Captive Review September Edition

Until Governor Bruce Rauner vetoed the new captive legislation in Illinois, this edition was going to focus on the contrasting paths being taken in relation to captives by elected officials in the Prairie State and those in the State of Washington.

Illinois has a chequered past in its dealing with captive insurance companies, but some progress – not least the proposal to reduce its controversial three-year-old self-procurement tax from 3.5% to 0.5% – appears to be being made. While Rauner’s veto delays the new legislation until November, there is realistic optimism that a resolution producing significant improvements to the environment for the state’s captive owners will be agreed. In short, Illinois’ legislators and regulators are on the road to embracing captives – whether domiciled in the ‘home state’ or not.

The same cannot be said for the State of Washington, where Commissioner Mike Kreidler has followed up his settlement with Microsoft’s Cypress Insurance Company by firing a warning shot that his office are keen to target other captives they believe are not in compliance.

Kreidler’s own publicly released comments admit that captives have remained a “grey area” in his state’s laws and he had viewed the action taken against Cypress as a valuable test case. To this editor, it seems a much more productive way to resolve such ambiguity would be to work with the local captive owner community to produce a solution that removed the uncertainty. Perhaps taking steps to offer a ‘home state’ option for captives (as has been done in Texas, Georgia and New Jersey in recent years), or legislate for a clearly defined self-procurement tax.

As it stands now, it appears the captive industry is in an uncertain stand-off with the new status quo in Washington, and other large captive owners headquartered in the state, including huge employers such as Amazon and Starbucks, are having to decide whether they challenge Kreidler’s position or alter their captive programmes accordingly.

There does, at least, seem little prospect of Washington’s stance spreading to other states, although California and New York may be the most likely to be watching closely if the approach proves fruitful in collecting additional tax revenue.

All of the above makes the European captive scene feel relatively serene. While Solvency II has its detractors, and the OECD’s Beps initiative is more than a growing pain, captive owners on the continent can be relieved they do not reside in such an ambiguous legal environment.

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