By: Murphy, Capriglione (Senate Sponsor - Hughes) H.B. No. 1944
(In the Senate - Received from the House May 8, 2017;
May 8, 2017, read first time and referred to Committee on Business &
Commerce; May 21, 2017, reported favorably by the following vote:
Yeas 6, Nays 1; May 21, 2017, sent to printer.)
Click here to see the committee vote
A BILL TO BE ENTITLED
AN ACT
relating to captive insurance companies.
BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS:
ARTICLE 1. REGULATION OF CAPTIVE INSURANCE COMPANIES
SECTION 1.01. Section 964.001(a), Insurance Code, is
amended by adding Subdivisions (1-a), (1-b), and (8) and amending
Subdivision (2) to read as follows:
(1-a) "Attorney in fact" means a firm or corporation
that, under a power of attorney or other appropriate authorization
of the attorney in fact, acts for subscribers of a captive exchange
by issuing reciprocal or interinsurance contracts.
(1-b) "Captive exchange" means a reciprocal or
interinsurance exchange formed under this chapter. The term
includes the attorney in fact through which a reciprocal or
interinsurance contract, as defined by Section 942.001, is
exchanged.
(2) "Captive insurance company" means a company that
holds a certificate of authority under this chapter to insure the
operational risks of the company's affiliates or risks of a
controlled unaffiliated business. The term includes a captive
exchange.
(8) "Subscriber" means an affiliated company or
controlled unaffiliated business that enters into a reciprocal
contract of insurance with an attorney in fact as a subscriber of a
captive exchange.
SECTION 1.02. 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 1.03. 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 1.04. Sections 964.053(a), (c), (d), and (e),
Insurance Code, are amended to read as follows:
(a) A captive insurance company, other than a captive
exchange, or an attorney in fact must be formed for the purpose of
engaging in the business of insurance under this chapter by filing
an appropriate application with the secretary of state.
(c) The certificate of formation of a captive insurance
company, other than a captive exchange, or an attorney in fact must
comply with the applicable requirements of the Business
Organizations Code. The [must include:
[(1) the] name of the company or attorney in fact in
the certificate of formation may include the words "insurance,"
"company," or similar words indicating that the purpose of the
company or attorney in fact is to operate as an insurance company or
attorney in fact under this chapter [, 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 company's principal business
office;
[(3) the type of insurance business in which the
company proposes to engage;
[(4) the number of directors or members of the
governing body of the company;
[(5) the number of authorized shares and the par value
of the company's capital stock for a captive insurance company
formed as a corporation;
[(6) the amount of the company's initial capital and
surplus; and
[(7) any other information required by the
commissioner as necessary to explain the company's objectives,
management, and control].
(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 1.05. 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 1.06. Section 964.056, Insurance Code, is amended
to read as follows:
Sec. 964.056. CAPITAL AND SURPLUS OR EQUIVALENT
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, or the
equivalent, in an amount determined by the commissioner after
considering:
(1) the amount of premium written by the captive
insurance company;
(2) the characteristics of the assets held by the
captive insurance company;
(3) the terms of reinsurance arrangements entered into
by the captive insurance company;
(4) the type of business covered in policies issued by
the captive insurance company;
(5) the underwriting practices and procedures of the
captive insurance company; and
(6) any other criteria that has an impact on the
operations of the captive insurance company determined to be
significant by the commissioner.
(b) The amount of capital and surplus, or the equivalent,
determined by the commissioner under Subsection (a) may not be less
than $250,000.
(c) The capital and surplus, or the equivalent, 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 1.07. Section 964.057(a), Insurance Code, is
amended to read as follows:
(a) After forming [To obtain a certificate of authority for]
a captive insurance company, other than a captive exchange, or an
attorney in fact, the incorporators or organizers must pay to the
commissioner an application fee and file with the commissioner an
application for a [the] certificate of authority for a captive
insurance company, 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 valid formation
of the captive insurance company, other than a captive exchange, or
the attorney in fact;
(4) an affidavit by the incorporators, organizers, or
officers of the captive insurance company stating that:
(A) the capital and surplus, or the equivalent,
are the bona fide property of the company; and
(B) the certificate of formation or other
documentation demonstrating the captive insurance company's or
attorney in fact'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 1.08. Section 964.058(a), Insurance Code, is
amended to read as follows:
(a) After the application and application fee for a
certificate of authority under Section 964.057 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 and surplus, or the
equivalent, requirements of Section 964.056 are satisfied;
(2) the capital and surplus, or the equivalent, are
the bona fide property of the applicant; and
(3) the applicant has fully complied with applicable
insurance laws.
SECTION 1.09. Sections 964.059(a) and (d), Insurance Code,
are amended to read as follows:
(a) The commissioner shall determine whether:
(1) the capital and surplus, or the equivalent,
[structure] of the applicant meet [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 1.10. Section 964.060, Insurance Code, is amended
by adding Subsection (d) to read as follows:
(d) The commissioner may waive the requirement for a captive
insurance company to file an actuarial report with the company's
annual report if the commissioner determines that the company:
(1) has less than $1 million of net 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 1.11. Section 964.061(b), Insurance Code, is
amended to read as follows:
(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, or the equivalent, required by this chapter.
SECTION 1.12. 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 1.13. The heading to Section 964.063, Insurance
Code, is amended to read as follows:
Sec. 964.063. DIVIDENDS AND DISTRIBUTIONS.
SECTION 1.14. 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 1.15. 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, or the equivalent, 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 1.16. Section 964.070, Insurance Code, is amended
by amending Subsection (a) and adding Subsection (d) to read as
follows:
(a) Any information filed with the commissioner by an
applicant or captive insurance company under this chapter 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) and (c), the information may not be disclosed without the prior
written consent of the applicant or captive insurance company to
which the information pertains.
(d) The secretary of state may index in the public record
any document filed with the secretary by an applicant or captive
insurance company.
SECTION 1.17. Subchapter B, Chapter 964, Insurance Code, is
amended by adding Section 964.073 to read as follows:
Sec. 964.073. ADJUSTER LICENSE NOT REQUIRED; EXCEPTION.
(a) Except as provided by Subsection (b), a captive insurance
company is not required to use a person licensed as an adjuster
under Chapter 4101 to adjust losses.
(b) A captive insurance company shall use a person licensed
as an adjuster under Chapter 4101 to adjust a claim that a person
that is not an affiliated company or an insured controlled
unaffiliated business makes against an affiliated company insured
by the captive insurance company.
ARTICLE 2. CAPTIVE EXCHANGES
SECTION 2.01. Chapter 964, Insurance Code, is amended by
adding Subchapter C to read as follows:
SUBCHAPTER C. CAPTIVE EXCHANGES
Sec. 964.101. 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. 964.102. 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. 964.103. SUBSCRIBER REQUIREMENTS. On and after the
date of the captive exchange's formation, each subscriber of the
captive exchange must:
(1) have an existing affiliation with each other
subscriber; or
(2) satisfy the definition of a controlled
unaffiliated business regardless of any affiliation relationship
created by the captive exchange.
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; or
(B) a limited liability company organized in this
state;
(2) on the date of the captive exchange's formation,
have and maintain a power of attorney with all subscribers of 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. 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.
ARTICLE 3. TRANSITION AND EFFECTIVE DATE
SECTION 3.01. The change in law made by this Act to Section
964.070, Insurance Code, applies only to information filed with the
secretary of state on or after September 1, 2017. Information filed
with the secretary of state before September 1, 2017, is governed by
the law applicable to the information immediately before the
effective date of this Act, and that law is continued in effect for
that purpose.
SECTION 3.02. 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, 2017.
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