified as a self-insurance program under the applicable state or federal law, as determined by the agency or other entity that has jurisdiction over the self-insurance program. 4. An agency captive insurer directly insuring life or disability income insurance risk as specified in subsection A, paragraph 3 of this section: (a) Shall mark each policy and certificate with a conspicuously stamped or written notice in bold-faced type that states the following: This policy is issued by an insurer that is not a member of an Arizona insurance guaranty fund. If the insurer that issued this policy becomes insolvent, insureds or claimants will not be eligible for insurance guaranty fund protection pursuant to title 20, Arizona Revised Statutes. (b) May insure only life and disability income insurance risks as specified in subsection A, paragraph 3 of this section for employers that maintain their principal place of business within this state. (c) May not be owned or controlled by an insurer that is granted authority by the director to transact insurance in this state. (d) Shall have its financial statements audited by an independent certified public accountant pursuant to section 20-1098.07, subsection B. (e) May not directly insure life or disability income insurance risks as specified in subsection A, paragraph 3 of this section in this state unless all of the following apply: (i) An insurance producer or managing general agent that owns the agency captive insurer remains in regulatory good standing in all states in which it is licensed. (ii) The agency captive insurer insures only the risks of employer group term life insurance, employer group disability income insurance and reimbursement of employer health plan deductibles that are placed by or through an insurance producer or managing general agent that owns the agency captive insurer and, if required by the director, provides the director the form of such policies. (iii) The agency captive insurer discloses to the original policyholder or policyholders, in a form or manner approved by the director, all limitations, rights and obligations held by the agency captive insurer as a result of its affiliation with an insurance producer or managing general agent. 5. This subsection does not prohibit a captive insurer from directly insuring deductible reimbursement risk. 6. This subsection does not prohibit a captive insurer from directly insuring employment practices liability risk. C. A captive insurer shall not accept or cede reinsurance except as provided in section 20-1098.11. D. A captive insurer that writes life insurance or disability insurance shall comply with all applicable state and federal laws. E. A captive insurer shall: 1. Hold at least one meeting of its board of directors or its board of managers or, for reciprocal insurers, its subscribers' advisory committee each year in this state. 2. Maintain its principal place of business in this state. 3. Appoint a resident statutory agent to accept service of process and to otherwise act on its behalf in this state and shall file the appointment with the director. In the case of a captive insurer formed as a reciprocal insurer, if the statutory agent cannot with reasonable diligence be found at the registered office of the captive insurer, the director is an agent of the captive insurer on whom any process, notice or demand may be served. F. Before receiving a license, an applicant for a captive insurer license shall file with the director the following: 1. If formed as a corporation, a certified copy of its articles of incorporation, articles of organization or other organizational document, a copy of its duly adopted bylaws or other governance rules, a statement under oath of its president and secretary showing its financial condition and any other statement or document required by the director. 2. If formed as a reciprocal insurer, a copy of the power of attorney of its attorney-in-fact, a copy of its subscribers' agreement, a copy of its duly adopted bylaws or other governance rules, a statement under oath of its attorney-in-fact showing its financial condition and any other statement or document required by the director. G. In addition to the information required by subsection F of this section, each applicant for a captive insurer license shall file with the director evidence of all of the following: 1. The amount and liquidity of its assets relative to the risks to be assumed. 2. The adequacy of the expertise, experience and character of the directors and officers of the captive insurer. 3. The overall soundness of its plan of operation. 4. The adequacy of the loss prevention programs of its insureds. 5. The engagement of a competent manager that does business at a location in this state. 6. The establishment of business relationships with any accountants, banks, attorneys and other professionals that are acceptable to the department. 7. The ability of the captive insurer's owners or members to pay claims to third parties if the captive insurer is unable to pay those claims. 8. Other factors deemed relevant by the director in ascertaining whether the proposed captive insurer will be able to meet its policy obligations. H. In addition to the information required by subsections F and G of this section, if the applicant is seeking authority as a protected cell captive insurer, the applicant shall file: 1. A business plan that demonstrates, in a manner acceptable to the director, how the applicant will account for the loss and expense experience of each protected cell and report that information to the director. 