Washington state establishes framework requiring captives to pay premium taxes

The Washington State government has established a framework for registering and imposing premium tax on eligible captive insurance companies.

Washington’s Second Substitute Bill, sponsored by the Senate Committee on Ways and Means, requires captives active in the state to pay a 2 percent premium tax on or before March 1 every year on insurance related to risk held in Washington state. Captives affiliated with public institutions of higher education are exempt from the premium tax.

If not previously paid to the Office of the Insurance Commissioner (OIC), captives must pay premium taxes for any period after January 1, 2011, when such risk was insured, though these payments are not subject to penalties and fees. As of July 1, 2021, penalties, interest, and fees may be imposed on registered eligible captive insurers.

The bill categorises captives as insurance companies that are partially or wholly owned by a corporation or other institution, that insures risk of their owner or their owner’s affiliates and that has one or more insureds whose principal place of business is Washington State. It must also have assets that exceed its liabilities by $1 million and the ability to pay debts when they come due, as verified by audited financial statements and prepared by an independent certified accountant. It must also be licensed as a captive insurer by the jurisdiction in which it is domiciled.

Eligible captive insurers must register with the OIC within 120 days of the effective date of the bill or of issuing a policy that covers Washington risks. The initial registration fee is $2,500, and a renewal fee may be set by the OIC not to exceed $2,500 per year.

Captives insuring risk in Washington state that do not register are subject to penalties and fines applicable to unlawful unauthorised insurers. Captives may only provide property and casualty insurance to a captive owner or to the captive owner's affiliates and obtain or provide reinsurance for ceded or assumed risks insured in this state or elsewhere. However, they may assume or cede risks to other insurers through reinsurance without regard to those limitations.