First Substitute H.B. 55

Representative James A. Dunnigan proposes the following substitute bill:

1 CAPTIVE INSURANCE COMPANY
2 AMENDMENTS
3 2008 GENERAL SESSION
4 STATE OF UTAH
5 Chief Sponsor: James A. Dunnigan
6 Senate Sponsor: Kevin T. VanTassell
7
8 LONG TITLE
9 General Description:
10 This bill modifies the Captive Insurance Companies Act and enacts the Special Purpose
11 Financial Captive Insurance Company Act.
12 Highlighted Provisions:
13 This bill:
14 . addresses fee amounts that are nonlapsing;
15 . modifies and enacts definitions;
16 . makes changes related to a captive insurance company formed as a limited liability
17 company;
18 . addresses applicable law;
19 . addresses the applicability of reorganization, receivership, and injunction statutes;
20 . addresses permissive areas of insurance;
21 . addresses sponsored captive insurance companies;
22 . addresses reporting to the commissioner;
23 . enacts the Special Purpose Financial Captive Insurance Company Act including:
24 . defining terms;
25 . outlining applicable law;

26 . imposing reporting requirements;
27 . imposing requirements related to books and records;
28 . providing for a transition to the new certificate of authority;
29 . establishing a process to issue a certificate of authority;
30 . addressing revocation, suspension, amendment, or modification of a certificate
31 of authority;
32 . requiring commissioner approval of certain actions;
33 . addressing sponsored captives;
34 . addressing the formation, assets, investments, and securities of a special purpose
35 financial captive insurance company;
36 . addressing reinsurance; and
37 . providing for enforcement and delinquency; and
38 . makes technical and conforming amendments.
39 Monies Appropriated in this Bill:
40 None
41 Other Special Clauses:
42 This bill has multiple effective dates.
43 Utah Code Sections Affected:
44 AMENDS:
45 31A-3-304, as last amended by Laws of Utah 2006, Chapter 320
46 31A-37-102, as last amended by Laws of Utah 2004, Chapter 312
47 31A-37-103, as enacted by Laws of Utah 2003, Chapter 251
48 31A-37-104, as last amended by Laws of Utah 2004, Chapter 312
49 31A-37-106, as last amended by Laws of Utah 2004, Chapter 312
50 31A-37-202, as last amended by Laws of Utah 2004, Chapter 312
51 31A-37-402, as last amended by Laws of Utah 2004, Chapter 312
52 31A-37-501, as last amended by Laws of Utah 2006, Chapter 177
53 31A-37-502, as last amended by Laws of Utah 2007, Chapter 307
54 31A-37-602, as enacted by Laws of Utah 2004, Chapter 312
55 31A-37-603, as enacted by Laws of Utah 2004, Chapter 312
56 ENACTS:

57 31A-37a-101, Utah Code Annotated 1953
58 31A-37a-102, Utah Code Annotated 1953
59 31A-37a-103, Utah Code Annotated 1953
60 31A-37a-104, Utah Code Annotated 1953
61 31A-37a-105, Utah Code Annotated 1953
62 31A-37a-201, Utah Code Annotated 1953
63 31A-37a-202, Utah Code Annotated 1953
64 31A-37a-203, Utah Code Annotated 1953
65 31A-37a-204, Utah Code Annotated 1953
66 31A-37a-205, Utah Code Annotated 1953
67 31A-37a-301, Utah Code Annotated 1953
68 31A-37a-302, Utah Code Annotated 1953
69 31A-37a-303, Utah Code Annotated 1953
70 31A-37a-304, Utah Code Annotated 1953
71 31A-37a-401, Utah Code Annotated 1953
72 31A-37a-402, Utah Code Annotated 1953
73 31A-37a-501, Utah Code Annotated 1953
74 31A-37a-502, Utah Code Annotated 1953
75
76 Be it enacted by the Legislature of the state of Utah:
77 Section 1. Section 31A-3-304 is amended to read:
78 31A-3-304. Annual fees -- Other taxes or fees prohibited.
79 (1) (a) A captive insurance company shall pay an annual fee imposed under this section
80 to obtain or renew a certificate of authority.
81 (b) The commissioner shall:
82 (i) determine the annual fee pursuant to Sections 31A-3-103 and 63-38-3.2 ; and
83 (ii) consider whether the annual fee is competitive with fees imposed by other states on
84 captive insurance companies.
85 (2) A captive insurance company that fails to pay the fee required by this section is
86 subject to the relevant sanctions of this title.
87 (3) (a) Except as provided in Subsection (3)(b) and notwithstanding Title 59, Chapter

