No. 29458 (New Rule): R590-238. Captive Insurance Companies

DAR File No.: 29458
Filed: 01/30/2007, 10:54
Received by: NL

RULE ANALYSIS

Purpose of the rule or reason for the change:

The purpose of this rule is to set forth the financial, reporting, record-keeping, and other requirements the commissioner deems necessary for the regulation of captive insurance companies, under the Captive Insurance Companies Act of Title 31A, Chapter 37.

Summary of the rule or change:

This rule sets forth financial, reporting, record-keeping, and other requirements the commissioner deems necessary for the regulation of captive insurance companies.

State statutory or constitutional authorization for this rule:

Sections 31A-2-201 and 31A-37-106

Anticipated cost or savings to:

the state budget:

This rule requires captive insurers to submit to the department annually certain reports and audits that will need to be reviewed by financial examiners. Currently, there are 32 captive insurers licensed in Utah and the Department anticipate that a minimum of 10 more will be licensed during this year. As a result, the Department has requested the addition of two financial examiners solely to examine these reports and audits, as well as an examination of the affairs and financial condition of the captive insurance companies books and records on a regular basis. The department has asked the legislature to set aside $162,300 to pay for these two examiners. A portion of this annual expense will be paid by the captives themselves in two ways. Each captive pays the cost of the financial examinations conducted by the department on their books on a regular basis; and each captive will pay licensing costs that will go to a dedicated account for expenses of the Captive Division. Each captive will pay $5,002 for the initial and renewal license, $202 to file the license with the department, and a $250 e-commerce fee. This is a total of $5,454 for the initial license and $5,252 for the annual renewal.

local governments:

This rule will have no impact on local governments since it relates solely to the relationship between the licensee and the Department.

other persons:

This rule will have a fiscal impact on each licensed captive insurer. Each captive will be required to pay a total of $5,454 for their initial license and $5,252 to renew it annually. A captive will also be required to file an annual financial statement and an independent audit with the department. In addition, a captive will be required to file the "Independent Actuary - Reserve Opinion," which will cost the captive an estimated $6,000 to have an independent actuary prepare it. A captive will also need to hire an independent certified public accountant (CPA) to prepare an annual audit report. This will cost an estimated $5,000. There are a number of other forms that will need to be filed, as noted in Section R590-238-19. Some captives that do not have the in-house legal staff may need to hire an attorney and an approved captive management firm. The reason large businesses decide to create a captive is to cover risks they cannot cover through a traditional insurance policy, as well as to reduce the cost of their insurance by controlling their own risks. Whether or not these costs or savings are transfered to their consumers will vary from captive to captive. These known first year expenses will total a minimum of $16,454. For each succeeding year, the cost will cost a minimum of $16,252. The anticipated 10 new captives to be licensed this year will incur costs of around $164,540 to complete the licensing process. The 32 captives already licensed will pay around $520,064 to complete the renewal process.

Compliance costs for affected persons:

This rule will have a fiscal impact on each licensed captive insurer. Each captive will be required to pay a total of $5,454 for their initial license and $5,252 to renew it annually. A captive will also be required to file an annual financial statement and an independent audit with the department. In addition, a captive will be required to file the "Independent Actuary - Reserve Opinion," which will cost the captive an estimated $6,000 to have an independent actuary prepare it. A captive will also need to hire an independent certified public accountant to prepare an annual audit report. This will cost an estimated $5,000. There are a number of other forms that will need to be filed, as noted in Section R590-238-19. Some captives that do not have the in-house legal staff may need to hire an attorney and an approved captive management firm. The reason large businesses decide to create a captive is to cover risks they cannot cover through a traditional insurance policy, as well as to reduce the cost of their insurance by controlling their own risks. Whether or not these costs or savings are transfered to their consumers will vary from captive to captive. These known first-year expenses will total a minimum of $16,454. For each succeeding year the cost will cost a minimum of $16,252.

