AN ACT Relating to Captive Insurers and Making an Appropriation Therefor

UNOFFICIAL COPY AS OF 01/12/06 06 REG. SESS. 06 RS BR 1318

AN ACT relating to captive insurers and making an appropriation therefor.

Be it enacted by the General Assembly of the Commonwealth of Kentucky:

Page 1 of 24

BR131800.100-1318

UNOFFICIAL COPY AS OF 01/12/06 06 REG. SESS. 06 RS BR 1318

SECTION 1. A NEW SECTION OF KRS 304.49-010 TO 304.49-230 IS CREATED TO READ AS FOLLOWS:

(1) A captive insurer shall engage a manager who is a resident of this state.

(2) The captive manager shall maintain the books and records of the captive insurer’s business, transactions, and affairs at a location that is in this state or shall make them available to the executive director at a location that is in this state.

(3) The captive manager shall promptly notify the executive director of any failure of the captive insurer to comply with this section.

(4) The executive director may require a captive insurer to discharge a captive manager for failure to substantively fulfill the captive manager’s duties under this subtitle.

SECTION 2. A NEW SECTION OF KRS 304.49-010 TO 304.49-230 IS CREATED TO READ AS FOLLOWS:

The executive director may promulgate administrative regulations to set minimum standards for the formation, structure, examination, and operation of a special purpose captive insurer or an agency captive insurer.

SECTION 3. A NEW SECTION OF KRS 304.49-010 TO 304.49-230 IS CREATED TO READ AS FOLLOWS:

(1) If there is any material change in the financial condition or management of a captive insurer, the captive insurer shall notify the executive director, in writing, within ten (10) business days of the change.

(2) No captive insurer shall voluntarily take any of the following material actions without providing the executive director at least thirty (30) days prior written notice and receiving the executive director’s approval of the action within the thirty (30) day period:

(a) The dissolution of the captive insurer;

(b) Any sale, exchange, lease, mortgage, assignment, pledge, or other transfer of, or granting of a security interest in, all or substantially all of the assets of the captive insurer;

(c) Any incurrence of material indebtedness by the captive insurer;

(d) Any making of a material loan or other material extension of credit by the captive insurer;

(e) Any payment or distribution that materially reduces capital and surplus;

(f) Any merger or consolidation to which the captive insurer is a constituent party;

(g) Any conversion of the captive insurer to another business form;

(h) Any transfer to or domestication in any jurisdiction by the captive insurer; or

(i) Any material amendment of the organizational documents of the captive insurer.

SECTION 4. A NEW SECTION OF KRS 304.49-010 TO 304.49-230 IS CREATED TO READ AS FOLLOWS:

A sponsored captive insurer may establish and maintain one (1) or more protected cells to insure risks of one (1) or more participants, subject to the following conditions:

(1) The owners of a sponsored captive insurer shall be limited to its participants and sponsors, provided that a sponsored captive insurer may issue nonvoting securities or interests to other persons on terms approved by the executive director;

(2) The assets of each protected cell shall be held and accounted for separately on the books and records of the sponsored captive insurer to reflect the financial condition and results of operations of the protected cell, net income or loss of the protected cell, dividends or other distributions to participants of the protected cell, and other factors regarding the protected cell as may be provided in the applicable participant contract or required by the executive director;

(3) The assets of a protected cell shall not be chargeable with liabilities of any other protected cell or, unless otherwise agreed in the applicable participant contract, of the sponsored captive insurer generally;

(4) No sale, or transfer of assets, or dividend or other distribution, may be made with respect to a protected cell by such sponsored captive insurer without the consent of the participants of each affected protected cell;

(5) No sale, exchange, or transfer of assets, or dividend or other distribution, other than a payment to a sponsor in accordance with the applicable participant contract, may be made with respect to a protected cell to a sponsor or a participant without the executive director’s approval;

(6) Each sponsored captive insurer shall annually file with the executive director financial reports as the executive director shall require, which shall include, without limitation, accounting statements detailing the financial experience of each protected cell;