2. A statement acknowledging that all financial records of the protected cell captive insurer, including records pertaining to protected cells, shall be available for inspection or examination by the director or the director's designee. 3. Its form for all participant contracts. 4. Evidence that the protected cell captive insurer will allocate expenses fairly and equitably to each protected cell. I. Before the issuance of a license, an applicant shall promptly notify the director of any material change in the information filed pursuant to this section. J. An applicant for a captive insurer license shall pay to the director a nonrefundable fee for the issuance of a captive insurance license pursuant to section 20-167. The captive insurer shall pay the license renewal fee pursuant to section 20-167 when the captive insurer files the annual report prescribed in section 20-1098.07 not earlier than July 1 and not later than September 1 of each year. K. If the director is satisfied that the documents and statements that the applicant has filed comply with this article, the director may grant the applicant a captive insurer license that authorizes the captive insurer to transact captive insurance business in this state. L. The director shall approve or deny an application for a license to transact captive insurance business within thirty days after the director deems the application complete. END_STATUTE Sec. 3. Section 20-1098.03, Arizona Revised Statutes, is amended to read: START_STATUTE20-1098.03. Minimum capital and surplus; letter of credit; borrowed surplus A. The director shall not issue a license to a captive insurer unless the insurer possesses and thereafter maintains minimum unimpaired paid-in capital and surplus in combination as follows: 1. In the case of a pure captive insurer, at least $250,000. 2. In the case of a group captive insurer, at least $500,000. 3. In the case of an agency captive insurer, at least $500,000. 4. In the case of a protected cell captive insurer, at least $500,000 $250,000. 5. In the case of a captive insurer that is organized as a reciprocal insurer, at least $500,000. 6. In the case of a pure or group captive insurer that transacts only reinsurance, one-half of the applicable amount prescribed in paragraph 1 or 2 of this subsection. B. All minimum capital and surplus requirements shall be in the form of cash or an irrevocable and unconditional letter of credit that contains an evergreen clause, that is payable to, filed with and held by the director in trust for the protection of all policyholders, ceding insurers and related expenses and that meets the following conditions: 1. The letter of credit shall be issued or confirmed by a qualified United States financial institution as defined in section 20-3601, subsection A and shall comply with the requirements prescribed by the director. 2. The captive insurer shall not be directly or contingently liable for any letter of credit comprising its capital or surplus, and its assets shall not be pledged as security for the letter of credit. C. The director may prescribe additional capital and surplus requirements based on the type, volume and nature of insurance. The captive insurer may pledge, with the approval of the department, any additional prescribed capital and surplus, whether in the form of cash, another allowable asset or any irrevocable and unconditional letter of credit that contains an evergreen clause. D. Notwithstanding any other provision of this title, a written agreement under which a captive insurer borrows monies that are required to be repaid only out of the insurers surplus in excess of that stipulated in the agreement may provide for interest at any rate agreed on and approved by the director. E. A captive insurer that is established solely for the purpose of reinsuring risks as part of a program filed and approved by the director to facilitate the securitization of risks ceded to the captive insurer may be a party to contracts that provide that subsequent purchasers of interests in the program assume the interests on a nonrecourse basis, both as to the captive insurer and any affiliate. END_STATUTE Sec. 4. Section 20-1098.04, Arizona Revised Statutes, is amended to read: START_STATUTE20-1098.04. Formation of captive insurers; redomestication A. An agency captive insurer or protected cell captive insurer shall be incorporated as a stock insurer with its capital divided into shares and held by the stockholders. Each owner of an agency captive insurer shall be licensed as an insurance producer. B. A group captive insurer may be formed in any of the following ways: 1. Incorporated as a stock insurer with its capital divided into shares and held by the stockholders. 2. Incorporated as a mutual insurer without capital stock, the governing body of which is elected by the member organizations of its association. 3. Organized as a reciprocal insurer pursuant to article 2 of this chapter. 4. Incorporated as a nonprofit corporation pursuant to title 10, chapter 25. C. A pure captive insurer may be formed in any of the following ways: 1. Incorporated as a stock insurer with its capital divided into shares and held by the stockholders. 2. Incorporated as a nonprofit corporation pursuant to title 10, chapter 25. 