Comments by the department head on the fiscal impact the rule may have on businesses:

This rule will create a fiscal impact on captives who decide to be licensed within the state of Utah. It should be noted that these captives could be licensed in anyone of a number of off-shore or state locations. They decide which location will work best for them. Due to our service and lower than average expense to domesticate, many are choosing to come here. D. Kent Michie, Commissioner

The full text of this rule may be inspected, during regular business hours, at the Division of Administrative Rules, or at:

Insurance
Administration
Room 3110 STATE OFFICE BLDG
450 N MAIN ST
SALT LAKE CITY UT 84114-1201

Direct questions regarding this rule to:

Jilene Whitby at the above address, by phone at 801-538-3803, by FAX at 801-538-3829, or by Internet E-mail at [e-mail]

Interested persons may present their views on this rule by submitting written comments to the address above no later than 5:00 p.m. on:

03/19/2007

Interested persons may attend a public hearing regarding this rule:

3/15/2007 at 3:00 PM, State Office Building (behind the Capitol), Room 3112, Salt Lake City, UT

This rule may become effective on:

03/26/2007

Authorized by:

Jilene Whitby, Information Specialist

RULE TEXT

R590. Insurance Administration.

R590-238. Captive Insurance Companies.

R590-238-1. Authority.

This rule is promulgated pursuant to the general rulemaking authority granted the insurance commissioner by Subsection 31A-2-201(3)(a) and the specific authority granted by Section 31A-37-106.

 

R590-238-2. Purpose and Scope.

The purpose of this rule is to set forth the financial, reporting, record-keeping, and other requirements which the commissioner deems necessary for the regulation of captive insurance companies, under the Captive Insurance Companies Act (the Act), Chapter 37, Title 31A. This rule applies to all captive insurance companies licensed under the Act.

 

R590-238-3. Definitions.

The definitions in Sections 31A-1-301 and 31A-37-102 apply to this rule.

 

R590-238-4. Annual Reporting Requirements.

(1) A captive insurance company authorized in this state shall file an annual report of its financial condition with the commissioner as required by Section 31A-37-501. The report shall be verified by oath of two of its executive officers and shall be prepared using generally accepted accounting principles. The annual report may be filed electronically consistent with directions from the commissioner.

(2) An association captive insurance company, a sponsored captive insurance company, and an industrial insured captive insurance company shall observe the requirements of Section 31A-4-113 when they file an annual report on its financial condition. In addition, an industrial insured group shall observe the requirements of Section 31A-4-113.5 when it files an annual report.

(3) The annual report shall be filed on the form prescribed in statute or in this rule.

 

R590-238-5. Risk Limitation.

(1) The commissioner may limit the net amount of risk a captive insurance company retains for a single risk after considering the impact of the retention on the captive insurance company's capital and surplus.

(2) The commissioner may also prescribe and demand additional capital and surplus of any captive insurance company if he determines that the captive insurance company is not adequately capitalized for the type, volume and nature of the risk that is being covered by the captive insurance company.

 

R590-238-6. Annual Audit.

(1) All companies shall have an annual audit by an independent certified public accountant, approved by the commissioner, and shall file such audited financial report with the commissioner on or before June 30 for the preceding year ending December 31. Financial statements furnished under this section shall be prepared in accordance with generally accepted auditing standards as determined by the American Institute of Certified Public Accountants.

(2) The annual audit report shall be considered part of the company's annual report of financial condition except with respect to the date by which it must be filed with the commissioner.

(3) The annual audit shall consist of the following:

(a) Opinion of Independent Certified Public Accountant

(i) Financial statements furnished pursuant to this section shall be examined by independent certified public accountants in accordance with generally accepted auditing standards as determined by the American Institute of Certified Public Accountants.

(ii) The opinion of the independent certified public accountant shall cover all years presented.

(iii) The opinion shall be addressed to the company on stationery of the accountant showing the address of issuance, shall bear original manual signatures and shall be dated.

(b) Report of Evaluation of Internal Controls

(i) This report shall include an evaluation of the internal controls of the company relating to the methods and procedures used in the securing of assets and the reliability of the financial records, including but not limited to, controls as the system of authorization and approval and the separation of duties.

(ii) The review shall be conducted in accordance with generally accepted auditing standards and the report shall be filed with the commissioner.

