HB270

ENROLLED, An Act,

Relating to captive insurance companies; to amend Sections 27-31B-2, 27-31B-3, 27-31B-6, 27-31B-8, 27-31B-9, 27-31B-12, 27-31B-16, 27-31B-19, 27-31B-20, 27-31B-22, and 27-31B-24; to add Section 27-31B-25 to, and to repeal Section 27-31B-23 of the Code of Alabama 1975; to revise the licensure requirements of captive insurance companies; to allow risk retention groups to operate as captive insurance companies; to allow captive insurance companies to be formed as a series limited liability corporation; to allow for a 60-day provisional license of a captive insurance company in certain circumstances; to alter the initial capital requirements needed to form a captive insurance company; to cap the premium tax of captive insurance companies and no longer require a premium tax until a captive insurance company is licensed for 12 months; and to provide for the governance and taxation of protected cell captive insurance companies.

BE IT ENACTED BY THE LEGISLATURE OF ALABAMA:Section 1. Sections 27-31B-2, 27-31B-3, 27-31B-6, 27-31B-8, 27-31B-9, 27-31B-12, 27-31B-16, 27-31B-19, 27-31B-20, 27-31B-22, and 27-31B-24, Code of Alabama 1975, are amended to read as follows:

§27-31B-2.

"As used in this chapter, the following terms shall have the following meanings, unless the context clearly indicates otherwise:

"(1) AFFILIATED COMPANY. Any 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.

"(2) ALIEN CAPTIVE INSURANCE COMPANY. Any 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 commissioner on companies transacting the business of insurance in that jurisdiction.

"(3) ASSOCIATION. Any legal association of individuals, corporations, limited liability companies, partnerships, or associations, or other entities whereby that has been in continuous existence for at least one year and meets either of the following exists:

"a. The member organizations of which collectively, or which does itself, which, or the association itself, whether or not in conjunction with some or all of the member organizations, meet either one of the following:

"1. 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.

"2. Have complete voting control over an association captive insurance company incorporated as a mutual insurer.

"3. Have complete voting control over an association captive insurance company formed as a limited liability company.

"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. Any company that insures risks of the member organizations of the association, and that also may insure the risks of affiliated companies of the member organizations and the risks of the association itself and their affiliated companies.

"(5) BRANCH BUSINESS. Any insurance business transacted by a branch captive insurance company in this state.

"(6) BRANCH CAPTIVE INSURANCE COMPANY. Any alien captive insurance company licensed by the commissioner to transact the business of insurance in this state through a business unit with a principal place of business in this state. A branch captive insurance company is a pure captive insurance company with respect to operations in this state, unless otherwise permitted by the commissioner.

"(7) BRANCH OPERATIONS. Any business operations of a branch captive insurance company in this state.

"(8) CAPTIVE INSURANCE COMPANY. Any pure captive insurance company, association captive insurance company, sponsored captive insurance company risk retention group, protected cell captive insurance company, incorporated cell 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 shall be a pure captive insurance company with respect to operations in this state, unless otherwise permitted by the commissioner.

"(9) CAPTIVE RISK RETENTION GROUP. A captive insurance company organized and licensed as a captive insurer under the laws of this state and operating pursuant to the Liability Risk Retention Act of 1986, as amended, 15 U.S.C. §3901 et seq., as a stock or mutual corporation, a reciprocal, or other limited liability entity. Risk retention groups formed under this chapter are subject to all the same provisions of this title applicable to a casualty insurer organized and licensed under the laws of this state.

"(9)(10) COMMISSIONER. The Alabama Commissioner of Insurance or the commissioner's designee.

"(10)(11) CONTROLLED UNAFFILIATED BUSINESS. Any company that meets all of the following criteria:

"a. Is not in the corporate system of a parent and affiliated companies in the case of a pure captive insurance company, or is not in the corporate system of an industrial insured and its affiliated companies in the case of an industrial insured captive insurance company.

"b. Has an existing contractual relationship with a parent or one of its affiliated companies in the case of a pure captive insurance company or with an industrial insured or one of its affiliated companies in the case of an industrial insured captive insurance company.

"c. Whose risks are managed by a pure captive insurance company or an industrial insured captive insurance company, as applicable, in accordance with Section 27-31B-20.

"(11)(12) EXCESS WORKERS' COMPENSATION INSURANCE. In the case of an employer or group of employers that has insured or self-insured its workers' compensation risks in accordance with applicable state or federal law, insurance in excess of a specified per-incident or aggregate limit established by the commissioner.

"(13) GENERAL ACCOUNT. All assets and liabilities of a protected cell captive insurance company not attributable to a protected cell.

"(14) INCORPORATED CELL. A protected cell of an incorporated cell captive insurance company that is organized as a corporation or other legal entity separate from the incorporated cell captive insurance company.

"(15) INCORPORATED CELL CAPTIVE INSURANCE COMPANY. A protected cell captive insurance company that is established as a corporation or other legal entity separate from its incorporated cells that are also organized as separate legal entities.

"(12)(16) INDUSTRIAL INSURED. As defined in subdivision (2) of Section 27-10-20.

