August 11, 2011 | No. 2011-383
The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), signed by President Obama on July 21, 2010, contains the Nonadmitted and Reinsurance Reform Act of 2010 (NRRA).
The NRRA became effective on July 21, 2011 (i.e., one year after the general enactment date for the Dodd-Frank Act). Included among the reforms enacted by the NRAA is a modification in a state's ability to tax transactions involving "nonadmitted insurance."
[The NRAA also imposes significant changes to the state regulation and tax reporting obligations of surplus lines brokers.]
The NRRA defines "nonadmitted insurance" to include:
...any property and casualty insurance permitted to be placed directly or through a surplus lines broker with a nonadmitted insurer eligible to accept such insurance.
A "nonadmitted insurer" is defined, with respect to any particular state, to mean an insurer that is not licensed to engage in the business of insurance in such state.
The NRRA provides that only the "home state" of an insured may require any premium tax payment for nonadmitted insurance.
Previously, the limit on a state's ability to impose tax on an insured's procurement of nonadmitted insurance were only limited by the seminal holding of State Board of Insurance v. Todd Shipyards Corp., 370 U.S. 451 (1962). Todd Shipyards generally provided that any state having a connection to the insurance transaction beyond the mere location of the insured risk may be entitled to levy nonadmitted insurance tax (commonly known as self-procurement tax) on the insured.
Approximately 39 states impose such taxes. Such a tax generally applies to any scenario in which an in-state party procures insurance from a nonadmitted insurer through other than a licensed surplus lines broker.
A captive insurance company typically will be licensed to engage in the business of insurance in a single state (such as Vermont) or foreign jurisdiction (such as Bermuda) and would be considered a "nonadmitted insurer" in most states in which its insured risks are located. Previously, an insured ideally would exercise great diligence over where all aspects of its insurance transactions with a captive insurance company took place to limit exposure to self-procurement tax in as many states as possible. In large part, NRRA makes this exercise obsolete by limiting taxation to an insured's home state.
An essential element of the NRRA framework appears to be the intent that all states join together in an interstate compact that facilitates not only the creation of uniform reporting requirements, forms, and procedures, but also allocation of collected premium taxes among all such states. Over 40 states have passed legislation over the last year to align their state laws with the NRRA ("enacting states").
Because the intent of Congress appears to be that each state ultimately is to enter into an agreement to allocate tax collected under the NRRA to all states in which an insured's underlying properties, risks, or exposures reside, the enacting states typically are imposing tax when they are considered the home state, on 100% of the premiums paid by an insured for nonadmitted insurance. This may be contrasted against the previous self-procurement tax regime that limited tax imposition to premiums related to risks located in that state.KPMG observation
Because the insured of a captive insurance company generally arranges its affairs to minimize self-procurement tax exposure, the NRRA provisions may represent a potentially significant increase in state tax liability to such insureds. Accordingly, companies employing a captive insurance structure need to begin evaluating the state tax implications of the NRRA.