Captives, NRRA and Nonadmitted Insurance Premium Taxes – A Primer (Part I)
We are seeing increased focus by state tax departments on nonadmitted insurance premium reporting, tax payments owed and auditing of captive insurance companies.
To understand why this is becoming more of “a thing” these days, a little history lesson first…. Dodd-Frank, enacted July 21, 2010, included a focused set of provisions called the Nonadmitted and Reinsurance Reform Act (NRRA) dealing with “nonadmitted insurance.” Nonadmitted insurance essentially arises when companies/headquarters purchase insurance from insurance companies not licensed in the incorporation/management state. These nonadmitted insurers are, nevertheless, bona fide, properly licensed insurers that are regulated by administrators in a different state, or perhaps a foreign country; they are just not licensed by or registered in the state where the insured is located.
Without getting into the nuts and bolts of state registration rules, it is indeed lawful for in-state insureds (the companies/headquarters referenced above) to purchase insurance from insurers domiciled and regulated outside their state, as long as the insureds/insurers abide by relevant state laws requiring reporting and tax payments, if any, imposed on such nonadmitted insurance purchases. These taxes are called “nonadmitted premium taxes” and are the focus of this blog post.
Nonadmitted insurance companies may be unrelated to the insured, such as Lloyds of London, or may be owned by or affiliated with the insured, such as “captive insurance companies”. For unrelated/unaffiliated insurance companies, insureds may use a broker to procure that insurance. In that case, those nonadmitted insurance purchases are generally called “surplus lines insurance” and may have their own local tax and reporting requirements. But, if the insureds purchase the insurance directly, such as from their own captive, it may be called “self-procured insurance.” Both surplus lines and self-procured insurance are forms of “nonadmitted insurance,” which is based on the nature and registration of the insurer.
With that background in mind, let us get to the main focus of this blog post: the application of the “nonadmitted premium tax” rules to purchases of insurance from out-of-state, or even foreign, captives.
In general, captives are privately held, lawfully and specifically licensed insurance companies in many states and are subject to the applicable domicile’s regulatory and reporting regime, whether a U.S. state or foreign country. Generally, captives write risks of related-parties; are not licensed to sell insurance to the public; they may reinsure risks in or reinsure/cede risks out (to other reinsures); and they are required to maintain minimum capital by their regulators and meet other domicile solvency and operational reporting requirements.
NRRA was an effort by Congress to eliminate a hodgepodge of state filing and nonadmitted premium tax payment laws, by imposing a “home state” regime. In general, under NRRA if your state is the “home state” of the insured, as defined in NRRA, that home state is entitled to 100 percent of the premium taxes imposed on the premiums paid to the nonadmitted insurer, even if some of the risks arose or were situated in other states. See 15 USC §§ 8201(a) and 8202(a).
Critically, the Congressional intent in NRRA was also to require those “home states” with premium tax collections to “allocate among the [other] States the premium taxes paid to an insurer’s home state” through a state “compact or otherwise”. See 15 USC § 8201(b). To make its intent clear, Congress specifically said: “The Congress intends that each State adopt nationwide uniform requirements, forms, and procedures, such as an interstate compact, that provide for the reporting, payment, collection, and allocation of premium taxes for nonadmitted insurance…” See 15 USC § 8201(b)(4) (emphasis added).
The problem: the interstate “compact” or “uniform … procedures” described in NRRA never came into effect, so only one-half of the Congressionally-intended process regarding nonadmitted insurance was ever implemented.
Another problem: NRRA does not reference “captive insurance companies.” Does NRRA apply to captives or not?
So, what happened to nonadmitted insurance placed with captives after NRRA’s enactment?