1 January 1970Analysis

NRRA: hoping for an exclusion

Captive insurance associations throughout the US are still unclear about whether specific clauses in the recent Dodd-Frank Act—the reform package pushed through in the wake of the financial crisis to provide greater regulation and governance in financial services— actually apply to them. Several US states are of the opinion that the law does not affect captive insurers, and so—until told to do otherwise— they are conducting business as usual.

The Nonadmitted and Reinsurance Reform Act (NRRA), part of the Dodd-Frank Act, requires that only the home state of the insured can collect surplus lines premium taxes, and it permits states to enter into interstate agreements to allocate those taxes, based on the risks covered in a state.

The NRRA—which became effective on July 21, 2011—creates a potential and perhaps unintended loophole which may encourage large multi-state companies to redomicile captives to home-based states to reduce premium taxes associated with non-admitted and reinsurance premiums.

"If your tax advisors have advised that you were not subject to self-procurement taxes before NRRA, generally speaking, they would not be applicable now."

With so many US states now authorising captives, many large corporations can domicile a captive within their home state to reduce and potentially avoid all taxes on non-admitted insurance premiums. Where a company’s home state is not the domicile of their captive, the state where they conduct the highest percentage of business will be deemed the home state that can then levy premium taxes on nonadmitted insurance. Top tax attorneys advising large single parent captives are already suggesting that if these companies domicile their captive in their home state, they may be able to avoid the 3 to 5 percent premium tax imposed by many states on non-admitted and reinsurance premiums.

However, insurance experts and lawyers argue that some of NRRA’s terms are not easily understandable. For example, they claim that the legislation’s definitions of “nonadmitted insurer” and “nonadmitted insurance” are broad, and a cursory reading of them could lead one to conclude that they include captive insurers and captive insurance, respectively. Some attorneys believe that a strong argument can be made that NRRA was intended to apply only to surplus lines insurance and that captive insurance is not covered.

Last year Washington DC-based law firm McIntyre & Lemon released a white paper on NRRA which went to great lengths to analyse Congressional legislative intent, and which concluded that the focus of the bill was for surplus lines of insurance—and not for captive insurers. This is because (i) captive insurers are not placing non-admitted insurance within the meaning of the NRRA, and (ii) the NRRA did not change the application of state independently procured insurance laws, nor should it restrict the collection of premium taxes paid for independently procured insurance to the home state of the insured, as it does for non-admitted insurance.

Jim McIntyre, partner at the firm, said that the Act “turns current law on its head” because it “assumes the captive is doing business in every state in which it has insureds, rather than just the domicile in which it is based”. He also believes that there is uncertainty over what was meant in the Act by the term “placement of insurance”.

An overview assessment of the NRRA could not be made because it would depend on the laws of the particular states involved, McIntyre added. He cited the example of New York, which was claiming 100 percent of independently placed insurance tax compared to Ohio, which had elected to exempt captives from tax obligations. The independent procurement tax laws of almost all states have different wordings, McIntyre added.

Understandably, the McIntyre report is a highly palatable document for those in the captive insurance industry who believe that the new law has no applicability to them. For example, the Vermont Captive Insurance Association (VCIA), the Captive Insurance Companies Association (CICA) and the National Risk Retention Association have readily agreed with McIntyre & Lemon’s analysis.

Some lawyers have also publicly backed its findings. “The legislative history is clear that Congress never intended this legislation to affect any insurance other than surplus lines,” said one lawyer. “The McIntyre report gives a convincing explanation of why captive insurance is not part of NRRA,” said Tom Jones, partner with law firm McDermott Will & Emery in Chicago. “The intent of NRRA appears to have been solely on surplus lines and never meant to include captive insurance,” he added.

Several states are continuing to act as normal, taking the view that the legislation does not have an impact on the activities of captives. Dan Towle, director of financial services for the State of Vermont, does not believe that the arrival of the Dodd-Frank Act has had any discernible negative impact on the captive insurance industry in Vermont. “Vermont had an outstanding year in 2011 and licensed 41 new captives. Dodd-Frank did not slow down our formation activity and the issue of self-procurement taxes would apply to any US corporation whether onshore or offshore,” said Towle.

However, others are more sceptical. Jay Adkisson, US commercial litigator, said: “The white paper is hardly an independent analysis since it was commissioned by CICA and VCIA. Not that anybody had foul motives, but merely that the paper seems more to justify a sought conclusion than to give an independent analysis.”