3. Incorporated as a limited liability company that is manager-managed pursuant to title 29. D. The capital stock of a captive insurer that is incorporated as a stock insurer may be authorized with no par value. E. A captive insurer that is formed as a corporation shall have at least three incorporators, at least one of whom shall be a resident of this state. Notwithstanding subsection B, paragraph 3 of this section, a captive insurer that is formed as a reciprocal insurer may be organized by three or more subscribers, none of whom shall be required to be a resident of this state. F. A pure captive insurer shall have at least one director. Any other kind of corporate captive insurer shall have at least three directors. Any group captive insurer formed as a reciprocal insurer shall have at least three subscribers' advisory committee members. In addition to independent directors, a group captive insurer may have as many directors as it has members. G. A captive insurer that is formed as a corporation shall have at least one member of the board of directors who is a resident of this state. A captive insurer that is formed as a limited liability company shall have at least one member of its board of managers who is a resident of this state. A captive insurer that is formed as a reciprocal insurer shall have at least one member of the subscribers' advisory committee who is a resident of this state. H. The articles of incorporation or bylaws of a captive insurer that is formed as a corporation with more than one director may authorize a quorum of a board of directors to consist of at least one-third of the fixed or prescribed number of directors, but at least two directors. The subscribers' agreement or other organizing document of a captive insurer formed as a reciprocal insurer may authorize a quorum of a subscribers' advisory committee to consist of at least one-third of the number of its members, but at least two members. I. Any foreign or alien insurer may become a domestic captive insurer by complying with the requirements of this article relating to the licensing of a domestic captive insurer and by complying with all applicable requirements of the laws of this state relating to the domestication of a corporation to this state. The effective date of a license that is issued to a foreign or alien insurer domesticated to this state shall be the date of filing its articles of domestication with the corporation commission. END_STATUTE Sec. 5. Title 20, chapter 4, article 14, Arizona Revised Statutes, is amended by adding section 20-1098.24, to read: START_STATUTE20-1098.24. Dormant captive insurers; certificate of dormancy; report; fee; rules A. A captive insurer that is domiciled in this state and that meets the definition of dormant captive insurer may apply for a certificate of dormancy by submitting an application to the director on a form prescribed by the director. The certificate of dormancy is subject to renewal every five years and expires unless renewed. B. A dormant captive insurer that is issued a certificate of dormancy shall: 1. Possess and thereafter maintain unimpaired, paid-in CAPITAL and surplus of at least $125,000. 2. Not later than ninety days after the end of the dormant captive insurer's fiscal year, submit to the director a report of its financial condition that is verified by oath of two of its executive officers. 3. Pay a certificate renewal fee as prescribed in section 20-167. C. A dormant captive insurer may surrender its certificate of dormancy by submitting an application to surrender to the director. The dormant captive insurer may not issue insurance policies or conduct the business of insurance until the director approves the application to surrender. D. the director shall revoke A certificate of dormancy if a dormant captive insurer no longer meets the definition of dormant captive insurer. E. The director may adopt guidelines, procedures and rules to implement this section. END_STATUTE
Be it enacted by the Legislature of the State of Arizona:
Section 1. Section 20-1098, Arizona Revised Statutes, is amended to read:
START_STATUTE20-1098. Definitions
In this article, unless the context otherwise requires:
1. "Affiliate" has the same meaning prescribed in section 20-481.
2. "Agency captive insurer" means a captive insurer that is owned by one or more business entities that are licensed in any state as insurance producers or managing general agents and that only insure risks on policies placed through their owners.
3. "Alien captive insurer" means any insurer that is formed to write insurance business for its affiliates and that is licensed pursuant to the laws of an alien jurisdiction that imposes statutory or regulatory standards that are acceptable to the director on companies transacting the business of insurance in such a jurisdiction.
4. "Association" means any lawfully formed association of individuals or business entities that has been in existence for at least one year and that is organized for a primary purpose other than procuring or providing insurance for its members.
5. "Association captive insurer" means a captive insurer that is completely under the direct or indirect voting control of an association.
6. "Branch business" means any insurance business that is transacted by a branch captive insurer in this state.
7. "Branch captive insurer" means an alien captive insurer or a foreign captive insurer that establishes a business unit with a principal place of business in this state and that is licensed pursuant to this chapter to transact the business of insurance through the business unit.
8. "Branch operations" means any business operations of a branch captive insurer in this state.
9. "Business entity" means any legal entity other than an individual or sole proprietorship.
10. "Captive insurer" means any pure captive insurer, agency captive insurer, group captive insurer or protected cell captive insurer that is domiciled in this state and that is formed and licensed under this article.
11. "Controlled unaffiliated business" means an individual or business entity that satisfies all of the following:
(a) Is not an affiliate of the captive insurer providing coverage or reinsurance.