88 9, Taxation of Admitted Insurers, the fee provided for in this section constitutes the sole tax or
89 fee under the laws of this state that may be otherwise levied or assessed on a captive insurance
90 company, and no other occupation tax or other tax or fee may be levied or collected from a
91 captive insurance company by the state or a county, city, or municipality within this state.
92 (b) Notwithstanding Subsection (3)(a), a captive insurance company is subject to real
93 and personal property taxes.
94 (4) A captive insurance company shall pay the fee imposed by this section to the
95 department by March 31 of each year.
96 (5) (a) The funds received pursuant to Subsection (2) shall be deposited into the
97 General Fund as a dedicated credit to be used by the department to:
98 (i) administer and enforce Chapter 37, Captive Insurance Companies Act; and
99 (ii) promote the captive insurance industry in Utah.
100 (b) At the end of each fiscal year, funds received by the department in excess of
101 [$250,000] $750,000 shall be treated as free revenue in the General Fund.
102 Section 2. Section 31A-37-102 is amended to read:
103 31A-37-102. Definitions.
104 As used in this chapter:
105 (1) "Affiliated company" means a [company] business entity that because of common
106 ownership, control, operation, or management is in the same corporate system as:
107 (a) a parent;
108 (b) an industrial insured; or
109 (c) a member organization.
110 (2) "Alien captive insurance company" means an [insurance company] insurer:
111 (a) formed to write insurance business for [its parents and affiliates] a parent or
112 affiliate of the insurer; and
113 (b) licensed pursuant to the laws of an alien jurisdiction that imposes statutory or
114 regulatory standards:
115 (i) on [companies] a business entity transacting the business of insurance in the alien
116 jurisdiction; and
117 (ii) in a form acceptable to the commissioner.
118 (3) "Association" means a legal association of [individuals, corporations, partnerships,

119 or associations] two or more persons that has been in continuous existence for at least one year
120 if:
121 (a) the association or its member organizations:
122 (i) own, control, or hold with power to vote all of the outstanding voting securities of
123 an association captive insurance company incorporated as a stock insurer; or
124 (ii) have complete voting control over an association captive insurance company
125 incorporated as a mutual insurer; [or]
126 (b) the association's member organizations collectively constitute all of the subscribers
127 of an association captive insurance company formed as a reciprocal insurer[.]; or
128 (c) the association or its member organizations have complete voting control over an
129 association captive insurance company formed as a limited liability company.
130 (4) "Association captive insurance company" means a [company] business entity that
131 insures risks of [the]:
132 (a) a member [organizations] organization of the association; [and]
133 (b) [affiliates of the] an affiliate of a member [organizations] organization of the
134 association[.]; and
135 (c) the association.
136 (5) "Branch business" means [any] an insurance business transacted by a branch
137 captive insurance company in this state.
138 (6) "Branch captive insurance company" means an alien captive insurance company
139 that has [obtained] a certificate of authority [by] from the commissioner to transact the business
140 of insurance in this state through a business unit with a principal place of business in this state.
141 (7) "Branch [operations"] operation" means [any] a business [operations] operation of a
142 branch captive insurance company in this state.
143 (8) "Captive insurance company" means any of the following formed or holding a
144 certificate of authority under this chapter:
145 (a) a branch captive insurance company;
146 (b) a pure captive insurance company;
147 (c) an association captive insurance company;
148 (d) a sponsored captive insurance company;
149 (e) an industrial insured captive insurance company;

