DODD FRANK AND CAPTIVES

Transcription

1 DODD FRANK AND CAPTIVES Delaware Captive Insurance Association 2014 DCIA Spring Forum Hotel du Pont Wilmington, DE May 13, 2014 Paul Phillips III Ernst & Young LLP 155 N. Wacker Drive Chicago, IL / Fax 866/ Patrick Theriault Strategic Risk Solutions 126 College Street, Suite 400 Burlington, VT / Fax 802/ Charles J. ( Chaz ) Lavelle Bingham Greenebaum Doll LLP 101 S. Fifth Street, Suite 3500 Louisville, KY / Fax 502/ clavelle@bgdlegal.com Richard F. Klumpp Wilmington Trust SP Services, Inc N. Market St., Suite 1300 Wilmington, DE /651/8356 Fax 302/ rklumpp@wilmingtontrust.com

2 Types of Taxes Based on Premium Premium Tax imposed on insurance companies licensed in state Surplus Lines Tax imposed on broker licensed in state with respect to insurance from insurance company not licensed in state for hard to place coverage Self Procurement Tax imposed on insured that purchases insurance from an insurance company that is not licensed in state 2

3 Rates of Taxes Measured By Premium The commercial insurance premium tax is generally in the range of 2% to 3% The captive insurance premium tax rate is often.4% or.38% of premium (sometimes on the first $x of premiums, then lower); some states impose a fee (say $5,000) rather than, or a cap on, premium tax The surplus lines tax is typically greater than the commercial insurance premium tax, often 2% to 5% The self procurement tax rate is usually comparable to the surplus lines tax rate 3

4 Nexus The premium tax is imposed on an insurance company licensed in the state Normally, an insurance company must have some nexus to the state in order for the state to have the authority to tax that company Nexus generally means that the company has sufficient contacts with the state (physical presence property or employees in the state vs. economic nexus) 4

5 Nexus (cont d) Allgeyer v. Louisiana, 165 U.S. 578 (1897) misdemeanor and $1,000 fine prohibited where the risk was in Louisiana, but it was insured in New York, although there was a letter sent by the insured, from Louisiana St. Louis Cotton Compress Co. v. Arkansas, 260 U.S. 346 (1922) Arkansas could not collect premium tax where the risk was located in Arkansas, but the insurance company was in Missouri The insurance company did not have any office in Arkansas The insurance company did not have any agents in Arkansas 5

6 Nexus (cont d) Connecticut General Life Insurance v. Johnson, 303 U.S. 77 California could not tax two insurance companies authorized to do business in California, where one reinsured life insurance on California residents to the other in Connecticut 6

7 Surplus Lines Surplus Lines Broker Have to demonstrate inability to obtain coverage Must have made robust search Although the insurance company may be outside the reach of the state to tax, the broker is subject to tax There is nexus because the broker does business in the state 7

8 Self Procurement Tax The self procurement tax is imposed by about 40 states; Delaware enacted a 2% tax after Dodd Frank was enacted (18 Del. C. 1926). Before that, there was no statute; see Atlas Mutual Insurance Co. v. Fisheries Co., 22 Del. 256 (1907) The self procurement tax is also referred to as direct placement A state cannot impose a premium tax on a company not licensed or doing business in that state and a self procured policy is not subject to a surplus lines tax on the broker (there is no broker on the transaction and no company listed on the surplus lines list) 8

9 Self Procurement Tax (cont d) The question is whether a state can levy a tax on the self-procurement of insurance on one of its citizens, when the acquisition of the insurance takes place wholly outside the state? 9

10 Todd Shipyards, 370 U.S. 451 (1962) In State Board of Insurance v. Todd Shipyards Corp., the U.S. Supreme Court held that Texas could not tax the purchase of insurance by a New York company from a New York insurance company, even though the risk insured (ship yard) was in Texas The policy was issued outside Texas All the negotiations for the policy took place outside Texas The payment of the premium was outside Texas The claims adjustment and payment would be outside Texas The insurers are not licensed in Texas, nor have agents, an office or place of business, nor solicit business or investigate risks or claims in Texas 10

