South Carolina General Assembly
114th Session, 2001-2002

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Bill 965


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COMMITTEE REPORT

February 14, 2002

    S. 965

Introduced by Senator Thomas

S. Printed 2/14/02--S.

Read the first time February 5, 2002.

            

THE COMMITTEE ON BANKING AND INSURANCE

    To whom was referred a Bill (S. 965) to amend the Code of Laws of South Carolina, 1976, by adding Section 38-90-175 so as to establish the Captive Insurance Regulatory and Supervision Fund, etc., respectfully

REPORT:

    That they have duly and carefully considered the same and recommend that the same do pass with amendment:

    Amend the bill, as and if amended, in Section 38-90-175 as contained in SECTION 1, Page 2, lines 22 and 23, by striking / premiums taxed under Section 38-90-140(H) / and inserting:

    / taxes collected by the department pursuant to Chapter 90 of Title 38 /

    Renumber sections to conform.

    Amend title to conform.

DAVID L. THOMAS for Committee.

            

STATEMENT OF ESTIMATED FISCAL IMPACT

ESTIMATED FISCAL IMPACT ON GENERAL FUND EXPENDITURES:

$0 (No additional expenditures or savings are expected)

ESTIMATED FISCAL IMPACT ON FEDERAL & OTHER FUND EXPENDITURES IS:

$0 (No additional expenditures or savings are expected)

EXPLANATION OF IMPACT:

    Revenue from captive insurance companies is a new source of revenue to the State. For this reason and also due to the fact that the number of captives is expected to continue to increase, this legislation should not result in a decrease to general fund revenue.

    Section 38-90-175 would allow the department to retain 10% of taxes and all fees and assessments collected from captive insurance companies, except for fines and administrative penalties. Section 38-90-140(C) would prorate the minimum tax on captive insurance companies in the initial year of licensure, if the minimum tax is applicable. If the 13 captive insurance companies had all been licensed in the current year, the department would only retain approximately $13,000 of the revenue.

SPECIAL NOTES:

    The Board of Economic Advisors is the appropriate agency to address any revenue impact of this legislation.

    The italicized portion of this impact indicates the items that have been revised. For this impact, the revised constitutes information that was not available in the original impact.

    Approved By:

    Don Addy

    Office of State Budget

A BILL

TO AMEND THE CODE OF LAWS OF SOUTH CAROLINA, 1976, BY ADDING SECTION 38-90-175 SO AS TO ESTABLISH THE CAPTIVE INSURANCE REGULATORY AND SUPERVISION FUND; TO AMEND SECTION 38-90-10, AS AMENDED, RELATING TO DEFINITIONS FOR PURPOSES OF REGULATION OF CAPTIVE INSURANCE COMPANIES, SO AS TO PROVIDE A DEFINITION FOR "SPECIAL PURPOSES CAPTIVE INSURANCE COMPANY"; TO AMEND SECTION 38-90-20, RELATING TO THE LICENSING OF CAPTIVE INSURANCE COMPANIES, SO AS TO PROVIDE THAT A SPECIAL PURPOSE CAPTIVE INSURANCE COMPANY MAY ONLY INSURE THE RISKS OF ITS PARENT; TO AMEND SECTION 38-90-40, RELATING TO THE CAPITALIZATION REQUIREMENTS OF CAPTIVE INSURANCE COMPANIES, SO AS TO AUTHORIZE THE DIRECTOR OF THE SOUTH CAROLINA DEPARTMENT OF INSURANCE TO DETERMINE THE REQUISITE AMOUNT OF UNIMPAIRED CAPITAL THAT A SPECIAL PURPOSE CAPTIVE INSURANCE COMPANY MUST POSSESS IN ORDER TO BE LICENSED AND TO PROVIDE THAT THE REQUISITE CAPITAL MAY BE IN THE FORM OF CASH EQUIVALENT INVESTMENTS; TO AMEND SECTION 38-90-50, RELATING TO THE FREE SURPLUS REQUIREMENTS OF CAPTIVE INSURANCE COMPANIES SO AS TO AUTHORIZE THE DIRECTOR OF THE SOUTH CAROLINA DEPARTMENT OF INSURANCE TO DETERMINE THE REQUISITE AMOUNT OF FREE SURPLUS THAT A SPECIAL PURPOSE CAPTIVE INSURANCE COMPANY MUST POSSESS IN ORDER TO BE LICENSED; TO AMEND SECTION 38-90-140, RELATING TO THE AGGREGATE TAXES PAID BY A CAPTIVE INSURANCE COMPANY, SO AS TO ALLOW A CAPTIVE INSURANCE COMPANY IN ITS FIRST OPERATING YEAR TO PAY THE MINIMUM PREMIUM TAX ON A PRORATED SCHEDULE; AND TO AMEND SECTION 38-90-160, RELATING TO THE APPLICABILITY OF CHAPTER 90, TITLE 38, SO AS TO AUTHORIZE THE DIRECTOR OF THE SOUTH CAROLINA DEPARTMENT OF INSURANCE TO EXEMPT SPECIAL PURPOSE CAPTIVE INSURANCE COMPANIES, ON A CASE BY CASE BASIS, FROM THOSE PROVISIONS OF CHAPTER 90, TITLE 38 THAT HE DETERMINES TO BE INAPPROPRIATE GIVEN THE NATURE OF THE RISKS TO BE INSURED.