"(13)(17) INDUSTRIAL INSURED CAPTIVE INSURANCE COMPANY. Any company that insures risks of the industrial insureds that comprise the industrial insured group, and their that may insure the risks of the affiliated companies of the industrial insureds and the risks of the controlled unaffiliated business of an industrial insured or its affiliated companies.

"(14)(18) INDUSTRIAL INSURED GROUP. Any group that meets either of the following criteria:

"a. Any group of industrial insureds that collectively meet any of the following criteria:

"1. 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.

"2. Have complete voting control over an industrial insured captive insurance company incorporated as a mutual insurer.

"3. Constitute all of the subscribers of an industrial insured captive insurance company formed as a reciprocal insurer.

"4. Have complete voting control over an industrial insured captive insurance company formed as a limited liability company.

"b. Any group which is created under the Product Liability Risk Retention Act of 1981, 15 U.S. Code § 3901 et seq., as amended, as a corporation or other limited liability association taxable as a stock insurance company or a mutual insurer under the law of the State of Alabama.

"(15)(19) MEMBER ORGANIZATION. Any individual, corporation, limited liability company, partnership, or association, or other entity that belongs to an association.

"(20) MUNICIPAL CORPORATION. A corporation or other legal entity organized without stockholders. The term includes a nonprofit corporation with members.

"(21) MUTUAL INSURER. An incorporated captive insurer without capital stock and the governing body of which is elected from policyholders at the mutual members' annual meeting.

"(22) ORGANIZATIONAL DOCUMENTS. The documents that must be submitted pursuant to state law in order to legally form a business in this state, or to obtain a certificate of authority to transact business in the state.

"(16)(23) PARENT. A An individual, corporation, limited liability company, partnership, or individual association, or other entity that directly or indirectly owns, controls, or holds with power to vote more than 50 percent of the outstanding voting securities of a pure captive insurance company of any of the following:

"(1) Voting securities of a pure captive insurance company organized as a stock corporation.

"(2) Membership interests of a pure captive insurance company organized as a nonprofit corporation.

"(3) Membership interests of a pure captive insurance company organized as a limited liability company.

"(17)(24) PARTICIPANT. An entity as defined in Section 27-31B-24, and any affiliates thereof, that are insured by a sponsored protected cell captive insurance company, where the losses of the participant are limited through a participant contract to the participant's pro rata share of the assets of one or more protected cells identified in the participant contract.

"(18)(25) PARTICIPANT CONTRACT. A contract by which a sponsored protected cell captive insurance company insures the risks of a participant and limits the losses of each participant to its pro rata share of the assets of one or more protected cells identified in the participant contract.

"(19)(26) PROTECTED CELL. A separate account established by a sponsored protected cell captive insurance company formed or licensed under this chapter, in which assets are maintained for one or more participants an identified pool of assets and liabilities is segregated and insulated by means of this chapter from the remainder of the protected cell captive insurance company's assets and liabilities in accordance with the terms of one or more participant contracts to fund the liability of the sponsored protected cell captive insurance company, with respect to the participants as set forth in the participant contracts.

"(27) PROTECTED CELL ASSETS. All assets, contract rights, and general intangibles identified with and attributable to a specific protected cell of a protected cell captive insurance company.

"(28) PROTECTED CELL CAPTIVE INSURANCE COMPANY. Any captive insurance company meeting all of the following:

"a. The minimum capital and surplus required by this chapter are provided by one or more sponsors.

"b. The company is formed and licensed under this chapter.

"c. The company insures the risks of separate participants through participant contracts.

"d. The company funds its liability to each participant through one or more protected cells and segregates the assets of each protected cell from the assets of other protected cells and from the assets of the protected cell captive insurance company's general account.

"(29) PROTECTED CELL LIABILITIES. All liabilities and other obligations identified with and attributed to a specific protected cell of a protected cell captive insurance company.

"(20) (30) PURE CAPTIVE INSURANCE COMPANY. Any company that insures risks of its parent and affiliated companies or controlled unaffiliated business or businesses.

"(21) (31) SPONSOR. Any person or entity that meets the requirements of Section 27-31B-23 and is approved by the commissioner to provide all or part of the capital and surplus required by applicable law and to organize and operate a sponsored protected cell captive insurance company.

"(22) SPONSORED CAPTIVE INSURANCE COMPANY. Any captive insurance company meeting all of the following criteria:

"a. The minimum capital and surplus required by applicable law is provided by one or more sponsors.

"b. Is formed or licensed under this chapter.

"c. Insures the risks of separate participants through participant contracts.

"d. Funds its liability to each participant through one or more protected cells and segregates the assets of each protected cell from the assets of other protected cells and from the assets of the sponsored captive insurance company's general account.

"(32) SURPLUS NOTE. An unsecured subordinated debt obligation deemed to be a surplus certificate under terms acceptable to the commissioner.

§27-31B-3.

"(a) Any captive insurance company, when permitted by its articles of association, charter, or other organizational document, may apply to the commissioner for a license to do any and all insurance defined in Sections 27-5-2, 27-5-4, and 27-5-5, in subdivisions (1), (2), (4), (5), (6), (7), (8), (9), (10), (11), (12), (13), and (14) of subsection (a) of Section 27-5-6, in Sections 27-5-7, 27-5-8, 27-5-9, and 27-5-10, and to grant annuity contracts as defined in Section 27-5-3, subject, however, to all of the following:

"(1) No pure captive insurance company may insure any risks other than those of its parent and affiliated companies or controlled unaffiliated business.

