FIN300 Premium Taxes and the Impact of Dodd-Frank. Risk & Insurance Management Society Annual Conference April 18, 2012

Transcription

1 FIN300 Premium Taxes and the Impact of Dodd-Frank Risk & Insurance Management Society Annual Conference April 18,

2 Housekeeping items Silence cellphones! Note exits Be sure to complete the evaluation form Sessions may be either audio or video taped, therefore. Please ask questions with the microphone provided Press may be here too Session materials can be found on the RIMS website and printed at the on-site printing stations 2

3 Arthur Koritzinsky Marsh USA Inc. (203) James Mannello Deloitte Tax LLP (203) Your Panelists Mike Lusk, Moderator Archer Daniels Midland (217)

4 Dodd-Frank: Nonadmitted and Reinsurance Reform Act of 2010 NRRA Applies to non-admitted insurance Does not grant states any new taxing authority, BUT: Text and legislative history contain ambiguities 4

5 Background Generally, insurance companies are taxed on premiums, not income Premiums are adjusted for returns, but not reinsurance paid to others Assumed reinsurance premiums are generally not taxed, but some captive statutes impose a tax of approximately.25% Rates range from a few basis points to 5% What is insurance from a premium tax perspective? 5

6 Admitted Company Obligation to remit to state tax authorities Allocated to each state where exposure is reported Generally not disclosed in policy premium to insureds Compliance is the responsibility of the admitted company 6

7 Surplus Lines-Pre NRRA It is the surplus lines broker or insured s obligation to remit to state tax authorities 50 state laws Who remits payment may be dependent upon allocation Broker must be appropriately licensed in each state where insured has exposures Available only when no admitted markets are available must evidence 3 declinations Price alone is not enough to go with surplus lines company, there must be differences in terms & conditions or declination 7

8 Surplus Lines-Pre NRRA Allocated to each state where exposure is reported Tax is in addition to policy premium and is fully disclosed Tax rates are generally higher than admitted company rates Compliance is not the responsibility of the surplus lines company Proposed federal legislation may make compliance easier 8

9 Direct Placement/Self Procurement- Pre-NRRA Applicable when no US licensed broker is involved with the placement and insured goes direct (a non-us broker may be involved) Approximately 37 states have statutes Applicable to captives and other placements such as Bermuda and European insurance markets State statutes permit direct commercial placements, not personal lines The transaction is not regulated, only taxed 9

10 Direct Placement/Self Procurement- Pre-NRRA Most of the transaction must take place out of state The insured is responsible for reporting the transactions and paying the tax similar to use tax compliance on an individual tax basis Insured awareness levels about the tax are low State revenue departments awareness levels are rising Tax rates are comparable to surplus lines 10

11 Risk Retention Group RRG are a special type of captive authorized by Federal law With proper filings, the RRG can transact certain types of liability insurance business in all 50 states RRGs are not admitted companies, but they are authorized. As such, they pay premium tax to the states based on premium receipts generated in the state 11

12 Risk Retention Group RRG has the compliance obligation to pay, can be an administrative burden if authorized in all states RRG will have submitted informational filings in the states where it transacts business Some states use admitted rates others use surplus lines rates which are generally higher 12

13 Domicile Taxes Most US state captive laws impose a premium tax on captive insurers, non-us domiciles generally do not If imposed, taxes may be on direct placements and/or reinsurance placements Some states have a graduated scale with a minimum and a maximum amount of tax 13

14 Domicile Taxes Active states may directly allocate a portion of the tax for captive regulation and economic development Note that domicile premiums tax rates can vary Reinsurance tax rates (lower) than direct premiums tax (higher) - e.g., VT, and other states 14

15 Self-Procurement Tax What have people been doing? (until now) Total Compliance Every State, Every Policy Partial compliance Payment to Headquarter State on Apportioned Basis Non-compliance or Non-payment Not aware, Head in Sand or reasoned argument Other (light candles) 15

16 What were problems with the system? Non-compliance Uneven taxes Uneven enforcement Widely various interpretations of laws from state to state, and even within states Ignorance of the law, or lack of understanding of it, frequently by regulators 16

17 Reliance on Court Decisions Todd Shipyards 1962 Supreme Court Case Dow Chemical Johnson & Higgins Rollins Hudig Hall of Rhode Island Inc. v. Clark 17