Be it enacted by the General Assembly of the State of South Carolina:

SECTION    1.    The 1976 Code is amended by adding:

    "Section 38-90-175.    (A)    There is hereby created a fund to be known as the captive insurance regulatory and supervision fund for the purpose of providing the financial means for the director to administer Chapter 87 and Chapter 90 of this title and for reasonable expenses incurred in promoting the captive insurance industry in the State. The transfer of ten percent of the premiums taxed under Section 38-90-140(H) of this title, and all fees and assessments received by the department pursuant to the administration of this chapter shall be credited to this fund. All fees received by the department from reinsurers who assume risk solely from captive insurance companies, shall be deposited into the captive insurance regulatory and supervision fund. All fines and administrative penalties, however, shall be deposited directly into the general fund.

    (B)    All payments from the captive insurance regulatory and supervision fund for the maintenance of staff and associated expenses including contractual services as necessary, shall be disbursed from the state treasury only upon warrants issued by the director, after receipt of proper documentation regarding services rendered and expenses incurred."

SECTION    2.    Section 38-90-10 of the 1976 Code, as last amended by Act 58 of 2001, is further amended to read:

    "Section 38-90-10.    As used in this chapter, unless the context requires otherwise:

    (1)    'Alien captive insurance company' means an insurance company formed to write insurance business for its parents and affiliates and licensed pursuant to the laws of an alien jurisdiction which imposes statutory or regulatory standards in a form acceptable to the director on companies transacting the business of insurance in such jurisdiction.

    (2)    'Affiliated company' means a company in the same corporate system as a parent, an industrial insured, or a member organization by virtue of common ownership, control, operation, or management.

    (3)    'Association' means a legal association of individuals, corporations, partnerships, or associations that has been in continuous existence for at least one year:

        (a)    the member organizations of which collectively, or which does itself:

            (i)        own, control, or hold with power to vote all of the outstanding voting securities of an association captive insurance company incorporated as a stock insurer; or

            (ii)    have complete voting control over an association captive insurance company incorporated as a mutual insurer; or

        (b)    the member organizations of which collectively constitute all of the subscribers of an association captive insurance company formed as a reciprocal insurer.

    (4)    'Association captive insurance company' means a company that insures risks of the member organizations of the association and their affiliated companies.

    (5)    'Branch business' means any insurance business transacted by a branch captive insurance company in this State.

    (6)    'Branch captive insurance company' means an alien captive insurance company licensed by the director to transact the business of insurance in this State through a business unit with a principal place of business in this State.

    (7)    'Branch operations' means any business operations of a branch captive insurance company in this State.

    (8)    'Captive insurance company' means a pure captive insurance company, association captive insurance company, captive reinsurance company, sponsored captive insurance company, special purpose captive insurance company, or industrial insured captive insurance company formed or licensed under this chapter. For purposes of this chapter, a branch captive insurance company must be a pure captive insurance company with respect to operations in this State, unless otherwise permitted by the director.

    (9)    'Captive reinsurance company' means a reinsurance company that is formed or licensed pursuant to this chapter and is wholly owned by a qualifying reinsurance parent company. A captive reinsurance company is a stock corporation.