(b) Has a contractual relationship with an affiliate of the captive insurer providing coverage or reinsurance.
(c) Whose risk management function that is related to the covered risk of loss is controlled by an affiliate of the captive insurer providing coverage or reinsurance.
12. "Deductible reimbursement" means insurance coverage that reimburses the insured for the deductible it paid under a separate commercial insurance policy issued to the same insured, without other conditions related to the underlying loss.
13. "Direct or directly", when used in this article to describe the transaction of insurance business by a captive insurer, means a transaction in which the captive insurer issues an insurance policy that provides primary coverage to the insured under the policy and that does not provide reinsurance coverage to another insurer.
14. "Dormant captive insurer":
(a) Means a captive insurer that has both:
(i) Ceased transacting the business of insurance, including issuing insurance policies.
(ii) No outstanding liabilities associated with the business of insurance or has not issued any insurance policy before filing an application for a certificate of dormancy.
(b) Does not include a captive risk retention group.
14. 15. "Foreign captive insurer" means any captive insurer that is domiciled in and licensed under the laws of another state that imposes statutory or regulatory standards on captive insurance companies in that state that are acceptable to the director.
15. 16. "Group captive insurer" means any of the following:
(a) A risk retention group.
(b) An industry group captive insurer.
(c) An association captive insurer.
16. 17. "Industry group" means two or more business entities or persons that are engaged in businesses or activities similar or related with respect to the liability that they are exposed to by virtue of any related, similar or common business, trade, product, services, premises or operations.
17. 18. "Industry group captive insurer" means a captive insurer that is completely under the direct or indirect voting control of an industry group.
18. 19. "Manager" means a person who is experienced in the field of captive insurance and who maintains all documents relating to a captive insurer's operations, transactions and affairs in this state and assists the captive insurer in its management and compliance with this article.
19. 20. "Member" means any individual or business entity that belongs to a group captive insurer.
20. 21. "Participant" means an entity and any affiliates of the entity that are insured by a protected cell captive insurer pursuant to a participant contract.
21. 22. "Participant contract" means a contract by which a protected cell captive insurer insures risks of one or more participants and limits losses under the contract to the assets of a protected cell.
22. 23. "Protected cell" means a separate account that is established and maintained by a protected cell captive insurer pursuant to a participant contract.
23. 24. "Protected cell captive insurer" means a captive insurer:
(a) In which the minimum capital and surplus required by applicable law is provided by one or more sponsors.
(b) That is formed and licensed under this article.
(c) That insures the risks of participants through participant contracts.
(d) That segregates liability under a participant contract through one or more protected cells.
24. 25. "Pure captive insurer" means a captive insurer that insures only the risks of its affiliates and controlled unaffiliated business.
25. 26. "Risk retention group" means a captive insurer that is organized pursuant to the liability risk retention act of 1986 (15 United States Code sections 3901 and 3902) and chapter 14 of this title.
26. 27. "Sponsor" means an entity that meets the requirements of section 20-1098.06 and that the director has approved to provide all or part of the capital and surplus required by applicable law to operate a protected cell captive insurer. END_STATUTE
Sec. 2. Section 20-1098.01, Arizona Revised Statutes, is amended to read:
START_STATUTE20-1098.01. Licensing; authority
A. If allowed by its articles of incorporation, bylaws or other organizational document, an applicant may apply to the director for a license to transact captive insurance, except that:
1. A pure captive insurer shall not insure risks other than the risks of its affiliates and controlled unaffiliated business.
2. A group captive insurer, other than a risk retention group, shall not insure risks other than the risks of its group members, its affiliates and controlled unaffiliated business. A risk retention group shall insure only the risks of its group members.
3. An agency captive insurer shall not:
(a) Insure any risks other than those placed by or through its owners.
(b) Directly insure life or disability insurance risks without the approval of the director. The insurance risks that the director may approve are limited to employer group term life insurance, employer group disability income insurance and reimbursement of employer health plan deductibles. The director may require the business written by an agency captive insurer to be any of the following:
(i) Fronted by an insurer that holds a certificate of authority under the laws of any state.
(ii) Reinsured by a reinsurer authorized, accredited or approved by the director.