(7) Each sponsored captive insurer shall notify the executive director, in writing, within ten (10) business days of any protected cell that has become insolvent or is otherwise unable to meet its claim or expense obligations;

(8) No participant contract shall take effect without the executive director’s prior written approval. The addition of each new protected cell and withdrawal of any participant or termination of any existing protected cell shall constitute a change in the plan of operation of the sponsored captive insurer requiring the executive director’s prior written approval; and

(9) (a) The business written by a sponsored captive insurer, with respect to each protected cell, shall be:

1. Fronted by an insurance company licensed under the laws of this state or any other state;

2. Reinsured by a reinsurer authorized or approved by this state;

3. Secured by a trust fund in this state for the benefit of policyholders and claimants; or

4. Funded by an irrevocable letter of credit or other arrangement that is approved in writing by the executive director.

(b) The amount of security provided shall be no less than the reserves associated with those liabilities which are neither fronted nor reinsured, including reserves for losses, allocated loss adjustment expenses, incurred but not reported losses, and unearned premiums for business written through the protected cell.

(c) The executive director may, for any reason, require the sponsored captive insurance company to increase the funding of any security arrangement established under this subsection in order to protect claimants or potential claimants.

(d) If the form of security is a letter of credit, the letter of credit shall be established, issued, or confirmed by a financial institution chartered by or licensed or otherwise authorized to do banking business in this state, or by any other financial institution approved by the executive director.

(e) A trust maintained pursuant to this subsection shall be established in a form and upon such terms as approved by the executive director.

Section 5. KRS 304.49-010 is amended to read as follows:

As used in KRS 304.49-010 to 304.49-230, unless the context requires otherwise:

(1) "Affiliated company" means 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) "Agency captive insurer" means a captive insurer that is owned by one (1) or more business entities that are licensed insurance producers and that only insure risks on policies placed through their owners.

(3) "Captive insurer" means any pure captive insurer, consortium captive insurer, sponsored captive insurer, or industrial insured captive insurer formed or issued a certificate of authority under the provisions of KRS 304.49-010 to 304.49-230. For purposes of KRS 304.49-010 to 304.49-230, a branch captive insurer shall be a pure captive insurer with respect to operations in Kentucky, unless otherwise permitted by the executive director.

(4)[(3)] "Consortium" means any legal association of individuals, corporations, partnerships, or associations that has been in continuous existence for at least one (1) year, the member organizations of which collectively, or which does itself:

(a) Own, control, or hold with power to vote all of the outstanding voting securities of a consortium captive insurer incorporated as a stock insurer; or

(b) Have complete voting control over a consortium captive insurer incorporated as a mutual insurer; or

(c) The member organizations of which collectively constitute all of the subscribers of a consortium captive insurer formed as a reciprocal insurer.

(5)[(4)] "Consortium captive insurer" means any company that insures risks of the member organizations of the consortium and their affiliated companies.

(6)[(5)] "Excess workers' compensation insurance" means, in the case of an employer 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 executive director.

(7)[(6)] "Industrial insured" means an insured as defined in KRS 304.11-020(1).

(8)[(7)] "Industrial insured captive insurer" means any company that insures risks of the industrial insureds that comprise the industrial insured group, and their affiliated companies.

(9)[(8)] "Industrial insured group" means any group that meets either of the following criteria:

(a) Any group of industrial insureds that collectively:

1. Own, control, or hold with power to vote all of the outstanding voting securities of an industrial insured captive insurer incorporated as a stock insurer;

2. Have complete voting control over an industrial insured captive insurer incorporated as a mutual insurer; or

3. Constitute all of the subscribers of an industrial insured captive insurer formed as a reciprocal insurer; or

(b) Any group which is created under the Product Liability Risk Retention Act of 1981, 15 U.S.C. secs. 3901 et seq., as amended, as a corporation or other limited liability association.

(10)[(9)] "Member organization" means any individual, corporation, partnership, or association that belongs to a consortium.

(11)[(10)] "Parent" means a corporation, partnership, or individual that directly or indirectly owns, controls, or holds with power to vote more than fifty percent (50%) of the outstanding voting securities of a pure captive insurer.