"(2) No association captive insurance company may insure any risks other than those of the member organizations of its association, and their affiliated companies.

"(3) No industrial insured captive insurance company may insure any risks other than those of the industrial insureds that comprise the industrial insured group, and their affiliated companies.

"(4) No risk retention group may insure any risks other than those of its members and owners.

"(5) No captive insurance company may provide personal motor vehicle coverage or any component thereof. Homeowner's insurance coverage may be written by an Alabama Coastal Captive Insurance Company as defined in Chapter 31C, but only in the gulf front, beach, and seacoast areas as designated by the Insurance Services Office, Inc.

"(5)(6) No captive insurance company may accept or cede reinsurance except as provided in Section 27-31B-13.

"(6)(7) Any captive insurance company may provide excess workers' compensation insurance to its parent and affiliated companies, and member organizations unless prohibited by the laws of the state having jurisdiction over the transaction. Any captive insurance company may reinsure workers' compensation of a qualified self-insured plan of its parent and affiliated companies.

"(7)(8) Any captive insurance company which insures risks described in Sections 27-5-2 and 27-5-4 shall comply with all applicable state and federal laws.

"(8)(9) No branch captive insurance company may write any business in this state except insurance or reinsurance of the employee benefit business of its parent and affiliated companies which is subject to the Employee Retirement Income Security Act of 1974, as amended.

"(9) No sponsored (10) No protected cell captive insurance company may insure any risks other than those of its participants.

"(b) To conduct insurance business in this state, a captive insurance company shall comply with all of the following:

"(1) It must obtain from the commissioner a license authorizing it to do insurance business in this state.

"(2) Its board of directors or managers, or in the case of a reciprocal insurer, its subscribers' advisory committee, must hold at least one meeting each year in this state.

"(3) It must maintain its principal place of business in this state, or in the case of a branch captive insurance company, maintain the principal place of business for its branch operations in this state.

"(4) It must appoint a registered agent to accept service of process and to otherwise act on its behalf in this state; subject further to the following:

"a. If formed as a corporation or other legal entity, whenever the registered agent cannot with reasonable diligence be found at the registered office of the captive insurance company, the Secretary of State shall be an agent of the captive insurance company upon whom any process, notice, or demand may be served.

"b. If formed as a reciprocal insurer, whenever the registered agent cannot with reasonable diligence be found at the registered office of the captive insurance company, the commissioner shall be an agent of the captive insurance company upon whom any process, notice, or demand may be served.

"(c)(1) Before receiving a license, a captive insurance company shall comply with one of the following:

"a. If formed as a corporation or other legal entity, it shall file with the commissioner a certified copy of its charter organizational documents and bylaws, a statement under oath of its president and secretary or other authorized official showing its financial condition, and any other statements or documents required by the commissioner.

"b. If formed as a reciprocal insurer, it shall comply with both of the following:

"1. File with the commissioner a certified copy of the power of attorney of its attorney-in-fact, a certified copy of its subscribers' agreement, a statement under oath of its attorney-in-fact showing its financial condition, and any other statements or documents required by the commissioner.

"2. Submit to the commissioner for approval a description of the coverages, deductibles, coverage limits, and rates, together with any additional information as the commissioner may reasonably require. In the event of any subsequent material change in any item in the description, the reciprocal captive insurance company shall submit to the commissioner for approval an appropriate revision and shall not offer any additional kinds of insurance until a revision of the description is approved by the commissioner. The reciprocal captive insurance company shall inform the commissioner of any material change in rates within 30 days of the adoption of the change.

"(2) In addition to the information required by subdivision (1), each applicant captive insurance company shall file with the commissioner evidence of all of the following:

"a. The amount and liquidity of its assets relative to the risks to be assumed.

"b. The adequacy of the expertise, experience, and character of the person or persons who will manage it.

"c. The overall soundness of its plan of operation.

"d. The adequacy of the loss prevention programs of its parent, member organizations, or industrial insureds, or other insureds as applicable.

"e. Any other factors deemed relevant by the commissioner in ascertaining whether the proposed captive insurance company will be able to meet its policy obligations.

"(3) In addition to the information required by subdivisions (1) and (2), each applicant sponsored protected cell captive insurance company shall file with the commissioner all of the following:

"a. A business plan demonstrating how the applicant will account for the loss and expense experience of each protected cell at a level of detail found to be sufficient by the commissioner and how it will report the experience to the commissioner.

"b. A statement acknowledging that all financial records of the sponsored protected cell captive insurance company, including records pertaining to any protected cells, shall be made available for inspection or examination by the commissioner or the commissioner's designated agent.

"c. All contracts or sample contracts between the sponsored protected cell captive insurance company and any participants.

"d. Evidence that expenses shall be allocated to each protected cell in a fair and equitable manner.