Towle said that certain states are using the NRRA as an opportunity to try to encourage captives to domicile in their state and that it is a disservice to the industry that some states are using this tactic in an attempt to leverage new business. “Companies should evaluate domiciles based on a set of facts. If they have questions regarding tax implications, they should consult their tax advisors,” said Towle.

“There has been an extensive analysis in a white paper written by Washington DC law firm McIntyre & Lemon that explains why NRRA does not apply to captive insurance companies. A panel of the leading legal and accounting experts in the captive industry has weighed in who believe that NRRA does not apply to captive insurance companies. I agree with those experts’ conclusions, though there are others that are promoting a different opinion. The captive industry is a small community, with a long memory: I don’t expect this to be a strategy that will be very successful.”

Towle added: “NRRA and the resulting compacts of Surplus Lines Insurance Multistate Compliance Compact (SLIMPACT) and Nonadmitted Insurance Multi-State Agreement (NIMA) are for the surplus lines market. Captive insurance companies are not surplus lines writers. If your tax advisors have advised that you were not subject to self-procurement taxes before NRRA, generally speaking, they would not be applicable now. The NRRA itself did not create any new taxes applicable to captive insurers. Solvency II is not applicable in the US at this time and has not impacted the US captive market.”

Captive insurance growth has also continued in Missouri and it appears set to continue into the near future. David Dimit, executive director at the Missouri Captive Insurance Association, said that Missouri has licensed eight new captives in 2011, which broke its previous record of six licences issued in 2010. “At the end of 2011, Missouri had 19 active captives and, given that we already have several applications in-house or expected shortly, we expect growth to continue,” he said.

Dimit added that the unease over what kind of insurance products and vehicles NRRA is actually supposed to relate to is unhelpful. “The way we feel is that everything is in a state of uncertainty at the moment until this issue is clarified. We hope that these legislative issues will not adversely affect our captive numbers.”

NRRA—winners and losers

The NRRA, which came into effect on July 21, 2011, requires that only the ‘home state’ of the insured can collect surplus lines premium taxes, and it permits states to enter into interstate agreements to allocate those taxes. The NIMA and SLIMPACT compacts are both designed to promote compliance with NRRA. However, lawyers, accountants and insurance experts have highlighted several ‘winners’ and ‘losers’ that are expected to emerge as NIMA and SLIMPACT are developed to allocate the premium taxes.


  • The company selected to run the NIMA clearinghouse: it will be paid a fee for operating the system, based on a percentage of the surplus lines premiums on multi-state risks of the participating states, which will ultimately be borne by insureds.
  • States that are not the home state of many large commercial insureds. These are the states that will be net-tax importers, meaning that the amount of tax allocated to those states based on in-state operations and properties of out-of-state insureds is expected to exceed the amount of surplus lines tax on in-state insureds that they allocate to other states.


  • States that are the home states of large commercial insureds that have significant surplus lines premiums, which will be nettax exporters. In other words, the amount of surplus lines tax on in-state insureds that is allocated to other states is expected to exceed, and perhaps far exceed, the amount of tax on insurance for out-of-state insureds that would be allocated to these states. 

Not surprisingly, states such as California, Illinois, New Jersey, New York, Ohio, Pennsylvania and Texas—which account for approximately 50 percent of the US surplus line premium—have shown little interest in the clearinghouse approach.

In June, Hawaii announced that it has withdrawn from the NIMA, leaving the coalition with only seven members. However, at the time of going to press, Florida Insurance Commissioner Kevin McCarty said that NIMA would still be launched on July 1.

He added that officials remain hopeful that NIMA will ultimately be the tax-sharing vehicle through which the NRRA is administered by the states. The seven remaining participating members of NIMA are Florida, Louisiana, Nevada, Puerto Rico, South Dakota, Utah and Wyoming.

Several commentators say that the decision was no surprise. According to data compiled by the National Association of Professional Surplus Lines Offices, 32 states, representing 72 percent of nationwide premium volume, have no plans to participate in tax-sharing agreements.

Joel Wood, senior vice president of government affairs for the Council of Insurance Agents and Brokers, said “It’s now more than two years since the enactment of these provisions, and it is clear that there is no momentum among the large states to participate in allocation regimes.”