(c) Accountant's Letter

The accountant shall furnish the company, for inclusion in the filing of the audited annual report, a letter stating:

(i) that he is independent with respect to the company and conforms to the standards of his profession as contained in the Code of Professional Ethics and pronouncements of the American Institute of Certified Public Accountants and pronouncements of the Financial Accounting Standards Board;

(ii) the general background and experience of the staff engaged in the audit, including their experience in auditing captive or other insurance companies;

(iii) that the accountant understands that the audited annual report and his opinions thereon will be filed in compliance with this rule.

(iv) that the accountant consents to the requirements of R590-238-10;

(v) that the accountant consents and agrees to make the work papers as defined in R590-238-10(3) available for review by the commissioner, his designee or his appointed agent; and

(vi) that the accountant is properly licensed by an appropriate state licensing authority and is a member in good standing in the American Institute of Certified Public Accountants.

(d) Financial Statements

(i) The financial statements required shall be as follows:

(A) balance sheet;

(B) statement of gain or loss from operations;

(C) statement of changes in financial position;

(D) statement of cash flow;

(E) statement of changes in capital paid up, gross paid in and contributed surplus and unassigned funds (surplus); and

(F) notes to financial statements.

(ii) The notes to financial statements shall be those required by generally accepted accounting principles and shall include:

(A) a reconciliation of differences, if any, between the audited financial report and the statement or form filed with the commissioner;

(B) a summary of ownership and relationship of the company and all affiliated corporations or companies insured by the captive; and

(C) a narrative explanation of all material transactions with the company. For purposes of this provision, no transaction shall be deemed material unless it involves 3% or more of a company's admitted assets as of the December 31 next preceding.

(e) Certification of Loss Reserves and Loss Expense Reserves of the companies opining actuary

(i) The annual audit shall include an opinion as to the adequacy of the company's loss reserves and loss expense reserves.

(ii) The individual who certifies as to the adequacy of reserves shall be approved by the Commissioner and shall be a Fellow of the Casualty Actuarial Society and a member in good standing of the American Academy of Actuaries, or a Fellow of the Society of Actuaries and a member in standing of the American Academy of Actuaries.

(4) Certification shall be in such form as the commissioner deems appropriate.

 

R590-238-7. Designation of Independent Certified Public Accountant.

A company that terminates the appointment of an independent certified public accountant retained to conduct the annual audit required in this rule shall report the name and address of the certified public accountant in writing to the commissioner within ninety days after the appointment is terminated and shall within the same period report the name and address of the certified public accountant that is subsequently retained. A certified public accountant that is retained to conduct the independent annual audit may only be appointed from the list of approved certified public accountants from companies maintained by the commissioner.

 

R590-238-8. Notification of Adverse Financial Condition.

A company shall require its certified public accountant to immediately notify an officer and all members of the board of directors of the company in writing of any determination by the independent certified public accountant that the company has materially misstated its financial condition in its report to the commissioner. The company shall furnish such notification to the commissioner within five working days of receipt thereof.

 

R590-238-9. Additional Deposit Requirement.

(1) Whenever the commissioner deems that the financial condition of a company warrants additional security, the commissioner may require the company to deposit, in trust for the company, cash, securities approved by the commissioner, or an irrevocable letter of credit issued by a bank chartered by the State of Utah or a member bank of the Federal Reserve System with the commissioner.

(2) The commissioner shall return the deposit or letter of credit of a company if the company ceases to do any business only after being satisfied that all obligations of the company have been discharged.

(3) A company may receive interest or dividends from the deposit or exchange the deposits for others of equal value with the approval of the commissioner.

 

R590-238-10. Availability and Maintenance of Working Papers of the Independent Certified Public Accountant.

(1) Each company shall require its independent certified public accountant to make all work papers prepared in the conduct of the audit of the company available for review by the commissioner or his appointed agent. The company shall require that the accountant retain the audit work papers for a period of not less than five years after the period reported upon.

(2) The review by the commissioner shall be considered an official investigation by the commissioner and all working papers obtained during the course of such investigation shall be confidential business papers and shall be classified as business confidential protected records. The company shall require that the independent certified public accountant provide photocopies of any of the working papers that the department considers relevant. The department may retain any photocopies of working papers.