(iii) Secured by a trust fund in the United States for the benefit of policyholders and claimants or funded by an irrevocable letter of credit or other arrangement that is acceptable to the director. The director may require the agency captive insurer to increase the funding of any security arrangement established under this item. If the form of security is a letter of credit, the letter of credit shall be issued or confirmed by a bank approved by the director. A trust maintained pursuant to this item shall be established in a form and on terms approved by the director.
4. A protected cell captive insurer shall not insure any risks other than those prescribed in its participant contracts.
B. The following apply to the transaction of insurance by a captive insurer on a direct basis:
1. A captive insurer shall not directly insure any of the following types of insurance business:
(a) Hospital service corporations, medical service corporations, dental service corporations, optometric service corporations or hospital, medical, dental and optometric service corporations as defined in section 20-822.
(b) Health care services organizations as defined in section 20-1051.
(c) Prepaid dental plan organizations as defined in section 20-1001.
(d) Prepaid legal insurance contracts as defined in section 20-1097.
(e) Business of title insurance as defined in section 20-1562.
(f) Personal motor vehicle or homeowner's insurance coverage or any component of that insurance coverage.
(g) Mortgage guaranty insurance as defined in section 20-1541.
(h) Workers' compensation or employers' liability insurance policies except in connection with a self-insurance program as prescribed in this subsection.
2. A pure captive insurer shall not provide direct coverage of workers' compensation or employers' liability in this state unless the coverage is provided under a self-insurance program that is approved by the industrial commission of Arizona pursuant to section 23-961. A captive insurance program that is authorized by section 23-961 is subject to and shall comply with all requirements of title 23, chapter 6 that are applicable to self-insurance.
3. A pure captive insurer shall not provide direct coverage of workers' compensation or employers' liability insurance in another state unless the coverage is provided under a self-insurance program that is qualified as a self-insurance program under the applicable state or federal law, as determined by the agency or other entity that has jurisdiction over the self-insurance program.
4. An agency captive insurer directly insuring life or disability income insurance risk as specified in subsection A, paragraph 3 of this section:
(a) Shall mark each policy and certificate with a conspicuously stamped or written notice in bold-faced type that states the following:
This policy is issued by an insurer that is not a member of an Arizona insurance guaranty fund. If the insurer that issued this policy becomes insolvent, insureds or claimants will not be eligible for insurance guaranty fund protection pursuant to title 20, Arizona Revised Statutes.
(b) May insure only life and disability income insurance risks as specified in subsection A, paragraph 3 of this section for employers that maintain their principal place of business within this state.
(c) May not be owned or controlled by an insurer that is granted authority by the director to transact insurance in this state.
(d) Shall have its financial statements audited by an independent certified public accountant pursuant to section 20-1098.07, subsection B.
(e) May not directly insure life or disability income insurance risks as specified in subsection A, paragraph 3 of this section in this state unless all of the following apply:
(i) An insurance producer or managing general agent that owns the agency captive insurer remains in regulatory good standing in all states in which it is licensed.
(ii) The agency captive insurer insures only the risks of employer group term life insurance, employer group disability income insurance and reimbursement of employer health plan deductibles that are placed by or through an insurance producer or managing general agent that owns the agency captive insurer and, if required by the director, provides the director the form of such policies.
(iii) The agency captive insurer discloses to the original policyholder or policyholders, in a form or manner approved by the director, all limitations, rights and obligations held by the agency captive insurer as a result of its affiliation with an insurance producer or managing general agent.
5. This subsection does not prohibit a captive insurer from directly insuring deductible reimbursement risk.
6. This subsection does not prohibit a captive insurer from directly insuring employment practices liability risk.
C. A captive insurer shall not accept or cede reinsurance except as provided in section 20-1098.11.
D. A captive insurer that writes life insurance or disability insurance shall comply with all applicable state and federal laws.
E. A captive insurer shall:
1. Hold at least one meeting of its board of directors or its board of managers or, for reciprocal insurers, its subscribers' advisory committee each year in this state.
2. Maintain its principal place of business in this state.
3. Appoint a resident statutory agent to accept service of process and to otherwise act on its behalf in this state and shall file the appointment with the director. In the case of a captive insurer formed as a reciprocal insurer, if the statutory agent cannot with reasonable diligence be found at the registered office of the captive insurer, the director is an agent of the captive insurer on whom any process, notice or demand may be served.
F. Before receiving a license, an applicant for a captive insurer license shall file with the director the following:
1. If formed as a corporation, a certified copy of its articles of incorporation, articles of organization or other organizational document, a copy of its duly adopted bylaws or other governance rules, a statement under oath of its president and secretary showing its financial condition and any other statement or document required by the director.
