Texas Department of Insurance Holds Informal Meeting On Rulemaking For New Captives Bill

Jul 17, 2013


The Texas Department of Insurance (“TDI”) held a Stakeholder Meeting on July 12, 2013 to discuss rulemaking for the recently enacted Senate Bill 734, which relates to the licensing of captive insurance companies.  The bill, which created Chapters 223A and Section 964 in Texas’ Insurance Code, also provides for authorized fees, and for the imposition of taxes on captives.  

The meeting followed the TDI’s solicitation of public input for Rule development and implementation strategy on SB 734, including matters it should address in the proposed Rules and experience with similar activities in other states, particularly:

  1. Procedures for licensing captive insurers, including updates to projections and plans of operation 
  2. Procedures for registering captive managers, including denial and duration of registration
  3. Biographical information of officers, directors, and key personnel of captive insurers and managers, including verification of disclosures
  4. Risk controls for controlled unaffiliated businesses
  5. Reimbursement policies as provided by Section 964.051(d) of Texas law

TDI Associate Commissioner for Licensing Services Jamie Walker, who is leading the rulemaking process, explained at the outset of the meeting that the TDI seeks to establish a defined regulatory balance inclusive of public accountability measures.

The first item on the agenda was a discussion of procedures for licensing captive insurers.  Ms. Walker explained that the TDI is contemplating the appropriate time period for companies to apply for corporate formation with the Texas Secretary of State.  The question was whether or not a prospective captive insurer should proceed directly to the Texas Secretary of State’s office, or first to the TDI. 

Representatives from various state insurance departments participating in the meeting explained that it would be optimal for a proposed company to go through the TDI before proceeding to the Secretary of State’s office to ensure it is even eligible to write captive insurance.

After further discussion, the general consensus was that a company should initially secure a determination of eligibility by the TDI, then file with the Secretary of State’s office for its corporate registration, and finally return to the TDI to be licensed as a captive insurer. 

SB 734 contains a confidentiality provision concerning financial information.  Participants in the meeting explained that the name of a captive and its parent needn’t be confidential, but that it is imperative for any information concerning the company’s finances to be kept confidential. 

The state regulators in attendance advised the TDI officials to rely on captive managers and company owners to provide them with information about their business and financial plans, and whether they have enough capital to establish a company.  They explained that the captive manger and owner should be well aware of this information and that their answers would guide the TDI in filtering the process.

Procedures for registering captive managers were also discussed, including duration and denial of registrations.  SB 734 states that captives “must register with the commissioner on approved form.”  The TDI officials requested feedback on these forms and their approval process from the regulators in attendance, who explained that captive managers or actuaries typically fill out a one-page form that illustrates whether they have the appropriate credentials to be approved.

In some states, it was explained, an approval process doesn’t really exist, inasmuch as captive managers simply submit their names for registration.  However, they must be registered with an entity to ensure they are eligible to be registered as a captive manager.

It was suggested that a captive manager should be registered with the captive.  Thus, if the captive becomes insolvent or the manager leaves the company, he or she will no longer be affiliated with that company and no longer be a registered captive manager.

Although the situation was said to be very rare, if a captive manager was unable to be registered because of a background check, typically the company would be asked to appoint another manager to complete the registration.  

The meeting agenda also included a discussion of biographical information required of officers, directors and key personnel of captive insurers and managers, including verification of disclosures.  During the meeting, the TDI officials sought information from the attending state regulators about the biographical information they typically collect from captive insurers and managers, and how thoroughly qualifications should be vetted.  Other states require a biographical affidavit to be submitted, as well as the results of a background check.  It was explained that while they do not require fingerprinting, that process-if necessary–is often completed by the company, rather than the insurance department.

Ms. Walker said that the TDI was concerned about the definition of “key personnel.”  Other regulators suggested that this could be defined as “people who attend the meetings with an insurance department,” since based on this, a comfort level can usually be gained about the company’s business plan, strategy, and whether these key personnel understand what they are “getting themselves into” and have the appropriate knowledge before their company’s approval as a captive insurer.

Risk controls for controlled unaffiliated businesses were also discussed.  There were some questions and concerns among meeting participants about the definition of “controls” and whether it was necessary to define the word by regulation or procedurally. 

After further discussion and input from other departments, it was suggested that the definition be handled procedurally-possibly in a contract.  Other regulators felt it was important to understand the transparency of the relationship that is presented, including understanding the dynamic of the insurer’s business plan.  Defining “control” by Rule could unnecessarily narrow its meaning, they said.

The TDI officials explained they will be looking for expected and adverse scenarios in a captive’s business plan, such as planning for solvency issues.

The final agenda item dealt with the question of reimbursement policies as provided by Section 964.051(d) of SB 734–specifically how the contractual reimbursement policies should work and how the money will flow.  For example, in the case of workers’ compensation insurance, an insurance company or the certified or licensed self-insured entity is responsible for the payment of benefits..  However, within these types of structures, exployers will use their captive to finance the deductible for those programs.

Ms. Walker explained to those in attendance that the application process provided by SB 734 is expected to be fairly short.  Depending on how many applications are received, she estimated a turnaround time of 30 to 45 days or less for redomestications. 

She also explained that the TDI is still trying to evaluate what it needs to do internally insofar as a consistent process for redomestications.  Coordinate with the Texas Secretary of State’s office is still necessary.

The TDI will have another meeting after the actual posting of the new Rules.

The TDI officials expressed their appreciation and gratitude for stakeholders’ insight and participation.


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