(3) "Work Papers" or "working papers" as referred to in this section include, but are not necessarily limited to, schedules, analyses, reconciliations, abstracts, memoranda, narratives, flow charts, copies of company records or other documents prepared or obtained by the accountant and his employees in the conduct of their audit of the company.

 

R590-238-11. Documentation Required to be Held in Utah by Licensed Captives.

(1) All companies licensed by the commissioner as a captive insurance company, shall maintain and make ready for inspection and examination by the commissioner, or the commissioner's agent, any and all documents pertaining to the formation, operation, management, finances, insurance, and reinsurance of each company.

(2) Original documents may be kept in the offices of the company's captive manager, the company's parent, or the company itself. Accurate and complete copies shall be held in an office located in Utah that is designated by the company and approved by the commissioner.

 

R590-238-12. Reinsurance.

(1) Any company authorized to do business in this state may take credit for reserves on risks ceded to a reinsurer subject to the following limitations:

(a) No credit shall be allowed for reinsurance where the reinsurance contract does not result in the transfer of the risk or liability to the reinsurer.

(b) No credit shall be allowed, as an asset or a deduction from liability, to any ceding insurer for reinsurance unless the reinsurance is payable by the assuming insurer on the basis of the liability of the ceding insurer under the contract reinsured without diminution because of the insolvency of the ceding insurer.

(2) Reinsurance under this section shall be effected through a written agreement of reinsurance setting forth the terms, provisions and conditions governing such reinsurance.

(3) The commissioner, in his discretion, may require that complete copies of all reinsurance treaties and contracts be filed and approved by him.

 

R590-238-13. Service Providers.

No person shall act, in or from this state, as an captive insurance manager, broker, agent, or salesman, or reinsurance intermediary for captive business without the authorization of the commissioner. Application for such authorization must be on a form prescribed by the commissioner.

 

R590-238-14. Directors.

(1) Every company shall report any change in its executive officers or directors to the commissioner within thirty days after a change is made, including, in its report, a biographical affidavit of any new executive officer or director.

(2) No director, officer, or employee of a company shall, except on behalf of the company, accept, or be the beneficiary of, any fee, brokerage, gift, or other emolument because of any investment, loan, deposit, purchase, sale, payment or exchange made by or for the company. Such person may receive reasonable compensation for necessary services rendered to the company in his or her usual private, professional or business capacity.

(3) Any profit or gain received by or on behalf of any person in violation of this section shall inure to and be recoverable by the company.

 

R590-238-15. Conflict of Interest.

(1) Each company licensed in Utah is required to adopt a conflict of interest statement for officers, directors and key employees. The statement shall disclose that the individual has no outside commitments, personal or otherwise, that would divert him from his duty to further the interests of the company he represents but this shall not preclude a person from being a director or officer in more than one insurance company.

(2) Each officer, director, and key employee shall file a yearly disclosure with the board of directors.

 

R590-238-16. Acquisition or Change of Control of or Merger with Domestic Company.

The acquisition or change of control of or merger of a domestic captive insurance company shall be regulated pursuant to Section 31A-16-103.

 

R590-238-17. Suspension or Revocation.

(1) The commissioner may by order suspend or revoke the license of a company or place the same on probation on the following grounds:

(a) the company has not commenced business according to its plan of operation within two years of being licensed; or

(b) the company ceased to carry on insurance business in or from within Utah; or

(c) at the request of the company; or

(d) for any reason provided in Section 31A-37-505.

(2) Before the commissioner takes any action set forth under R590-238-16(1) the commissioner shall give the company notice in writing of the grounds on which he proposes to act, and shall afford the company a hearing as to such proposed action in accordance with the Utah Administrative Procedures Act, Chapter 46b, Title 63.

 

R590-238-18. Change of Business.

(1) Any material change in a company's business plan that was filed with the commissioner at the time of initial application and any subsequent amendment of the plan requires prior approval of the commissioner.

(2) Any change in any other information filed with the initial application must be filed with the commissioner within sixty days after the change, but does not require prior approval.

(3) The company shall immediately notify the commissioner upon making changes in board members or officers of the company.

 

R590-238-19. Application and Forms.