150 (f) a captive reinsurance company; [or]
151 (g) a special purpose captive insurance company[.]; or
152 (h) a special purpose financial captive insurance company.
153 (9) "Captive reinsurance company" means a [reinsurance company] reinsurer that is:
154 (a) formed or [licensed] has a certificate of authority pursuant to this chapter;
155 (b) wholly owned by a qualifying [reinsurance] reinsurer parent company; and
156 (c) a stock corporation.
157 (10) "Common ownership and control" means that two or more captive insurance
158 companies are owned or controlled by the same person or group of persons as follows:
159 (a) in the case of a captive insurance company that is a stock [corporations]
160 corporation, the direct or indirect ownership [by the same shareholder or shareholders] of 80%
161 or more of the outstanding voting stock of [two or more corporations] the stock corporation;
162 [and]
163 (b) in the case of a captive insurance company that is a mutual [corporations]
164 corporation, the direct or indirect ownership [by the same member or members] of 80% or
165 more of the surplus and the voting power of [two or more corporations.] the mutual
166 corporation;
167 (c) in the case of a captive insurance company that is a limited liability company, the
168 direct or indirect ownership by the same member or members of 80% or more of the
169 membership interests in the limited liability company; or
170 (d) in the case of a sponsored captive insurance company, a protected cell is a separate
171 captive insurance company owned and controlled by the protected cell's participant, only if:
172 (i) the participant is the only participant with respect to the protected cell; and
173 (ii) the participant is the sponsor or is affiliated with the sponsor of the sponsored
174 captive insurance company through common ownership and control.
175 (11) "Commissioner" means the Insurance Commissioner or the commissioner's
176 designee.
177 (12) "Consolidated debt to total capital ratio" means the ratio of Subsection (12)(a) to
178 (b).
179 (a) This Subsection (12)(a) is an amount equal to the sum of all debts and hybrid
180 capital instruments including:

181 (i) all borrowings from depository institutions;
182 (ii) all senior debt;
183 (iii) all subordinated debts;
184 (iv) all trust preferred shares; and
185 (v) all other hybrid capital instruments that are not included in the determination of
186 consolidated GAAP net worth issued and outstanding.
187 (b) This Subsection (12)(b) is an amount equal to the sum of:
188 (i) total capital consisting of all debts and hybrid capital instruments as described in
189 Subsection (12)(a); and
190 (ii) shareholders' equity determined in accordance with generally accepted accounting
191 principles for reporting to the United States Securities and Exchange Commission.
192 (13) "Consolidated GAAP net worth" means the consolidated shareholders' equity
193 determined in accordance with generally accepted accounting principles for reporting to the
194 United States Securities and Exchange Commission.
195 (14) "Controlled unaffiliated business" means a [company] business entity:
196 (a) (i) in the case of a pure captive insurance company, that is not in the corporate
197 system of a parent [and affiliates;] or the parent's affiliate; or
198 (ii) in the case of an industrial insured captive insurance company, that is not in the
199 corporate system of an industrial insured or an affiliated company of the industrial insured;
200 (b) (i) in the case of a pure captive insurance company, that has [an existing] a
201 contractual relationship with a parent or affiliate; [and] or
202 (ii) in the case of an industrial insured captive insurance company, that has a
203 contractual relationship with an industrial insured or an affiliated company of the industrial
204 insured; and
205 (c) whose risks are managed by [a pure captive insurance company] one of the
206 following in accordance with [Section 31A-37-504 .] Subsection 31A-37-106 (1)(k):
207 (i) a pure captive insurance company; or
208 (ii) an industrial insured captive insurance company.
209 (15) "Department" means the Insurance Department.
210 (16) "Industrial insured" means an insured:
211 (a) that produces insurance:

212 (i) by the services of a full-time employee acting as a risk manager or insurance
213 manager; or
214 (ii) using the services of a regularly and continuously qualified insurance consultant;
215 (b) whose aggregate annual premiums for insurance on all risks total at least $25,000;
216 and
217 (c) that has at least 25 full-time employees.
218 (17) "Industrial insured captive insurance company" means a [company] business
219 entity that:
220 (a) insures risks of[: (a)] the industrial insureds that comprise the industrial insured
221 group; and
222 [(b) the affiliates of the industrial insured group.]
223 (b) may insure the risks of:
224 (i) an affiliated company of an industrial insured; or
225 (ii) a controlled unaffiliated business of:
226 (A) an industrial insured; or
227 (B) an affiliated company of an industrial insured.
228 (18) "Industrial insured group" means:
229 (a) a group of industrial insureds that collectively:
230 (i) own, control, or hold with power to vote all of the outstanding voting securities of
231 an industrial insured captive insurance company incorporated as a stock insurer; or
232 (ii) have complete voting control over an industrial insured captive insurance company
233 incorporated as a mutual insurer; [or]
234 (b) a group that is:
235 (i) created under the Product Liability Risk Retention Act of 1981, 15 U.S.C. Section
236 3901 et seq., as amended, as a corporation or other limited liability association; and
237 (ii) taxable under this title as a:
238 (A) stock corporation; or
239 (B) mutual insurer[.]; or
240 (c) a group that has complete voting control over an industrial captive insurance
241 company formed as a limited liability company.
242 (19) "Member organization" means [an individual, corporation, partnership, or