"(4) Information submitted pursuant to this subsection shall be and remain confidential, and may not be made public by the commissioner or by an employee or agent of the commissioner without the written consent of the company, except as provided in the following:

"a. The information may be discoverable by a party in a civil action or contested case to which the captive insurance company that submitted the information is a party, upon a showing by the party seeking to discover the information that (i) the information sought is relevant to and necessary for the furtherance of the action or case, (ii) the information sought is unavailable from other nonconfidential sources, and (iii) a subpoena issued by a judicial or administrative officer of competent jurisdiction has been submitted to the commissioner. Notwithstanding the foregoing, this subdivision shall not apply to any industrial insured captive insurance company insuring the risks of an industrial insured group as defined in paragraph b. of subdivision (14) (18) of Section 27-31B-2 or to a captive risk retention group.

"b. The commissioner may disclose the information to a public officer having jurisdiction over the regulation of insurance in another state, provided that (i) the public official shall agree in writing to maintain the confidentiality of the information, and (ii) the laws of the state in which the public official serves require the information to be and to remain confidential.

"(d) Each captive insurance company shall pay to the commissioner a nonrefundable fee as set forth in Section 27-31B-4 for examining, investigating, and processing its application for license, and the commissioner is authorized to retain legal, financial, and examination services from outside the department, the reasonable cost of which may be charged against the applicant in accordance with Section 27-2-25. In addition, each captive insurance company shall pay a license fee for the year of registration and a renewal fee for each year thereafter as set forth in Section 27-31B-4.

"(e) If the commissioner is satisfied that the documents and statements filed by a captive insurance company comply with this chapter, the commissioner may grant a license authorizing the company to do insurance business in this state until April 1 thereafter, which license may be renewed.

"(f)(1) Notwithstanding any other provision of this chapter, the commissioner may issue a provisional license to any applicant captive insurance company for a period not to exceed 60 days if the commissioner deems that the public interest will be served by the issuance of the provisional license.

"(2) As a condition precedent to the issuance of a provisional license under this subsection, the applicant shall have filed a complete application containing all information required by this section, paid all fees required for licensure, and the commissioner shall have made a preliminary finding that the expertise, experience, and character of the person or persons who will control and manage the captive insurer are acceptable.

"(3) The commissioner, by order, may limit the authority of any provisional licensee in any way deemed necessary to protect insureds and the public. The commissioner, by order, may revoke a provisional license if the interests of insureds or the public are endangered. If the applicant fails to complete the regular licensure application process within the 60-day provisional period, the provisional license shall terminate automatically at the end of the 60-day period, and any policy issued during the provisional period shall be cancelled as of the termination date and any premium unearned shall be refunded to the policyholder within 10 days.

§27-31B-6.

"(a) No pure captive insurance company, association captive insurance company, sponsored captive insurance company, or industrial insured captive insurance company shall be issued a license unless it shall possess and thereafter maintain unimpaired paid-in capital and surplus as follows:

"(1) In the case of a pure captive insurance company, not less than two hundred fifty thousand dollars ($250,000) or such other amount determined by the commissioner and actuarially supported by a feasibility study.

"(2) In the case of an association captive insurance company or risk retention group, not less than seven hundred fifty thousand dollars ($750,000) five hundred thousand dollars ($500,000) or such other amount determined by the commissioner and actuarially supported by a feasibility study.

"(3) In the case of an industrial insured captive insurance company, not less than five hundred thousand dollars ($500,000).

"(4) In the case of a sponsored protected cell captive insurance company, not less than one million dollars ($1,000,000) two hundred fifty thousand dollars ($250,000) or such other amount determined by the commissioner and actuarially supported by a feasibility study.

"(b) Notwithstanding the requirements of subsection (a), no captive insurance company organized as a reciprocal insurer under this chapter shall be issued a license unless it has and thereafter maintains free surplus of one million dollars ($1,000,000).

"(c) The commissioner may prescribe additional capital and surplus based upon the type, volume, and nature of insurance business transacted.

"(d) Capital and surplus may be in the form of cash, cash equivalents, securities meeting the eligibility requirements of Section 27-6-3, or, if approved by the commissioner, a clean, irrevocable, and unconditional letter of credit issued by a bank chartered by the State of Alabama or a member bank of the Federal Reserve System and approved by the commissioner. No assets of the captive insurer shall be pledged or encumbered for the payment of the letter of credit.

"(e) In the case of a branch captive insurance company, as security for the payment of liabilities attributable to the branch operations, the commissioner shall require that a trust fund, funded by an irrevocable letter of credit or other acceptable asset, be established and maintained in the United States for the benefit of United States policyholders and United States ceding insurers under insurance policies issued or reinsurance contracts issued or assumed, by the branch captive insurance company through its branch operations. The amount of the security may be no less than the capital and surplus required hereunder and the reserves on these insurance policies or reinsurance contracts, including reserves for losses, allocated loss adjustment expenses, incurred but not reported losses, and unearned premiums with regard to business written through the branch operations. Notwithstanding the foregoing, the commissioner may permit a branch captive insurance company that is required to post security for loss reserves on branch business by its reinsurer to reduce the funds in the trust account required by this section by the same amount so long as the security remains posted with the reinsurer. If the form of security selected is a letter of credit, the letter of credit must be established by, or issued or confirmed by, a bank chartered in this state or a member bank of the Federal Reserve System.

§27-31B-8.