(1) Any person that wants to form a captive insurance company shall make application to the commissioner for authority to conduct a captive insurance using the form, "Application to Form a Captive Insurance Company."

(2) Two complete copies of the application including forms, attachments, exhibits and all other papers and documents filed as a part thereof, accompanied by the appropriate filing fee, shall be filed in writing or online with the commissioner. A written application, including all required attachments and information, may be filed by personal delivery or mail addressed to: Office of the Commissioner, Utah Insurance Department, State Office Building, Room 3110, Salt Lake City, Utah 84114-6901, Attention: Captive Insurance Administrator.

(3) At least one of the copies of the application shall be signed in the manner prescribed in the application. If the signature of any person is affixed pursuant to a power of attorney or other similar authority, a copy of such power of attorney or other authority shall also be filed with the application.

(4) A company must include with its application, a feasibility study demonstrating the feasibility of the business plan of the company. The department may test the feasibility of the study by examining the company's corporate records, including: charter; bylaws and minute books; verification of capital and surplus; verification of principal place of business; determination of assets and liabilities; and other factors as the commissioner deems necessary.

 

R590-238-20. Fee Schedule. Initial Application. Renewal.

(1) An applicant for a certificate of authority under the captive insurance code shall pay a nonrefundable fee established in the department's fee rule, R590-102-7 for examining, investigating, and processing its initial application for license to the commissioner at the time the application is filed.

(2) In addition, each company that is licensed by the commissioner shall pay a license fee, without proration, for the initial year of registration and a renewal fee for each succeeding year in the amount established in the department's fee rule, R590-102-7.

(3) Each company shall pay an annual nonrefundable service fee each year in the amount established in the department's fee rule, R590-102-7 to the commissioner at the time its license is renewed for the preparation and issuance of:

(a) certificates of:

(i) compliance;

(ii) deposit;

(iii) application;

(iv) capital; and

(v) surplus;

(b) transcript of records;

(c) annual statements;

(d) report of examination; and

(e) other certifications as may be necessary, but excluding certificates of authority.

(4) Each company shall pay an annual nonrefundable e-commerce and internet technology services fee each year in the amount established in the department's fee rule, R590-102-14(1)(b) to the commissioner.

(5) Each captive insurance company shall pay a nonrefundable fee in the amount established in the department's fee rule, R590-102-7 for photocopies of documents to the commissioner.

 

R590-238-21. Authorized Forms.

(1) The following forms are to be used for any applicant applying for a certificate of authority for a new captive insurance company and may be obtained from the department's captive administrator at [phone] or [phone]:

(a) "Application to Form A Captive Insurance Company;"

(b) "Biographical Affidavit For Captive Insurance Company;"

(c) "Utah Insurance Department Captive Insurance Company Reinsurance Exhibit;"

(e) "Utah Approved Irrevocable Letter of Credit;"

(f) "Statement if Economic Benefit to the State of Utah;" and

(g) "Appointment Of The Insurance Commissioner For The State Of Utah As Attorney To Accept Service of Process."

(2) The following forms are to be used when applying to become an Approved captive insurance company provider and are available on the department's captive website:

(a) "Application for Placement on Approved Captive Insurer Management Firm List;"

(b) "Application To Certify Loss And Expense For Captive Insurance Companies Captive Actuary Application;" and

(c) "Application For Authorization As An Independent Certified Public Accountant for Captive Insurance Companies."

(3) All captive insurance companies, except those noted in R590-238-4(2), are to use the "Captive Insurance Company Annual Statement Form."

(4) The "Statement of Economic Benefit to the State of Utah" form should be filed with the initial application and for each of the 12 months ending December 31, of each applicable year.

(5) The forms indicated in Sections (2), (3), and (4) are available on the department's captive website, www.captive.utah.gov/licensing.html.

 

R590-238-22. Severability.

If any provision of this rule or its application to any person or circumstance is, for any reason, held to be invalid, the remainder of this rule and its application to other persons and circumstances are not effected.

 

KEY: captive insurance

Date of Enactment or Last Substantive Amendment: 2007

Authorizing, and Implemented or Interpreted Law: 31A-2-201; 31A-37-106