Alerts

Gardere Assists in Creating New Captive Insurance Law in Texas

06.11.13

On June 4, 2013, Texas Governor Rick Perry signed a law making Texas the latest state to allow the formation of captive insurers, or "captives." The Government Affairs team at Gardere Wynne Sewell LLP drafted the language for and led negotiations with the Texas Department of Insurance that paved the way for the new law that allows parent companies to form "captive" subsidiaries in Texas to self-insure their affiliates' insurance risks.

The new captive law will give Texas companies (or out-of-state companies operating in Texas) a cutting edge alternative risk management option that has risen in popularity as companies seek to maintain greater autonomy insuring risks that are either expensive or difficult to procure. Captive formation has not previously been an attractive option in Texas because companies have had to domicile their captive in other jurisdictions with a captive law. As a result, those companies have faced multiple state compliance hurdles, uncertain tax consequences, and a host of other administrative and expense burdens inherent in operating an insurance company affiliate outside of a parent's home state.

Scheduled to take effect on Sept. 1, 2013, the TDI will begin authorizing "pure captive" insurers in Texas. The law allows for a parent company that underwrites the insurance needs of its operating subsidiaries in lieu of outsourcing the risk to traditional insurers. Other state laws have expanded upon the "pure captive" model to allow for multiple types of captive formations. Such variations — including association, outside, industry group or branch captives — allow either non-traditional or alien corporate structures to form captives within the given state. Some states also authorize "protected cell" captives in which multiple participants contract for a "sponsored" captive that maintains the assets and funds the liabilities of participants according to the terms of their contracts.

While Texas adopted only a "pure captive" model, the Legislature may set up other forms of captives in future legislative sessions if businesses advocate for them. But for the time being, the Texas captive law affords many attractive options for businesses seeking to form or re-domesticate captives in Texas. Highlights of the new law include:

  • Favorable Tax Consequences: Whereas existing Texas companies with out-of-state captives operate them in Texas by paying the 5 percent self-procurement tax that Texas charges unauthorized insurers. The new law establishes a tax rate of one-half of 1 percent on a captive's taxable premium receipts. The most favorable tax advantage is that the law provides a $200,000 tax cap on premiums. Maintenance taxes will also be imposed on the direct premiums on individual lines of business written by the captive.
  • Greater Taxation Predictability: The capped premium tax applies to "each kind of property or risk without regard to the location of the property or risk." This provides a more certain regulatory structure in the wake of the federal Dodd-Frank legislation's Nonadmitted and Reinsurance Reform Act. Dodd-Frank left some question over whether parent companies could be taxed in their home states for captive insurers based elsewhere, but the Texas law provides necessary predictability by ensuring that captives pay the low Texas rates for all risk underwritten by a captive without regard to the risk's location.
  • Relaxed Regulatory Scrutiny: The new law requires TDI to promulgate rules for the licensing and oversight of captives. The law requires that captives maintain capital and surplus of at least $250,000, the common minimum requirement among other captive laws throughout the nation. TDI will also promulgate rules for annual reporting requirements and standards by which a captive can make loans to its affiliates with the prior approval of the commissioner.
  • Restrictive Confidentiality Provisions: While TDI has the ability to receive and share some of the captive's confidential information, that authority is more limited than what information can be obtained from traditional insurers. For example, the law limits access of a captive's confidential information to only certain entities who are acting in their official capacities, absent written approval from the captives.
  • Registration of Captive Managers: The new law recognizes that formation of an insurance company may not be within the institutional competence of many parent companies since few companies forming captives are in the business of insurance themselves. Thus, captive parents are permitted to hire either an outside insurance company or captive manager to manage the captive, subject to registration with the commissioner.
  • Redomestication of Captives: There is a process by which an existing non-Texas captive can redomesticate to Texas upon the approval of the commissioner. The commissioner is authorized to postpone or waive the imposition of any fees or taxes upon the redomesticating captive for up to two years.

Captives have traditionally been formed by large Fortune 500 companies whose affiliates' national insurance exposure is quite large. But as many small companies become better versed in alternative risk management measures, they find that forming a captive affords greater autonomy when commercial insurance markets are particularly hard. This most often occurs when property/casualty availability stretches thin during times of natural disaster or when costs of specialized coverage for hard-to-insure risks soar. An energy company may form a captive, for example, to guard against environmental claims related to infrequent but potentially high-cost events such as oil spills. Or, health care providers may form a captive to control their own fate with professional liability coverage (i.e., medical malpractice claims).

The new captive law will take effect on Sept. 1, 2013, but many companies are already exploring options to form their captives early so that they can provide input while TDI promulgates its administrative captive formation rules. Given the extensive role the Gardere Government Affairs team played in negotiating the law with TDI, Gardere can assist companies interested in taking advantage of this new pro-business law. We will keep you up-to-date on further developments.

If you have any questions about these or other legislative issues, please contact Kimberly A. Yelkin, executive partner of Gardere Wynne Sewell LLP's Austin Office and chair of the Firm's Government Affairs Practice Group, (kyelkin@gardere.com or 512.542.7001).

The Gardere Captive Team includes Ms. Yelkin, along with Val J. Albright, Partner in the Tax Practice Group, Marco Nájera, Attorney in the Mexico City office, Nanette K. Beaird, Senior Attorney in the Government Affairs Practice Group, and Leslie Ritchie Robnett, Associate in the Government Affairs Practice Group.

The publications contained in this site do not constitute legal advice. Legal advice can only be given with knowledge of the client's specific facts. By putting these publications on our website we do not intend to create a lawyer-client relationship with the user. Materials may not reflect the most current legal developments, verdicts or settlements. This information should in no way be taken as an indication of future results.

Search Tips:

You may use the wildcard symbol (*) as a root expander.  A search for "anti*" will find not only "anti", but also "anti-trust", "antique", etc.

Entering two terms together in a search field will behave as though an "OR" is being used.  For example, entering "Antique Motorcars" as a Client Name search will find results with either word in the Client Name.

Operators

AND and OR may be used in a search.  Note: they must be capitalized, e.g., "Project AND Finance." 

The + and - sign operators may be used.  The + sign indicates that the term immediately following is required, while the - sign indicates to omit results that contain that term. E.g., "+real -estate" says results must have "real" but not "estate".

To perform an exact phrase search, surround your search phrase with quotation marks.  For example, "Project Finance".

Searches are not case sensitive.

back to top