"(a) A pure captive insurance company or a sponsored protected cell captive insurance company shall be incorporated formed as a stock or mutual insurer, or as a nonprofit or limited liability company with its capital divided into shares units and held by the stockholders, members, or other equivalent as allowed by law.

"(b) An association captive insurance company, or an industrial insured captive insurance company, or a risk retention group may be formed in any of the following ways:

"(1) Incorporated Organized as a stock insurer with its capital divided into shares share units and held by the stockholders, members, or other equivalent as allowed by law.

"(2) Incorporated Organized as a mutual insurer without capital stock, the governing body of which is elected by the member organizations of its association.

"(3) Organized as a reciprocal insurer in accordance with Chapter 31 of this title.

"(4) Organized as a manager-managed limited liability company.

"(c) A captive insurance company incorporated or organized in this state shall have not less than three incorporators or two organizers of whom not less than two one or more incorporators or one or more organizers, at least one of which shall be a resident of this state.

"(d)(1) In the case of a captive insurance company formed as a corporation, before the articles of incorporation are transmitted to the Secretary of State, the incorporators shall petition the commissioner to issue a certificate setting forth the commissioner's finding that the establishment and maintenance of the proposed corporation will promote the general good of the state. In arriving at this finding the commissioner shall consider all of the following:

"a. The character, reputation, financial standing, and purposes of the incorporators.

"b. The character, reputation, financial responsibility, insurance experience, and business qualifications of the officers and directors.

"c. Any other aspects as the commissioner shall deem advisable.

"(2) The articles of incorporation, the certificate, and the organization fee shall be transmitted to the Secretary of State, who shall thereupon record both the articles of incorporation and the certificate.

"(e) In the case of a captive insurance company formed as a reciprocal insurer, the organizers shall petition the commissioner to issue a certificate setting forth the commissioner's finding that the establishment and maintenance of the proposed association will promote the general good of the state. In arriving at this finding the commissioner shall consider all of the following:

"(1) The character, reputation, financial standing, and purposes of the organizers.

"(2) The character, reputation, financial responsibility, insurance experience, and business qualifications of the attorney-in-fact.

"(3) Any other aspects as the commissioner shall deem advisable.

"(f) In the case of a captive insurance company licensed as a branch captive insurance company, the alien captive insurance company shall petition the commissioner to issue a certificate setting forth the commissioner's finding that, after considering the character, reputation, financial responsibility, insurance experience, and business qualifications of the officers and directors of the alien captive insurance company, the licensing and maintenance of the branch operations will promote the general good of the state. The alien captive insurance company may register to do business in this state after the commissioner's certificate is issued.

"(g) The capital stock of a captive insurance company incorporated as a stock insurer may be authorized with no par value.

"(h) In the case of a captive insurance company formed as a corporation, at least one of the members of the board of directors, managing members, or equivalents as allowed by law, shall be a resident of this state.

"(i) In the case of a captive insurance company formed as a reciprocal insurer, at least one of the members of the subscribers' advisory committee shall be a resident of this state.

"(j) Captive insurance companies formed as corporations under this chapter shall have the privileges and be subject to the general corporation law as well as the applicable provisions of this chapter. In the event of conflict between the general corporation law and this chapter, the latter shall control. The provisions of this title pertaining to mergers, consolidations, conversions, mutualizations, and redomestications shall apply in determining the procedures to be followed by captive insurance companies in carrying out any of the transactions described therein, except that the commissioner may waive or modify the requirements for public notice and hearing in accordance with rules which the commissioner may adopt addressing categories of transactions. If a notice of public hearing is required, but no one requests a hearing, then the commissioner may cancel the hearing.

"(k)(1) Captive insurance companies formed as reciprocal insurers under this chapter shall have the privileges and be subject to Chapter 31 in addition to the applicable provisions of this chapter. In the event of a conflict between Chapter 31 and this chapter, the latter shall control. To the extent a reciprocal insurer is made subject to other provisions of this title pursuant to Chapter 31, the provisions shall not be applicable to a reciprocal insurer formed under this chapter unless the provisions are expressly made applicable to captive insurance companies under this chapter.

"(2) In addition to subdivision (1), captive insurance companies organized as reciprocal insurers that are industrial insured groups as defined in paragraph b. of subdivision (14) (18) of Section 27-31B-2 shall have the privileges and be subject to the provisions of Chapter 31A in addition to the applicable provisions of this chapter.

"(l) The articles of incorporation, organization, or equivalent allowed by law, or bylaws of a captive insurance company formed as a corporation may authorize a quorum of a board of directors to consist of no fewer than one-third of the fixed or prescribed number of directors determined under Title 10.

"(m) The subscribers' agreement or other organizing document of a captive insurance company formed as a reciprocal insurer may authorize a quorum of a subscribers' advisory committee to consist of no fewer than one-third of its members.

§27-31B-9.

"(a) Captive insurance companies shall not be required to make any annual report except as provided in this chapter.