243 association] a person that belongs to an association.
244 (20) "Parent" means a [corporation, partnership, or individual] person that directly or
245 indirectly owns, controls, or holds with power to vote more than 50% of:
246 (a) the outstanding voting securities of a pure captive insurance company[.]; or
247 (b) the pure captive insurance company, if the pure captive insurance company is
248 formed as a limited liability company.
249 (21) "Participant" means [any of the following] an entity that [are] is insured by a
250 sponsored captive insurance company[,]:
251 (a) if the losses of the participant are limited through a participant contract to the assets
252 of a protected cell[:]; and
253 [(a) an] (b)(i) the entity is permitted to be a participant under Section 31A-37-403 ;
254 [and] or
255 [(b) any] (ii) the entity is an affiliate of an entity permitted to be a participant under
256 Section 31A-37-403 .
257 (22) "Participant contract" means a contract by which a sponsored captive insurance
258 company:
259 (a) insures the risks of a participant; and
260 (b) limits the losses of the participant to the assets of a protected cell.
261 (23) "Protected cell" means a separate account established and maintained by a
262 sponsored captive insurance company for one participant.
263 (24) "Pure captive insurance company" means a [company] business entity that insures
264 risks of [its parent and affiliates] a parent or affiliate of the business entity.
265 (25) "Qualifying reinsurer parent company" means a reinsurer:
266 (a) authorized to write reinsurance by this state; and
267 (b) that has:
268 (i) a consolidated GAAP net worth of not less than $500,000,000; and
269 (ii) a consolidated debt to total capital ratio not greater than .50.
270 (26) "Special purpose financial captive insurance company" is as defined in Section
271 31A-37a-102 .
272 [(26)] (27) "Sponsor" means an entity that:
273 (a) meets the requirements of Section 31A-37-402 ; and

274 (b) is approved by the commissioner to:
275 (i) provide all or part of the capital and surplus required by applicable law; and
276 (ii) organize and operate a sponsored captive insurance company.
277 [(27)] (28) "Sponsored captive insurance company" means a captive insurance
278 company:
279 (a) in which the minimum capital and surplus required by applicable law is provided by
280 one or more sponsors;
281 (b) that is formed or holding a certificate of authority under this chapter;
282 (c) that insures the risks of a separate [participants] participant through the contract;
283 and
284 (d) that segregates each participant's liability through one or more protected cells.
285 [(28)] (29) "Treasury rates" means the United States Treasury strip asked yield as
286 published in the Wall Street Journal as of a balance sheet date.
287 Section 3. Section 31A-37-103 is amended to read:
288 31A-37-103. Chapter exclusivity.
289 (1) Except as provided in Subsection (2) or otherwise provided in this chapter, [no
290 provisions] a provision of this title other than this chapter does not apply to a captive insurance
291 company.
292 (2) In addition to this chapter, and subject to Section 31A-37a-103 :
293 (a) Chapter 37a, Special Purpose Financial Captive Insurance Company Act, applies to
294 a special purpose financial captive insurance company; and
295 (b) for purposes of a special purpose financial captive insurance company, a reference
296 in this chapter to "this chapter" includes a reference to Chapter 37a.
297 Section 4. Section 31A-37-104 is amended to read:
298 31A-37-104. Applicability of reorganization, receivership, and injunction
299 authority.
300 (1) Except as provided in Chapter 37a, Special Purpose Financial Captive Insurance
301 Company Act, and Subsection (2), [the provisions of this title pertaining to insurance
302 reorganizations, receiverships, and injunctions apply] Chapter 27a, Insurer Receivership Act,
303 applies to a captive insurance company formed or holding a certificate of authority under this
304 chapter.

