Stalled Illinois captive reform measure may revive by year-end

Illinois’ efforts to become a more favorable captive domicile may have stalled, but they could resurface later this year when the legislature starts its next session, experts say.

Illinois Gov. Bruce Rauner last week issued an amendatory veto of S.B. 1737 — legislation that would overhaul a number of provisions in the Illinois Insurance Code — because of concerns that it would impose “detrimental” new limitations on certain types of health coverage and “overregulate our competitive market” for workers compensation insurance, according to his veto message. However, he praised other elements of the bill that would update the state’s captive insurance law to be “more attractive to companies that use this insurance option” and “help Illinois overcome its competitive disadvantage in attracting the companies that offer this product to Illinois businesses.”

The bill “would make Illinois a more receptive place for captive insurance companies to domicile,” said Mary Kay McCalla Martire, a Chicago-based partner with law firm McDermott Will & Emery LLP. “They make a number of changes following the lead of other jurisdictions that are viewed as more receptive to captive formations.”

Illinois had three captives in 2017, according to Business Insurance’s annual captive survey.

“Our goal is to create a favorable captive insurance law so that Illinois companies will keep their captives in the state of Illinois,” said Mark Denzler, Springfield, Illinois-based vice president and chief operating officer of the Illinois Manufacturers’ Association, which is part of a coalition of organizations lobbying to modernize the state’s captive insurance law.

The bill would give broad authority to the Illinois director of insurance to set minimum capital and surplus requirements for Illinois licensed captives based on the amount of premium written, the type of assets held by the captive, the terms of reinsurance arrangements, the types of business covered in policies issued by the captive, the underwriting practices and procedures of the captive, and any other criteria that has an impact on the captive deemed significant by the director, according to an alert by McDermott Will & Emery. It would provide only that the capital and surplus requirements be not less than $250,000 for a pure captive insuring only the risks of its parent/affiliated companies, $500,000 for an industrial insured captive insuring the risks of larger insureds with aggregate annual premiums in excess of $100,000 and access to the full-time services of an insurance manager, and $750,000 for an association captive insuring the risks of the member organizations of an association and their affiliated companies.

Illinois law currently requires state-licensed captives to meet the minimum capital requirements for Illinois domestic insurers, which are much higher than the minimum levels set forth in the bill, according to the alert.

Illinois also adopted a self-procurement tax of 3.5% of premiums imposed on Illinois-based businesses for payments made to unauthorized insurers, potentially including captives, in 2014. But the current bill would lower that tax rate to 0.5% of premiums.

“That is a significant drop and makes that much more palatable to folks if you’re self-procuring, even if your captive wasn’t based in Illinois,” Ms. Martire said, adding that these are “all things that we view as very favorable.”

“It reduces the tax rate to create parity, number one,” Mr. Denzler said. “Number two, it just makes a number of changes to surplus requirements, reporting requirements, regulatory requirements to make sure that they fall in line with what a number of other states are doing around the country, just to simplify it and make it easier for companies to locate captives in Illinois.”

The Illinois General Assembly will meet again in November, when it could reconsider the legislation. “What that means is we’re not going to know until probably November or December whether or not the bill is going to become law or whether it will die,” Ms. Martire said. “If it does (die), it could be reintroduced next year, but it’s a shame to have this language that the General Assembly approved and the governor approved and yet it’s in a bill with other language that wasn’t acceptable to the governor so it may not become law.”

The governor offered some potential changes on provisions he objected to but did not recommend changes to the captive insurance provisions, Mr. Denzler noted.

State lawmakers are “not going to accept the changes that he’s offered, so their decision will be either try to override the governor to put all five provisions into law, or if they choose to do nothing then the bill dies,” he said. “It’s a pretty safe bet to say they’re not going to go along with the governor’s changes.”

This article was first published by Business Insurance.

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