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Wednesday, 28 August 2013 18:31

Texas Passes Two Bills That Could Impact Insurance for Shops, Other Small Business

Two pieces of insurance legislation, passed during the 83rd Texas Legislative Session, could be of great significance to businesses in Texas. SB 1332 relates to classifying business as small and large employers for health insurance purposes, and SB 734 relates to the creation of captive insurance companies in Texas. A captive insurance company is essentially a private insurer that is a wholly owned subsidiary of another company.

Senate Bill 1332

Senate Bill 1332, sponsored by Sen. Robert Duncan (R-Lubbock) and Rep. John Smithee (R-Amarillo), amends Texas law to allow the inclusion of part‐time employees to classify businesses as large or small employers. The bill allows the definitions to be based on total number of employees instead of the previous “eligible” employees, which were those who worked at least 30 hours per week. This will bring the state in line with federal definitions regarding how businesses are sized for the Affordable Care Act. The change in law applies only to health benefit plans delivered, issued for delivery, or renewed on or after January 1, 2014. It is important to note that under federal law, as of January 2014, small employers will be classified as one to 100 employees, but according to TDI, because Texas specified that small employers would be kept to 50 and under, small employers will remain up to 50 employees in Texas, with large employers at 51 employees and above.

The ACA’s “pay or play” provision requiring employers with more than 50 employees to provide insurance coverage will still apply.

SB 1332 was a legislative priority of the Texas Association of Health Underwriters. The measure was also supported by the Texas Association of Business and National Federation of Independent Businesses.

“Our goal in championing the legislation was to help this group of Texas employers avoid premium rate shock as a result of changes in federal law,” said Kelly Fristoe, president of TAHU.

Fristoe continued, “The ACA will bring tough changes for many Texas businesses, but SB 1332 will help ease the burden for thousands of employers, workers and their families. We applaud and thank Sen. Duncan and Rep. Smithee for their leadership in providing this relief for Texas businesses.”

Senate Bill 734

Senate Bill 734, authored by State Sen. John Carona, R-Dallas, amends the Insurance Code to set out provisions governing captive insurance companies. It authorizes the formation of pure captive insurance companies in Texas and sets out provisions relating to the operation and tax liability of such companies.

For the first time authorizes domestic captive insurers in Texas. The bill, known as SB 734, allows Texas businesses to realize the advantages, including tax benefits, of forming and operating a “pure” captive insurance company without the burden and cost associated with an out-of-state captive.

A captive insurance company is formed for the purpose of providing insurance for the parent company and related entities. A “pure” captive insurance company exclusively insures the risks of its affiliates. More than 30 states have statutes that specifically authorize captive insurance companies to be organized under those laws. These statutes generally subject captive insurance companies to different regulations than traditional insurance carriers.

Texas does not currently have a captive insurance statute and supporters of the bill highlighted that a number of large companies domiciled in Texas currently have captives that have been formed in other states with captive-enabling legislation. This situation, they argued, creates additional expenses and administrative burdens for Texas companies because other states typically impose a number of obligations on out-of-state companies.

Industry experts note that an insurance commissioner typically has significant discretion to regulate and set a captive’s minimum financial requirements based on the financial strength of the captive’s owner.

The Texas law authorizes only single parent captives and requires, as a condition to being issued a certificate of authority to form a captive in the state, that affiliates of the captive insurance company have “significant operations” in the State of Texas. The Texas law will not permit captive insurance companies to reinsure certain types of risk, including accident and health insurance or workers’ compensation insurance. Minimum capital and surplus for a pure captive will be $250,000. Premium taxes will be charged on all business written by the captive at an overall rate of .5% (subject to variances by line of business) and capped at $200,000. The new law goes into effect on September 1, 2013, as long as the governor does not exercise his veto.

The chapter will define the forms of business organization under which a captive can operate, the minimum qualifications for its board of directors, and the features of the captive’s certificate of formation.

A domestic captive insurance company will apply for a certificate of authority from the Texas Department of Insurance (TDI) and pay a $1500 application fee. It will be required to have significant operations in Texas, hold at least one meeting of its board of directors in Texas each year, and maintain its principal office and records in Texas. A foreign captive may also transfer its domicile to Texas upon approval of the TDI.

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