(12)[(11)] "Pure captive insurer" means any company that insures risks of its parent and affiliated companies or controlled unaffiliated business.

(13)[(12)] "Controlled unaffiliated business" means any company:

(a) That is not in the corporate system of a parent and affiliated companies;

(b) That has an existing contractual relationship with a parent or affiliated company; and

(c) Whose risks are managed by a pure captive insurer in accordance with KRS 304.49-170.

(14)[(13)] "Foreign captive insurer" means any insurer formed to write insurance business for its parents and affiliates and licensed pursuant to the laws of any state other than Kentucky which imposes statutory or regulatory standards in a form acceptable to the executive director on companies transacting the business of insurance in that jurisdiction. Under KRS 304.49-010 to 304.49-230, captive insurers formed under the laws of any jurisdiction other than a state of the United States shall be treated as a foreign captive insurer unless the context requires otherwise.

(15)[(14)] "Branch business" means any insurance business transacted by a branch captive insurer in Kentucky.

(16)[(15)] "Branch captive insurer" means any foreign captive insurer issued a certificate of authority by the executive director to transact the business of insurance in Kentucky through a business unit with a principal place of business in Kentucky.

(17)[(16)] "Branch operations" means any business operations of a branch captive insurer in Kentucky.

(18)[(17)] "Participant" means an entity as defined in KRS 304.49-210, and any affiliates thereof, that are insured by a sponsored captive insurer, where the losses of the participant are limited through a participant contract to the assets of a protected cell.

(19)[(18)] "Participant contract" means a contract by which a sponsored captive insurer insures the risks of a participant and limits the losses of the participant to the assets of a protected cell.

(20)[(19)] "Protected cell" means a separate account established and maintained by a sponsored captive insurer for one (1) participant.

(21)[(20)] "Reciprocal insurer" means an insurer engaging in reciprocal insurance as defined by KRS 304.27-010.

(22) "Special purpose captive insurer" means any person that is licensed under this chapter and designated as a special purpose captive insurer by the executive director. A person may be designated as a special purpose captive insurer if it is established for one (1) specific purpose or transaction, and where it is desirable to isolate the purpose or transaction from the other activities of a party or parties involved in the transaction, or where the transaction dictates that the vehicle should not be treated as controlled or owned by any other party to that transaction.

(23)[(21)] "Sponsor" means any entity that meets the requirements of KRS 304.49-200 and is approved by the executive director to provide all or part of the capital and surplus required by applicable law and to organize and operate a sponsored captive insurer.

(24)[(22)] "Sponsored captive insurer" means any captive insurer:

(a) In which the minimum capital and surplus required by applicable law is provided by one (1) or more sponsors;

(b) That is formed or issued a certificate of authority under the provisions of this subtitle;

(c) That insures the risks of separate participants through contract; and

(d) That segregates each participant's liability through one (1) or more protected cells.

Section 6. KRS 304.49-020 is amended to read as follows:

(1) Any captive insurer, when permitted by its articles of incorporation, charter, or other organizational document, may apply to the executive director for a certificate of authority to engage in any and all kinds of insurance defined in Subtitle 5 of this chapter; provided, however, that:

(a) No pure captive insurer may insure any risks other than those of its parent and affiliated companies or controlled unaffiliated business;

(b) No consortium captive insurer may insure any risks other than those of the member organizations of its consortium and their affiliated companies;

(c) No industrial insured captive insurer may insure any risks other than those of the industrial insureds that comprise the industrial insured group and their affiliated companies;

(d) No captive insurer may provide personal motor vehicle or homeowner's insurance coverage or any component thereof;

(e) No captive insurer may accept or cede reinsurance except as provided in KRS 304.49-110;

(f) No captive insurer that is issued an initial certificate of authority on or after July 1, 2006, shall directly provide workers’ compensation insurance; however, any captive insurer may provide excess workers' compensation insurance to its parent and affiliated companies, unless prohibited by the laws of the state having jurisdiction over the transaction. Any captive insurer may reinsure workers' compensation of a qualified self-insured plan of its parent and affiliated companies;