11 Todd Shipyards (cont d) Todd Shipyards reaffirmed the earlier cases such as Allgeyer v. Louisiana St. Louis Cotton Compress Co. v. Arkansas Connecticut General Life Insurance v. Johnson Todd Shipyards said that nothing in the McCarran Ferguson Act changed the earlier cases McCarran Ferguson Act generally gives states the right to tax and regulate insurance 11

12 Dow Chemical Co. v. Rylander The Texas state court found that Texas could not impose the self procurement tax in Dow Chemical Co. v. Rylander, 38 S.W. 3d 741 (Texas 2001) The court followed Todd Shipyards because in Dow the insurance company was outside Texas, the property was owned by a non-texas company, the policies were negotiated, executed, delivered and paid for outside of Texas, claims would be investigated outside Texas, there would be no communications inside Texas, etc. 12

13 Other State Procurement Tax Cases Despite Todd Shipyards and Dow Chemical, other state courts have often imposed a self procurement or other tax on purchase of insurance by an insured directly from a non-licensed insurance company. For instance: Associated Electric & Gas Insurance Services, Ltd. v. Clark, 676 A. 2d 1357 (R.I. 1996), AEGIS is a leading case 13

14 AEGIS (R.I. 1996) Associated Electric & Gas Insurance Services, Ltd v. Clark (R.I. 1996) -- AEGIS is a foreign (Bermuda) insurance company that insured four electric utilities in New Hampshire Neither AEGIS or its affiliate, AEGIS Services, and MGA, entered the state of Rhode Island This case is really a premium tax case, because Rhode Island did not have a self-procurement tax AEGIS said that it did not conduct business in Rhode Island and Todd Shipyards forbade the imposition of tax 14

15 AEGIS (cont d) The Rhode Island court looked to a U.S. Supreme Court case that occurred after Todd Shipyards, but had nothing to do with insurance Quill Corp. v. North Dakota, 504 U.S. 298 (1992) involved a company that saturated North Dakota with mail order catalogues, although Quill did not have any property or employees in North Dakota North Dakota imposed a sales tax on the mail orders made by North Dakota residents 15

16 AEGIS (cont d) In Quill, the U.S. Supreme Court noted that, even though Quill did not have a physical presence in North Dakota, Quill availed itself of an economic market in North Dakota The Rhode Island court concluded that (1) Quill represented the current view of the U.S. Supreme Court (and, essentially, Todd Shipyards had been passed by) and that (2) the U.S. Supreme Court would impose a tax under its current view Thus, the Rhode Island court imposed the tax 16

17 The Nonadmitted Reinsurance Reform Act (NRRA) of 2010 The only tax provision included in Dodd-Frank Wall Street Reform and Consumer Protection Act PL (July 21, 2010), effective July 21, Codified at 15 U.S.C et. seq. Purpose was to make uniform and simplify the payment of taxes on excess and surplus lines insurance. Make placement of such insurance easier. Previous law could subject > 100% of premiums to state tax. 17

18 The Nonadmitted Reinsurance Reform Act (NRRA) of 2010 Tax is imposed on the Insured (directly or via an E&S broker), not the Insurer. The Insured must pay a premium tax on the premiums paid to an unauthorized insurance company. Unauthorized insurers are those not licensed to write insurance in the state. Rates range from 1% to 6% of premium. 40 states imposed this type of tax. 18

19 The Nonadmitted Reinsurance Reform Act (NRRA) of 2010 Only the insured s home state can impose a tax for non-admitted insurance. Home state headquarters state or principal place of business. New York where the insured maintains its headquarters and where the insured's high-level officers direct, control and coordinate the business activities. NY CLS Tax 1550 (d)(2)(a). 19

