Washington State captive bill passes, will become law

The much-contested new Washington State captive bill has passed the state’s legislature and will become law.

The bill will not make Washington State a captive domicile, but will introduce on a 2% tax on premiums on a captive’s ‘Washington-based’ risks. The 2% premium tax is also retrospective, and will net Washington State $34.2m in the first year.

It will also require captives operating in the state to register with the Washington State Office of the Insurance Commissioner, paying a $2,500 fee. An annual fee may also be payable, with the bill report stating “a renewal fee may be set by the [Office of the Insurance Commissioner] OIC not to exceed $2,500 a year”, however it has not been confirmed when or if this renewal fee will be in place.

Registered and approved captives will also only be allowed to provide property and casualty insurance, however they will be able to “obtain or provide reinsurance for ceded or assumed risks insured in this state or elsewhere”. Captives for higher education institutions still need to register with the state but are exempt from the premium tax.

Background

The bill is a project of Insurance Commissioner Mike Kreidler, who has been on a long-running campaign to tax captives in Washington State.

In 2018 Microsoft’s Arizona-domiciled captive Cypress was issued with a cease and desist order, which the company challenged. Microsoft ended up settling with the OIC for more than $875,000 in mid-2018. In March 2019 Costco captive, NW Re, settled with Kreidler for more than $3.2m.

Recently, the OIC has been in a legal battle with two captives and their parents – ASA Assurance, Alaska Air’s captive, and Olympic Casualty Insurance, Starbucks’ captive. In 2019 Kriedler fined ASA Assurance $2.5m, and then ordered all captives to stop operating in the state.

In late 2020 OIC then started negotiating with large captives to create the SB 5315 bill, which has just passed.

Criticism

However the bill had been criticised heavily, with president of the Vermont Captive Insurance Association (VCIA), Rich Smith, writing that it was “poorly drafted”.

“Besides being poorly drafted, the bill sets a terrible precedent whereby acquiescing some regulatory oversight by the Washington State insurance commissioner on captives domiciled in other states,” Smith wrote on the VCIA blog.

“This is the culmination of a battle over the past few years between Washington’s Office of Insurance (OIC) and reality. For whatever reason, the OIC has not liked that companies in Washington can set up captives to better manage the risks of their organisations.”

However some have, while not completely happy with the deal, spoken in support of it.

Denny Eliason, a partner at government relations firm Alliance Northwest, spoke earlier in the year to a public hearing for the bill on behalf of Amazon and Starbucks,  and the captive coalition.

Eliason contended in the hearing that the 2% premium tax was an “appropriate level of taxation”.

“[Captive insurance] is a tool that companies in Washington prudently use when commercial and or surplus lines coverage is either unavailable or unaffordable at the scale with which we need to protect against our future losses,” Eliason said.

“This bill does indeed call for an appropriate level of taxation, a 2% premium tax in Washington-only risk exposures. Please understand that this tax is in addition to the premium taxes we pay and the states where our captives are domiciled.

“That said, we believe that this is an equitable level of taxation under which it will still be prudent for Washington headquartered companies to use this important financial tool on behalf of our coalition.”

The future

Despite the criticism of the bill, it has now passed and the premium tax is law. Exactly how this will impact the larger captive industry is unknown, although as Rich Smith suggests, it may lead to a slippery slope of non-domicile US states looking to implement a premium tax in the current less than ideal economic conditions.

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