    (10)    'Consolidated debt to total capital ratio' means the ratio of the sum of (a) all debts and hybrid capital instruments including, but not limited to, all borrowings from banks, all senior debt, all subordinated debts, all trust preferred shares, and all other hybrid capital instruments that are not included in the determination of consolidated GAAP new worth issued and outstanding to (b) total capital, consisting of all debts and hybrid capital instruments as described in subitem (a) plus shareholders' equity determined in accordance with GAAP for reporting to the United States Securities and Exchange Commission.

    (11)    'Consolidated GAAP net worth' means the consolidated shareholders' equity determined in accordance with GAAP for reporting to the United States Securities and Exchange Commission.

    (12)    'Controlled unaffiliated business' means a company:

        (a)    that is not in the corporate system of a parent and affiliated companies;

        (b)    that has an existing contractual relationship with a parent or affiliated company; and

        (c)    whose risks are managed by a pure captive insurance company in accordance with Section 38-90-190.

    (13)    'Director' means the Director of the South Carolina Department of Insurance or the director's designee.

    (14)    'Department' means the South Carolina Department of Insurance.

    (15)    'GAAP' means generally accepted accounting principles.

    (16)    'Industrial insured' means an insured as defined in Section 38-25-150(8).

    (17)    'Industrial insured captive insurance company' means a company that insures risks of the industrial insureds that comprise the industrial insured group and their affiliated companies.

    (18)    'Industrial insured group' means a group that meets either of the following criteria:

        (a)    a group of industrial insureds that collectively:

            (i)        own, control, or hold with power to vote all of the outstanding voting securities of an industrial insured captive insurance company incorporated as a stock insurer; or

            (ii)    have complete voting control over an industrial insured captive insurance company incorporated as a mutual insurer; or

        (b)    a group which is created under the Product Liability Risk Retention Act of 1981, 15 U.S.C. Section 3901, et seq., as amended, as a corporation or other limited liability association taxable as a stock insurance company or a mutual insurer under this title.

    (19)    'Member organization' means any individual, corporation, partnership, or association that belongs to an association.

    (20)    'Parent' means any corporation, partnership, or individual that directly or indirectly owns, controls, or holds with power to vote more than fifty percent of the outstanding voting securities of a pure captive insurance company.

    (21)    'Participant' means an entity as defined in Section 38-90-230, and any affiliates of that entity, that are insured by a sponsored captive insurance company, where the losses of the participant are limited through a participant contract to the assets of a protected cell.

    (22)    'Participant contract' means a contract by which a sponsored captive insurance company insures the risks of a participant and limits the losses of the participant to the assets of a protected cell.

    (23)    'Protected cell' means a separate account established and maintained by a sponsored captive insurance company for one participant.

    (24)    'Pure captive insurance company' means a company that insures risks of its parent and affiliated companies.

    (25)    'Qualifying reinsurer parent company' means a reinsurer authorized to write reinsurance by this State and that has a consolidated GAAP net worth of not less than five hundred million dollars and consolidated debt to total capital ratio not greater than 0.50.

    (26)    'Special purpose captive insurance company' means a captive insurance company that is formed or licensed under this chapter that does not meet the definition of any other type of captive insurance company defined in this section.

    (26)(27)    'Sponsor' means an entity that meets the requirements of Section 38-90-220 and is approved by the director to provide all or part of the capital and surplus required by applicable law and to organize and operate a sponsored captive insurance company.

    (27)(28)    'Sponsored captive insurance company' means a captive insurance company:

        (a)    in which the minimum capital and surplus required by applicable law is provided by one or more sponsors;

        (b)    that is formed or licensed under this chapter;

        (c)    that insures the risks of separate participants through the contract; and

        (d)    that segregates each participant's liability through one or more protected cells.

    (28)(29)    'Treasury rates' means the United States Treasury strips asked yield as published in the Wall Street Journal as of a balance sheet date."

SECTION    3.    Section 38-90-20(A) of the 1976 Code, as added by Act 331 of 2000, is amended to read:

    "(A)    A captive insurance company, when permitted by its articles of incorporation or charter, may apply to the director for a license to do any and all insurance, except workers' compensation insurance, authorized by this title; however:

        (1)    a pure captive insurance company may not insure any risks other than those of its parent, and affiliated companies, or controlled unaffiliated business, or a combination thereof;

        (2)    an association captive insurance company may not insure any risks other than those of the member organizations of its association and their affiliated companies;

        (3)    an industrial insured captive insurance company may not insure any risks other than those of the industrial insureds that comprise the industrial insured group and their affiliated companies;

        (4)    in general, a special purpose captive insurance company may only insure the risks of its parent. Notwithstanding any other provisions of this chapter, a special purpose captive insurance company may provide insurance or reinsurance, or both, for risks as approved by the director;

        (4)(5)    a captive insurance company may not provide personal motor vehicle or homeowner's insurance coverage or any component of these coverages;

        (5)(6)    a captive insurance company may not accept or cede reinsurance except as provided in Section 38-90-110."