2. If formed as a reciprocal insurer, a copy of the power of attorney of its attorney-in-fact, a copy of its subscribers' agreement, a copy of its duly adopted bylaws or other governance rules, a statement under oath of its attorney-in-fact showing its financial condition and any other statement or document required by the director.
G. In addition to the information required by subsection F of this section, each applicant for a captive insurer license shall file with the director evidence of all of the following:
1. The amount and liquidity of its assets relative to the risks to be assumed.
2. The adequacy of the expertise, experience and character of the directors and officers of the captive insurer.
3. The overall soundness of its plan of operation.
4. The adequacy of the loss prevention programs of its insureds.
5. The engagement of a competent manager that does business at a location in this state.
6. The establishment of business relationships with any accountants, banks, attorneys and other professionals that are acceptable to the department.
7. The ability of the captive insurer's owners or members to pay claims to third parties if the captive insurer is unable to pay those claims.
8. Other factors deemed relevant by the director in ascertaining whether the proposed captive insurer will be able to meet its policy obligations.
H. In addition to the information required by subsections F and G of this section, if the applicant is seeking authority as a protected cell captive insurer, the applicant shall file:
1. A business plan that demonstrates, in a manner acceptable to the director, how the applicant will account for the loss and expense experience of each protected cell and report that information to the director.
2. A statement acknowledging that all financial records of the protected cell captive insurer, including records pertaining to protected cells, shall be available for inspection or examination by the director or the director's designee.
3. Its form for all participant contracts.
4. Evidence that the protected cell captive insurer will allocate expenses fairly and equitably to each protected cell.
I. Before the issuance of a license, an applicant shall promptly notify the director of any material change in the information filed pursuant to this section.
J. An applicant for a captive insurer license shall pay to the director a nonrefundable fee for the issuance of a captive insurance license pursuant to section 20-167. The captive insurer shall pay the license renewal fee pursuant to section 20-167 when the captive insurer files the annual report prescribed in section 20-1098.07 not earlier than July 1 and not later than September 1 of each year.
K. If the director is satisfied that the documents and statements that the applicant has filed comply with this article, the director may grant the applicant a captive insurer license that authorizes the captive insurer to transact captive insurance business in this state.
L. The director shall approve or deny an application for a license to transact captive insurance business within thirty days after the director deems the application complete. END_STATUTE
Sec. 3. Section 20-1098.03, Arizona Revised Statutes, is amended to read:
START_STATUTE20-1098.03. Minimum capital and surplus; letter of credit; borrowed surplus
A. The director shall not issue a license to a captive insurer unless the insurer possesses and thereafter maintains minimum unimpaired paid-in capital and surplus in combination as follows:
1. In the case of a pure captive insurer, at least $250,000.
2. In the case of a group captive insurer, at least $500,000.
3. In the case of an agency captive insurer, at least $500,000.
4. In the case of a protected cell captive insurer, at least $500,000 $250,000.
5. In the case of a captive insurer that is organized as a reciprocal insurer, at least $500,000.
6. In the case of a pure or group captive insurer that transacts only reinsurance, one-half of the applicable amount prescribed in paragraph 1 or 2 of this subsection.
B. All minimum capital and surplus requirements shall be in the form of cash or an irrevocable and unconditional letter of credit that contains an evergreen clause, that is payable to, filed with and held by the director in trust for the protection of all policyholders, ceding insurers and related expenses and that meets the following conditions:
1. The letter of credit shall be issued or confirmed by a qualified United States financial institution as defined in section 20-3601, subsection A and shall comply with the requirements prescribed by the director.
2. The captive insurer shall not be directly or contingently liable for any letter of credit comprising its capital or surplus, and its assets shall not be pledged as security for the letter of credit.
C. The director may prescribe additional capital and surplus requirements based on the type, volume and nature of insurance. The captive insurer may pledge, with the approval of the department, any additional prescribed capital and surplus, whether in the form of cash, another allowable asset or any irrevocable and unconditional letter of credit that contains an evergreen clause.
D. Notwithstanding any other provision of this title, a written agreement under which a captive insurer borrows monies that are required to be repaid only out of the insurers surplus in excess of that stipulated in the agreement may provide for interest at any rate agreed on and approved by the director.
