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Companies with Captive Insurance Affiliates - Look Out for a Premiums Tax Increase

On December 10, 2010, the largest bipartisan organization of state representatives – the National Council of State Legislators – voted to support the adoption of a multistate compact that could affect many captive in

December 13, 2010

On December 10, 2010, the largest bipartisan organization of state representatives – the National Council of State Legislators – voted to support the adoption of a multistate compact that could affect many captive insurance companies. 

The compact provides for the centralized collection and allocation of state premium taxes imposed on property and casualty insurance obtained from companies not licensed in the state of the risk. This development is another in a string of legislative and regulatory actions that may fundamentally alter the tax liability of many companies employing a captive insurance entity. Unfortunately, many affected taxpayers are not fully aware, or aware at all, of the possible increase in their tax liability resulting from the adoption of the compact. 

Included as part of the 2,319-page federal Wall Street Reform and Consumer Protection Act, known as the Dodd-Frank Act, was a relatively obscure provision known as the Nonadmitted and Reinsurance Reform Act of 2010 (NRRA). Aimed primarily at simplifying the states’ taxation and regulation of surplus lines insurance, NRRA provides that no state, except the “Home State” of the insured, may impose a premium tax on nonadmitted insurers. However, the NRRA also provides that states may form a compact and determine by agreement how to allocate among the states in which the risk is located the premium taxes paid to the Home State. Thus, for companies with a captive insurance company in their structure, the issues to watch are:

  1. Will their Home State impose a premium tax on 100% of the premiums paid to the captive, regardless of where the risk is located, and if so, at what rate? 
  2. Will their Home State become a member of the anticipated multistate compact? 
  3. What will such a multistate compact ultimately require? 

The contents and scope of a multistate compact for the collection and allocation of taxes on premiums paid to nonadmitted insurers is currently being fleshed out by trade organizations in the form of two separate and competing drafts. One alternative is the Nonadmitted Insurance Multi-State Agreement (NIMA), drafted by the National Association of Insurance Commissioners.  The other, currently more popular alternative, is the Surplus Lines Insurance Multi-State Compliance Compact – otherwise known as SLIMPACT-Lite (and no, it is not a new diet supplement). SLIMPACT-Lite is supported by numerous groups and associations, including the Council of State Govern-ments and the National Council of Insurance Legislators.

The NRRA was aimed primarily at simplifying the taxation and regulation of surplus lines insurance, and the collateral effect on captive insurance companies will be significant. For companies currently not paying a premium tax on insurance purchased from their captive insurance company, NRRA could significantly increase their liability if their Home State joins the compact or does not join the compact but nevertheless imposes its tax on all risks wherever located. Monitoring the implementation of NRRA is important for those with an existing or contemplated captive insurance company.

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