305 (2) In the case of a sponsored captive insurance company:
306 (a) the assets of [the] a protected cell may not be used to pay [any expenses or claims]
307 an expense or claim other than [those] one attributable to the protected cell; and
308 (b) the capital and surplus of the sponsored captive insurance company:
309 (i) shall at all times be available to pay [any]:
310 (A) [expenses] an expense of the sponsored captive insurance company; or
311 (B) [claims] a claim against the sponsored captive insurance company; and
312 (ii) may not be used to pay [expenses or claims] an expense or claim attributable to a
313 protected cell.
314 Section 5. Section 31A-37-106 is amended to read:
315 31A-37-106. Authority to make rules -- Authority to issue orders.
316 (1) In accordance with Title 63, Chapter 46a, Utah Administrative Rulemaking Act, the
317 commissioner may adopt rules to:
318 (a) determine circumstances under which a branch captive insurance company is not
319 required to be a pure captive insurance company;
320 (b) [determine any] require a statement, document, or information that a captive
321 insurance company must provide to the commissioner to obtain a certificate of authority;
322 (c) determine [any factors] a factor a captive insurance company shall provide evidence
323 of under Subsection 31A-37-202 (4)(c);
324 (d) prescribe one or more capital requirements for a captive insurance company in
325 addition to those required under Section 31A-37-204 based on the type, volume, and nature of
326 insurance business transacted by the captive insurance company;
327 (e) establish:
328 (i) the amount of capital or surplus required to be retained under Subsection
329 31A-37-205 (4) at the payment of a dividend or other distribution by a captive insurance
330 company; or
331 (ii) a formula to determine the amount described in Subsection 31A-37-205 (4);
332 (f) waive or modify [the requirements] a requirement for public notice and hearing for
333 [any of] the following by a captive insurance company:
334 (i) merger;
335 (ii) consolidation;

336 (iii) conversion;
337 (iv) mutualization; or
338 (v) redomestication;
339 (g) approve the use of [alternative] one or more reliable methods of valuation and
340 rating for:
341 (i) an association captive insurance company;
342 (ii) a sponsored captive insurance company; or
343 (iii) an industrial insured group;
344 (h) prohibit or limit an investment that threatens the solvency or liquidity of:
345 (i) a pure captive insurance company; or
346 (ii) an industrial insured captive insurance company;
347 (i) determine the financial reports a sponsored captive insurance company shall
348 annually file with the commissioner;
349 (j) [determine] prescribe the required forms and reports under Section 31A-37-501 ; and
350 (k) establish one or more standards to ensure that [a parent or affiliate of a pure captive
351 insurance company]:
352 (i) one of the following is able to exercise control of the risk management function of
353 [any] a controlled unaffiliated business to be insured by [the] a pure captive insurance
354 company[.]:
355 (A) a parent; or
356 (B) an affiliated company of a parent; or
357 (ii) one of the following is able to exercise control of the risk management function of
358 a controlled unaffiliated business to be insured by an industrial insured captive insurance
359 company:
360 (A) an industrial insured; or
361 (B) an affiliated company of the industrial insured.
362 (2) Notwithstanding Subsection (1)(k), until the commissioner adopts the rules
363 authorized under Subsection (1)(k), the commissioner may by temporary order grant authority
364 to insure risks to:
365 (a) a pure captive insurance company [to insure risks.]; or
366 (b) an industrial insured captive insurance company.

367 (3) The commissioner may issue prohibitory, mandatory, and other orders relating to a
368 captive insurance [companies] company as necessary to enable the commissioner to secure
369 compliance with this chapter.
370 Section 6. Section 31A-37-202 is amended to read:
371 31A-37-202. Permissive areas of insurance.
372 (1) (a) Except as provided in Subsection (1)(b), when permitted by its articles of
373 incorporation or charter, a captive insurance company may apply to the commissioner for a
374 certificate of authority to do all insurance authorized by this title except workers' compensation
375 insurance.
376 (b) Notwithstanding Subsection (1)(a):
377 (i) a pure captive insurance company may not insure [any risks] a risk other than
378 [those] a risk of [its]:
379 (A) its parent [and affiliates] or affiliate;
380 (B) a controlled unaffiliated business; or
381 &