E. A captive insurer that is established solely for the purpose of reinsuring risks as part of a program filed and approved by the director to facilitate the securitization of risks ceded to the captive insurer may be a party to contracts that provide that subsequent purchasers of interests in the program assume the interests on a nonrecourse basis, both as to the captive insurer and any affiliate. END_STATUTE
Sec. 4. Section 20-1098.04, Arizona Revised Statutes, is amended to read:
START_STATUTE20-1098.04. Formation of captive insurers; redomestication
A. An agency captive insurer or protected cell captive insurer shall be incorporated as a stock insurer with its capital divided into shares and held by the stockholders. Each owner of an agency captive insurer shall be licensed as an insurance producer.
B. A group captive insurer may be formed in any of the following ways:
1. Incorporated as a stock insurer with its capital divided into shares and held by the stockholders.
2. Incorporated as a mutual insurer without capital stock, the governing body of which is elected by the member organizations of its association.
3. Organized as a reciprocal insurer pursuant to article 2 of this chapter.
4. Incorporated as a nonprofit corporation pursuant to title 10, chapter 25.
C. A pure captive insurer may be formed in any of the following ways:
1. Incorporated as a stock insurer with its capital divided into shares and held by the stockholders.
2. Incorporated as a nonprofit corporation pursuant to title 10, chapter 25.
3. Incorporated as a limited liability company that is manager-managed pursuant to title 29.
D. The capital stock of a captive insurer that is incorporated as a stock insurer may be authorized with no par value.
E. A captive insurer that is formed as a corporation shall have at least three incorporators, at least one of whom shall be a resident of this state. Notwithstanding subsection B, paragraph 3 of this section, a captive insurer that is formed as a reciprocal insurer may be organized by three or more subscribers, none of whom shall be required to be a resident of this state.
F. A pure captive insurer shall have at least one director. Any other kind of corporate captive insurer shall have at least three directors. Any group captive insurer formed as a reciprocal insurer shall have at least three subscribers' advisory committee members. In addition to independent directors, a group captive insurer may have as many directors as it has members.
G. A captive insurer that is formed as a corporation shall have at least one member of the board of directors who is a resident of this state. A captive insurer that is formed as a limited liability company shall have at least one member of its board of managers who is a resident of this state. A captive insurer that is formed as a reciprocal insurer shall have at least one member of the subscribers' advisory committee who is a resident of this state.
H. The articles of incorporation or bylaws of a captive insurer that is formed as a corporation with more than one director may authorize a quorum of a board of directors to consist of at least one-third of the fixed or prescribed number of directors, but at least two directors. The subscribers' agreement or other organizing document of a captive insurer formed as a reciprocal insurer may authorize a quorum of a subscribers' advisory committee to consist of at least one-third of the number of its members, but at least two members.
I. Any foreign or alien insurer may become a domestic captive insurer by complying with the requirements of this article relating to the licensing of a domestic captive insurer and by complying with all applicable requirements of the laws of this state relating to the domestication of a corporation to this state. The effective date of a license that is issued to a foreign or alien insurer domesticated to this state shall be the date of filing its articles of domestication with the corporation commission. END_STATUTE
Sec. 5. Title 20, chapter 4, article 14, Arizona Revised Statutes, is amended by adding section 20-1098.24, to read:
START_STATUTE20-1098.24. Dormant captive insurers; certificate of dormancy; report; fee; rules
A. A captive insurer that is domiciled in this state and that meets the definition of dormant captive insurer may apply for a certificate of dormancy by submitting an application to the director on a form prescribed by the director. The certificate of dormancy is subject to renewal every five years and expires unless renewed.
B. A dormant captive insurer that is issued a certificate of dormancy shall:
1. Possess and thereafter maintain unimpaired, paid-in CAPITAL and surplus of at least $125,000.
2. Not later than ninety days after the end of the dormant captive insurer's fiscal year, submit to the director a report of its financial condition that is verified by oath of two of its executive officers.
3. Pay a certificate renewal fee as prescribed in section 20-167.
C. A dormant captive insurer may surrender its certificate of dormancy by submitting an application to surrender to the director. The dormant captive insurer may not issue insurance policies or conduct the business of insurance until the director approves the application to surrender.
D. the director shall revoke A certificate of dormancy if a dormant captive insurer no longer meets the definition of dormant captive insurer.
E. The director may adopt guidelines, procedures and rules to implement this section. END_STATUTE