"(b) Prior to March 1 of each year, each captive insurance company shall submit to the commissioner a report of its financial condition, verified by oath of two of its executive officers. Except as provided in Section 27-31B-6, each captive insurance company shall report using statutory accounting principles, unless the commissioner approves the use of generally accepted accounting principles, with any useful or necessary modifications or adaptations thereof required or approved or accepted by the commissioner for the type of insurance and kinds of insurers to be reported upon, and as supplemented by additional information required by the commissioner. Except as otherwise provided, each association captive insurance company and each industrial insured captive insurance company insuring the risks of an industrial insured group defined in paragraph b. of subdivision (14) (18) of Section 27-31B-2 shall file its report in the form required by Section 27-3-26. Each risk retention group shall file its report in the form required by Section 27-3-26 and shall comply with all filing requirements set forth in this title as well as rules and bulletins of the Alabama Department of Insurance applicable to casualty insurers domiciled in the state. The commissioner shall by rule propose the forms in which pure captive insurance companies and industrial insured captive insurance companies insuring the risks of an industrial insured group defined in paragraph a. of subdivision (14) (18) of Section 27-31B-2 shall report. Subdivision (4) of subsection (c) of Section 27-31B-3 shall apply to each report filed pursuant to this section, except the subdivision shall not apply to reports filed by industrial insured captive insurance companies insuring the risks of industrial insured groups as defined in paragraph b. of subdivision (14) (18) of Section 27-31B-2.

"(c) Any pure captive insurance company or an industrial insured captive insurance company insuring the risks of industrial insured groups as defined in paragraph a. of subdivision (14) (18) of Section 27-31B-2 may make written application for filing the required report on a fiscal year-end. If an alternative reporting date is granted, the annual report shall be due 60 days after the end of the fiscal year and, in order to provide sufficient detail to support the premium tax return, the pure captive insurance company or industrial insured captive insurance company insuring the risks of industrial insureds as defined in paragraph b. of subdivision (14) (18) of Section 27-31B-2 shall file prior to March 1 of each year for each calendar year-end, pages 1, 2, 3, and 5 of the "Captive Annual Statement; Pure or Industrial Insured," verified by oath of two of its executive officers.

"(d) Sixty days after the fiscal year-end, a branch captive insurance company shall file with the commissioner a copy of all reports and statements required to be filed under the laws of the jurisdiction in which the alien captive insurance company is formed, verified by oath of two of its executive officers. If the commissioner is satisfied that the annual report filed by the alien captive insurance company in its domiciliary jurisdiction provides adequate information concerning the financial condition of the alien captive insurance company, the commissioner may waive the requirement for completion of the captive annual statement for business written in the alien jurisdiction.

§27-31B-12.

"(a) An association captive insurance company,sponsored captive insurance company risk retention group, and an industrial insured captive insurance company insuring the risks of an industrial insured group defined in paragraph b. of subdivision (14) (18) of Section 27-31B-2 shall comply with the investment requirements contained in this title, as applicable; provided, however, that compliance with these investment requirements shall be waived for sponsored captive insurance companies risk retention groups to the extent that credit for risks ceded to reinsurers is allowed pursuant to Section 27-31B-13 or to the extent otherwise deemed reasonable and appropriate by the commissioner. Chapter 37 of this title shall apply to association captives, sponsored captive insurance companies risk retention groups, and industrial insured captive insurance companies insuring the risks of industrial insured groups defined in paragraph b. of subdivision (14) (18) of Section 27-31B-2 except to the extent it is inconsistent with approved accounting standards in use by the association captive insurance company, sponsored captive insurance company risk retention group, or industrial insured captive insurance company insuring the risks of an industrial insured group as defined in paragraph b. of subdivision (14) (18) of Section 27-31B-2. Notwithstanding any other provision of this title, the commissioner may approve the use of alternative reliable methods of valuation and rating.

"(b) No pure captive insurance company, or industrial insured captive insurance company insuring the risks of an industrial insured group as defined in paragraph b. of subdivision (14) (18) of Section 27-31B-2, or protected cell captive insurance company shall be subject to any restrictions on allowable investments whatever, including those limitations contained in Chapters 37 and 41. Notwithstanding the foregoing, the commissioner may prohibit or limit any investment that threatens the solvency or liquidity of the company.

"(c) Only a pure captive insurance company or a protected cell captive insurance company may make loans to its parent company or affiliates. No loans to a parent company or any affiliate shall be permitted without prior written approval of the commissioner and must be evidenced by a note in a form approved by the commissioner. Loans of minimum capital and surplus funds required by Section 27-31B-6 are prohibited. Any loan made by a protected cell captive insurance company must be made from funds in the company's general account.

§27-31B-16.

"(a) Each captive insurance company shall pay to the commissioner, by March 1 of each year, a tax at the rate of four-tenths of one percent on the first 20 million dollars, three-tenths of one percent on the next 20 million dollars, two-tenths of one percent on the next 20 million dollars, seventy-five thousandths of one percent on each dollar thereafter on the direct premiums collected or contracted for on policies or contracts of insurance written by the captive insurance company during the year ending December 31 next preceding, after deducting from the direct premiums subject to the tax the amounts paid to policyholders as return premiums which shall include dividends on unabsorbed premiums or premium deposits returned or credited to policyholders. Notwithstanding the foregoing, no tax shall be due or payable as to considerations received for annuity contracts.

