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Illinois Governor Supports Captive Provisions in Vetoed Legislation

Veto Stamp
August 27, 2018

Governor Bruce Rauner vetoed legislation Sunday that would set new minimum capital and surplus requirements for captive insurance companies licensed in Illinois.

In his veto message, Governor Rauner said that he supported the captive provisions in the legislation, S.B. 1737. Updating Illinois's captive law would make Illinois "more attractive to companies that use this insurance option," Governor Rauner said.

Governor Rauner's objections involved other provisions, including those that would, he said, impose "unnecessary new restrictions on rate-setting in the Illinois workers' compensation insurance industry."

The measure, though, is not dead yet. The Illinois Assembly will meet again for several days in mid-November, during which lawmakers will have the option to try to override gubernatorial vetoes.

Among other things, the bill would set new minimum captive capital and surplus requirements with a $250,000 minimum for pure captives—those insuring the risks of parents and affiliated companies; $500,000 for industrial insured captives; and $750,000 for association captives.

By contrast, under current Illinois law, captives generally have to maintain at least $1 million in capital.

The measure also would give Illinois-licensed captives the ability—after first securing the approval of the director of the Illinois Department of Insurance—to provide loans to affiliated companies.

At the recent North Carolina captive insurance conference, Bruce Wright, a partner at Eversheds Sutherland (US) LLP, mentioned the legislation and said that a vast majority of states have a direct placement statute or an industrial insured (self-procured insurance) statute for nonadmitted companies writing direct business in the state. In such instances, the tax charged is usually the same as the surplus lines tax for the state—typically between 2 percent and 5 percent.

He said that the Illinois industrial insured statute has a 3.5 percent premium tax imposed on industrial insureds, and, according to Mr. Wright, a number of large Illinois companies with large captive insurance programs based outside of Illinois took action. As a result, the bill also includes a provision that would reduce the industrial insured premium tax from 3.5 percent to 0.5 percent of gross premium.

Observers say that the legislation, if enacted, would significantly boost Illinois's appeal as a captive domicile. "The bill, if enacted, will be a positive step forward and will certainly warrant consideration by Illinois-based enterprises that have previously had no real option but to locate their captives elsewhere," according to an analysis by Tom Jones, Lisa M. Kaderabek, and Mary Kay McCalla Martire, attorneys with the law firm McDermott, Will & Emery L.L.P. in Chicago.

The action by Governor Rauner is in sharp contrast to several others states—including Kansas, South Carolina, and Vermont—in which governors this year signed captive legislation. In North Carolina, state lawmakers overrode vetoes by Governor Ray Cooper of bills that, among other things, made clear that captives licensed in other states are exempt from North Carolina taxes, such as premium taxes, even if they do business in North Carolina.

Like Illinois, the gubernatorial objection in North Carolina to the legislation was unrelated to the measure's captive provisions.

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