18 Dodd-Frank: Nonadmitted and Reinsurance Reform Act of 2010 NRRA Applies to non-admitted insurance Does not grant states any new taxing authority, BUT: Text and legislative history contain ambiguities 18

19 Dodd-Frank NRRA: Why Captives are Concerned Does the broad definition of non-admitted insurance include insurance provided by captives? Do the provisions related to independently procured insurance apply to insurance purchased from captive insurers? 19

20 Does the NRRA apply to captives? Legislative Intent: Clear indication that NRRA s sponsors intended for its nonadmitted insurance provisions to apply only to surplus lines insurance. The 3 Congressional sponsors described the NRRA bill as a resolution to improve surplus lines insurance laws. 20

21 Does the NRRA apply to captives? Analysis of tax allocation and regulations, as they would apply with captives, shows conflicts with 1. Stated legislative intent 2. Definition of nonadmitted insurance 3. Interpretation by implementing bodies 4. Independently procured insurance provisions 5. Practicality of implementation and enforcement 6. Other areas of unclear and inconsistent text 21

22 NRRA Definition of Nonadmitted insurance NRRA defines it as: Any property and casualty insurance permitted to be placed directly or through a surplus lines broker with a nonadmitted insurer eligible to accept such insurance. BUT: This definition appears to come from the NAIC Nonadmitted Insurance Model Act s definition of Surplus lines insurance. 22

23 NRRA Definition of Nonadmitted insurance Conflicts: Independently procured insurance is not necessarily included within the definition of nonadmitted insurance Captive insurance is not necessarily permitted to be placed directly or through a surplus lines broker with a nonadmitted insurer eligible to accept such insurance. 23

24 Implementing Bodies NRRA encourages states to adopt process for allocation of premium taxes on nonadmitted insurance. TWO alternative programs have developed: Nonadmitted Insurance Multi-State Agreement (NIMA) Surplus Lines Insurance Multi-State Compliance Compact (SLIMPACT) 24

25 Dodd-Frank NRRA and Independently Procured Insurance Home state in which the insured is located may require tax allocation reports from insureds that are independently procuring insurance No changes to basic jurisdictional requirements for imposing and collecting a premiums tax At least one state imposed additional taxes 25

26 NRRA: Applicability to captives NRRA permits only an insured s home state to collect nonadmitted insurance premium taxes Therefore, the insured (usually the parent) would need to pay any nonadmitted premiums taxes to the parent s home state BUT: How is home state determined? If the home state has adopted an interstate compact, then do premiums need to be allocated to those states too? What about states with extra-territorial provisions? 26

27 NRRA: Inconsistencies Premium tax is defined to include taxes imposed as consideration for insurance on surplus lines and independently procured insurance, but not on all nonadmitted insurance. The placement of nonadmitted insurance shall be subject to the statutory and regulatory requirements solely of the insured s home state. Establishes uniform standards for surplus lines [insurer] eligibility, but then applies some aspects of that surplus lines uniformity to all nonadmitted insurers domiciled in the U.S. 27

28 Dodd-Frank NRRA Remaining Questions Clarify the intent of NRRA Surplus lines vs. nonadmitted Placement, purchase Was it the intent to include insurance purchased from captives? What additional reach/authority did the NRRA provide to states in collecting premium taxes? What additional clarifications will be needed, and by whom? 28

29 How are taxpayers reacting/adjusting? Redomicile Captive Bifurcate Policies Close Down Captive 29

30 What Defines Captives as Being Exempt from Self-Procurement Taxes In most states, self procurement taxes imposed on insured paying premium to a non-admitted insurer If captive is domiciled in same state as insured paying the premium, the payment is not made to a nonadmitted insurer, and as such no tax is due Some companies have or are looking to redomicile Captive to home state Many states now have captive legislation 30

31 Bifurcate Policies One policy for Home-State Risks Another policy for all other risks Locate captive in a state where footprint is large 31

32 Other Paths Close down Captive self-procurement costs may outweigh income tax savings Lobbying Efforts this should not apply to us!! Stick Head in Sand 32

33 33 Disclaimer This presentation does not offer accounting, tax or legal advice regarding the positions taken or intended to be taken by Insureds, Agents, Brokers, or Insurers. Insureds, Agents, Brokers and Insurers should conduct an independent evaluation of the information contained herein and consult with their own accounting, tax, and legal advisors, and any other relevant specialists in connection with any transaction. 33

34 QUESTIONS? As part of RIMS green initiatives, there are no printed handouts. Visit to download available handouts. 34