"(b) Each captive insurance company shall pay to the commissioner by March 1 of each year a tax at the rate of two hundred and twenty-five thousandths of one percent on the first 20 million dollars of assumed reinsurance premium, one hundred fifty thousandths of one percent on the next 20 million dollars, fifty thousandths of one percent on the next 20 million dollars, twenty-five thousandths of one percent of each dollar thereafter. However, no reinsurance tax applies to premiums for risks or portions of risks which are subject to taxation on a direct basis pursuant to subsection (a). No reinsurance premium tax shall be payable in connection with the receipt of assets in exchange for the assumption of loss reserves and other liabilities of another insurer under common ownership and control if the transaction is part of a plan to discontinue the operations of the other insurer, and if the intent of the parties to the transaction is to renew or maintain business with the captive insurance company.

"(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 ($5,000) in any year, the captive insurance company shall pay a tax of five thousand dollars ($5,000) for that year. The aggregate taxes paid by a captive insurance company may not exceed one hundred thousand dollars ($100,000) in any year.

"(d) The minimum tax for a protected cell captive insurance company may not be less than five thousand dollars ($5,000) and shall apply to the protected cell captive insurance company as a whole and not to each protected cell. The maximum tax to be paid by a protected cell captive insurance company shall be the aggregate of the tax liabilities of each protected cell. The maximum tax liability attributed to any one protected cell captive insurance company shall be one hundred thousand dollars ($100,000).

"(e) Examination expenses paid in accordance with Section 27-31B-10 and business privilege taxes paid in accordance with Section 40-14A-22 by a captive insurance company shall be allowed as credits to the tax provided for in this section for the calendar year in which they were paid. In the event application of the credit results in a negative tax due, the tax due shall be zero and any unused portion of the credit may not be carried forward for use in subsequent years.

"(f) A captive insurance company failing to make returns as required by Chapter 14A of Title 40 or failing to pay within the time required all taxes assessed by this section, shall be subject to Section 27-4A-4.

"(e)(g) Two or more captive insurance companies under common ownership and control shall be taxed as though they were a single captive insurance company.

"(f)(h) For the purposes of this section, "common ownership and control" shall have the following meaning, as applicable:

"(1) In the case of stock corporations, the direct or indirect ownership of 80 percent or more of the outstanding voting stock of two or more corporations by the same shareholder or shareholders.

"(2) In the case of mutual corporations, the direct or indirect ownership of 80 percent or more of the surplus and the voting power of two or more corporations by the same member or members.

"(g)(i) In the case of a branch captive insurance company, the tax provided for in this section shall apply only to the branch business of the company.

"(j) If a captive insurance company has been licensed for less than a full calendar year and has written premiums the tax for which is less than the minimum set forth in this section, the tax due shall be prorated as follows:

"(1) If licensed on or before March 31, 100 percent.

"(2) If licensed April 1 to June 30, 75 percent.

"(3) If licensed July 1 to September 30, 50 percent.

"(4) If licensed October 1 to December 31, 25 percent.

"(k) If a captive insurance company surrenders its license and the calculated tax on premiums written during the calendar year is less than the minimum set forth in this section, the tax due shall be prorated as follows:

"(1) If surrendered on or before March 31, 25 percent.

"(2) If surrendered April 1 to June 30, 50 percent.

"(3) If surrendered July 1 to September 30, 75 percent.

"(4) If surrendered October 1 to December 31, 100 percent.

"(h) (l) The tax provided for in this section shall constitute all taxes collectible under the laws of this state from any captive insurance company, and no other occupation tax or other taxes shall be levied or collected from any captive insurance company by the state or any county, city, or municipality within this state, except business privilege taxes and ad valorem taxes on real and personal property used in the production of income.

"(m) The tax provided for in this section shall not be applicable if the captive insurance company writes no premiums during the calendar year.

§27-31B-19.

"(a) Except as otherwise provided in this section, the terms and conditions set forth in Chapter 32 and Article 2, commencing with Section 27-2-50, of Chapter 2, pertaining to rehabilitation, reorganization, conservation, and liquidation of insurers, shall apply in full to captive insurance companies formed or licensed under this chapter.

"(b) In the event of an action described in subsection (a) against a sponsored protected cell captive insurance company, both of the following shall apply:

"(1) The assets of a protected cell may not be used to pay any expenses or claims other than those attributable to the protected cell.

"(2) Its capital and surplus shall at all times be available to pay any expenses of or claims against the sponsored protected cell captive insurance company.

"(c) Notwithstanding the provisions of this title, in the event of an insolvency of a protected cell captive insurance company where the commissioner determines that one or more protected cells remain solvent, the commissioner may separate those cells from the protected cell captive insurance company, and may allow, on application from the sponsor, for the conversion of the protected cells into one or more new or existing captive insurance companies, pursuant to a plan of operation as the commissioner deems acceptable.

§27-31B-20.

"The commissioner shall adopt rules establishing standards to ensure that a parent or affiliated company is able to exercise control of the risk management function of any controlled unaffiliated business to be insured by the pure captive insurance company. Until the rules under this section are adopted, the commissioner may by temporary order grant authority to a pure captive insurance company to insure risks.

§27-31B-22.

"(a) One or more sponsors may form a sponsored protected cell captive insurance company under this chapter.