20 The Nonadmitted Reinsurance Reform Act (NRRA) of 2010 Tax imposed on 100% of the premiums. Imposed on premium for risk not located in the home state. The NRRA authorizes (and everyone assumed that) the states would enter into compacts to distribute tax to states where the risk is located. The home state would collect 100% of the tax. The home state could require that the surplus lines brokers and insureds file reports each year in which the premiums would be allocated among the states in which the risk resided. The home state would then divvy up the tax among the states in which the risk resided. 20

21 The Nonadmitted Reinsurance Reform Act (NRRA) of 2010 Two different compacts have arisen, but neither is in force: NIMA (Non-Admitted Insurance Multi-State Agreement). This has the support of the NAIC. 12 states have adopted, but 6 have pulled out. SLIMPACT (Surplus Lines Insurance Multi-State Compact) Supported by the NCOIL National Council of Insurance Legislators. 9 states have adopted. Tennessee just pulled out. Many larger states have determined to keep the 100% that they collect, and forego the ability to share in other states receipts (NY). 21

22 The Nonadmitted Reinsurance Reform Act (NRRA) of 2010 Tax originally intended only to apply to property and casualty insurance. Maine has expanded the application to life and annuity premium. Maine HB 1293 (2012). Unauthorized Insurer includes surplus lines company. Does it literally include a captive? 22

23 Impact of Dodd Frank on Captive Industry Real or Fantasy? Definitely real, but justified? Appears to have fallen down the critical issue list after early alarm We have noticed direct impacts on: Industry Associations representing captives Certain U.S. states broad range reaction Captive Owners both existing and prospective 23

24 Industry Response Significant and active (NRRA, VCIA, CICA, etc ) Associations attempt to repair miss-step Amendment/clarification to Dodd Frank sought Industry Experts disagree on steps to be taken Upon Dodd Frank discovery React vs. do nothing and let the storm die down Post Dodd Frank publicity Attempt to repeal/clarify vs. leave it alone Where are we now? No change to Dodd Frank and limited clarification Already old news and/or new issues are taking precedent 24

25 States Reaction Varies significantly Most still unaware of possible impact on captives altogether The old guard remains consistent or increase focus (Texas) Certain states use Dodd Frank as a marketing tool to attract or encourage captive formation/redomestication (Missouri, New Jersey) Established captive states down play impact Some indirect actions focused on captives directly noticed Texas rule 3.8 and new Indiana foreign captive tax More to come? 25

26 Captive Owners Reaction Most smaller organizations are unaware Some service providers are also unaware or have already forgotten Sophisticated captive owners have performed thorough in depth reviews Most decided to take a wait and see approach Some redomestications seen In response to Dodd Frank or as a result of wanting to be a good corporate citizen? 26

27 Greatest Impact Seen on New Captives Greater emphasis on self procurement tax when completing a feasibility study and domicile comparison Home state review Premium allocation by state (split policies) Review of potential exposure (self procurement tax rates) Impact we have seen during feasibility phase Financial and operational impact could adversely impact captive viability Increased interest in fronting arrangement Increased interest in new captive states Review of multi-captive or branch captive arrangements 27

28 Some SRS Client Action Examples New York based client forming a VT captive elects to pay New York self procurement tax Missouri based client elects to insert fronting carrier in captive structure over redomestication or payment of self procurement tax Couple clients elect redomestication Prospect evaluates fronting and multi-captive structure and finally elects to not pursue captive due to increased complexity 28

29 Texas Captive Legislation As it Happened. Senate Bill 734 signed by Governor Perry on June 14, 2013 Texas Department of Insurance ( TDI ) issued informal rules on August 30, 2013 TDI proposed formal rules on November 22, 2013 started accepting applications for redomestication TxCIA first annual conference held in Austin February 18 & 19, 2014 First Captive licensed in Texas on March 18, 2014 TDI Adopted formal rules, effective April 27,

30 Coalition for Captive Insurance Clarity (CICC) Formed by VCIA in 2012 DCIA is an original member Purpose is to clarify that captive insurance companies are not part of the Nonadmitted and Reinsurance Reform Act (NRRA) If not part of NRRA, then what??? 30

31 QUESTIONS?