Insurance commissioner Mike Kriedler provides an overview of the implementation of Washington’s new captive law, as well as the likely impact on captive owners in the state
In May 2021, insurance commissioner Mike Kriedler signed into law the somewhat contentious captive bill that, although allowing for the creation of a framework in the state of Washington to register eligible captive insurers, posed a 2 per cent premium tax on the risk covered by premiums allocable to the state.
This meant that eligible captive insurers were required to pay the premium tax for insurance both directly procured by and provided to its parent or affiliate for Washington risks during the preceding calendar year.
Originally submitted to Washington’s 2021 legislative session at the request of Kriedler, the Office of the Insurance Commissioner (OIC) estimated that the bill would bring US$29 million in back taxes, and generate revenues of more than $2.5 million per year/
A stakeholder draft proposed by the OIC in August 2021 set out draft regulations for the implementation of the new captive insurance law.
Among this, it determined an eligible captive insurer to be one that provides property and casualty insurance to a captive owner or its affiliates.
Medical stop-loss insurance and workers’ compensation directly covering the worker were explicitly excluded.
The OIC adopted these proposed regulations in November, effective from 21 December 2021, despite the results of an advisory ballot vote by Washington voters to repeal the 2 per cent premium tax.
Following the implementation of the law, Kriedler explains to Captive Insurance Times how the law will impact captive owners in Washington.
How do you assess current market conditions for the captive industry in Washington? What about the landscape?
The new captive law requires captive insurers to register within 120 days after 12 May 2021, or within 120 days after first issuing a policy that covers Washington risks. We use data such as consumer complaints, industry reports and insurance market data to determine whether entities are participating as captives in Washington.
The State of Washington formally adopted the proposed implementation of the captive insurance law late last year. Can you provide an overview of the law?
The law provides a framework for registering eligible captive insurers and collecting a 2 per cent premium tax from them, as we do with other registered insurers.
To be eligible to register, captive insurers may only provide property and casualty insurance to a captive owner or to the captive owner’s affiliates, and obtain or provide reinsurance for ceded or assumed risks insured in this state or elsewhere. They may assume or cede risks to other insurers through reinsurance without regard to those limitations.
Captive insurers affiliated with public institutions of higher education are not subject to the premium tax.
How will the law impact captive owners in Washington? How will it impact the state as a whole?
The impact to the state of Washington is that we are now collecting 2 per cent premium tax from captive insurers, which benefits the state general fund. Captives for public institutions of higher education are exempt from premium tax.
The revenue to the state depends on how many captives register. However, OIC anticipates over $2.5 million per year in revenue.
For decades, Washington businesses have used captives as a financial tool, and some businesses would not be able to continue without the use of captives. However, the state’s insurance code did not previously authorise or recognise captives. In 2018 and 2019, we began enforcement actions and subsequently some businesses suspended the use of captives. At the request of legislators, we suspended enforcement to allow for a study on captive insurance and we began work on this legislation with our stakeholders.
The new law authorises the use of captives and allows for appropriate oversight and will generate revenue for the state.
The revenue assumptions in the fiscal note on record may increase as businesses reinstate their captives.
Additionally, the use of captives by institutions of higher education saves the state millions of dollars each year.
Is the law likely to pose significant challenges to the captive industry in Washington?
This law represents thoughtful collaboration between the OIC and the insurance industry. Captive insurers and corporations actively participated in the legislative process.
We have not heard any feedback from them that our laws are challenging for them to follow.