"(b) A sponsored protected cell captive insurance company formed or licensed under this chapter may establish and maintain one or more protected cells to insure risks of one or more participants, subject to all of the following conditions:

"(1) The shareholders of a sponsored captive insurance company shall be limited to its participants and sponsors.

"(2)(1) Each protected cell shall be accounted for separately on the books and records of the sponsored protected cell captive insurance company to reflect the financial condition and results of operations of the protected cell, net income or loss, dividends or other distributions to participants, and other factors as may be provided in the participant contract or required by the commissioner.

"(3)(2) The assets of a protected cell shall not be chargeable with liabilities arising out of any other insurance business the sponsored protected cell captive insurance company may conduct.

"(4)(3) No sale, exchange, or other transfer of assets may be made by the sponsored protected cell captive insurance company between or among any of its protected cells without the consent of the protected cells.

"(5)(4) No sale, exchange, transfer of assets, dividend, or distribution may be made from a protected cell to a sponsor or participant without the commissioner's approval and in no event shall the approval be given if the sale, exchange, transfer, dividend, or distribution would result in insolvency or impairment with respect to a protected cell.

"(6)(5) Each sponsored protected cell captive insurance company shall annually file with the commissioner all financial reports as the commissioner shall require, which shall include, without limitation, accounting statements detailing the financial experience of each protected cell.

"(7)(6) Each sponsored protected cell captive insurance company shall notify the commissioner in writing within 10 business days of any protected cell that is insolvent or otherwise unable to meet its claim or expense obligations.

"(8)(7) No participant contract shall take effect without the commissioner's prior written approval, and the addition of each new protected cell and withdrawal of any participant of any existing protected cell shall constitute a change in the business plan requiring the commissioner's prior written approval.

"(9)(8) The commissioner, based on the type, nature, and volume of insurance business transacted, may require that the business written by a sponsored protected cell captive insurance company, with respect to each cell, shall be one of the following:

"a. Fronted by an insurance company licensed under the laws of any state.

"b. Reinsured by a reinsurer authorized or approved by the State of Alabama state.

"c. Secured by a trust fund in the United States for the benefit of policyholders and claimants funded by an irrevocable letter of credit or other asset that is acceptable to the commissioner. The amount of security provided by a trust fund shall be no less than the reserves associated with those liabilities, including reserves for losses, allocated loss adjustment expenses, incurred but not reported losses, and unearned premiums for business written through the participant's protected cell. The commissioner may require the sponsored protected cell captive insurance company to increase the funding of any trust as established under this subdivision. If the form of security in the trust is a letter of credit, the letter of credit must be clean, irrevocable, and unconditional and must be issued or confirmed by a bank chartered in this state, a member of the federal reserve system, or a bank chartered by another state if the state chartered bank is acceptable to the commissioner. A trust and trust instrument maintained pursuant to this subdivision shall be established in a form and upon terms approved by the commissioner.

§27-31B-24.

"(a) An association, corporation, limited liability company, partnership, trust, or other business entity may be a participant in a sponsored protected cell captive insurance company formed or licensed under this chapter.

"(b) A sponsor may be a participant in a sponsored protected cell captive insurance company.

"(c) A participant need not be a shareholder of the sponsored protected cell captive insurance company or an affiliate of the company.

"(d) A participant shall insure only its own approved risks through a sponsored protected cell captive insurance company."

Section 2. Section 27-31B-25 is added to the Code of Alabama 1975, to read as follows:

§27-31B-25.

(a) A protected cell of a protected cell captive insurance company may be formed as an incorporated protected cell.

(b) Subject to the prior written approval of the protected cell captive insurance company and of the commissioner, an incorporated protected cell shall be entitled to enter into contracts and undertake obligations in its own name and for its own account. In the case of a contract or obligation to which the protected cell captive insurance company is not a party, either in its own name and for its own account or on behalf of a protected cell, the counterparty to the contract or obligation shall have no right or recourse against the protected cell captive insurance company and its assets other than against assets properly attributable to the incorporated protected cell that is a party to the contract or obligation.

(c) The certificate of formation of an incorporated protected cell shall refer to the protected cell captive insurance company for which it is a protected cell and shall state that the protected cell is incorporated or organized for the limited purposes authorized by the protected cell captive insurance company's license. A copy of the prior written approval of the commissioner to add the incorporated protected cell, required by subdivision (7) of subsection (b) of Section 27-31B-22, shall be attached to and filed with the certificate of formation.

(d) It is the intent of the Legislature under this section to provide protected cell captive insurance companies with the option to establish one or more protected cells as a separate corporation, mutual corporation, nonprofit, limited liability company, or other entity as allowed by law. This section shall not be construed to limit any rights or protections applicable to protected cells not established as corporations, mutual corporations, nonprofit corporations, limited liability companies, or other entities as allowed by law.

Section 3. Section 27-31B-23, Code of Alabama 1975, relating to qualifications of sponsors of a sponsored captive insurance company, is repealed.

Section 4. This act shall become effective on the first day of the third month following its passage and approval by the Governor, or its otherwise becoming law.

Insurance Companies

Insurance

Insurance Premium Tax

Corporations

Insurance Department

Code Added

Code Repealed

Code Amended