SECTION.    4.    Section 38-90-40(A) of the 1976 Code, as added by Act 331 of 2000, is amended to read:

    "(A)        The director may not issue a license to a pure captive insurance company, sponsored captive insurance company, association captive insurance company incorporated as a stock insurer, or industrial insured captive insurance company incorporated as a stock insurer unless the company possesses and thereafter maintains unimpaired paid-in capital of:

        (1)    in the case of a pure captive insurance company, not less than one hundred thousand dollars;

        (2)    in the case of an association captive insurance company incorporated as a stock insurer, not less than four hundred thousand dollars;

        (3)    in the case of an industrial insured captive insurance company incorporated as a stock insurer, not less than two hundred thousand dollars;

        (4) in the case of a sponsored captive insurance company, not less than five hundred thousand dollars.;

        (5)    in the case of a special purpose captive insurance company, an amount determined by the director after giving due consideration to the company's business plan, feasibility study, and pro-formas, including the nature of the risks to be insured.

    The capital may be in the form of cash, cash equivalent, or an irrevocable letter of credit issued by a bank chartered by this State or a member bank of the Federal Reserve System and approved by the director."

SECTION    5.    Section 38-90-50(A) of the 1976 Code, as added by Act 331 of 2000, is amended to read:

    "(A)    The director may not issue a license to a captive insurance company unless the company possesses and thereafter maintains free surplus of:

        (1)    in the case of a pure captive insurance company, not less that one hundred fifty thousand dollars;

        (2)    in the case of an association captive insurance company incorporated as a stock insurer, not less than three hundred fifty thousand dollars;

        (3)    in the case of an industrial insured captive insurance company incorporated as a stock insurer, not less than three hundred thousand dollars;

        (4)    in the case of an association captive insurance company incorporated as a mutual insurer, not less than seven hundred fifty thousand dollars;

        (5)    in the case of an industrial insured captive insurance company incorporated as a mutual insurer, not less than five hundred thousand dollars; and

        (6)    in the case of a sponsored captive insurance company, not less than five hundred thousand dollars.; and

        (7)    in the case of a special purpose captive insurance company, an amount determined by the director after giving due consideration to the company's business plan, feasibility study, and pro-formas, including the nature of the risks to be insured.

    The surplus may be in the form of cash, cash equivalent, or an irrevocable letter of credit issued by a bank chartered by this State or a member bank of the Federal Reserve System and approved by the director."

SECTION    6.    Section 38-90-140(C) of the 1976 Code, as added by Act 331 of 2000, is amended to read:

    "(C) If the aggregate taxes to be paid by a captive insurance company calculated under subsections (A) and (B) amount to less than five thousand dollars in any year, the captive insurance company shall pay a minimum tax of five thousand dollars for that year. However, in the calendar year in which a captive is first licensed, the minimum tax will be prorated on a quarterly basis. For captives licensed in the first quarter, the prorated minimum tax is five thousand dollars. For captives licensed in the second quarter, the prorated minimum tax is three thousand seven hundred fifty dollars. For captives licensed in the third quarter, the prorated minimum tax is two thousand five hundred dollars. For captives licensed in the fourth quarter, the prorated minimum tax is one thousand two hundred fifty dollars. In the calendar year in which a captive is first licensed, if the aggregate taxes to be paid by a captive insurance company calculated under subsections (A) and (B) amount to less than the minimum tax prorated on a quarterly basis, the captive insurance company shall pay the prorated minimum tax for that calendar year."

SECTION    7.    Section 38-90-160 of the 1976 Code, as added by Act 331 of 2000, is amended to read:

    "Section 38-90-160.    (A)    No provisions of this title, other than those contained in this chapter or contained in specific references contained in this chapter, apply to captive insurance companies.

    (B)    The director may, by rule, regulation, or order, exempt special purpose captive insurance companies, on a case by case basis, from provisions of this chapter that he determines to be inappropriate given the nature of the risks of be insured."

SECTION    8.    This act takes effect upon approval by the Governor.

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