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1 South Carolina General Assembly 2 122nd Session, 2017-2018 3 4 H. 4675 5 6 STATUS INFORMATION 7 8 General Bill 9 Sponsors: Reps. Sandifer and Spires 10 Document Path: l:\council\bills\nbd\11187cz18.docx 11 12 Introduced in the House on January 24, 2018 13 Introduced in the Senate on February 15, 2018 14 Currently residing in the Senate 15 16 Summary: Captive insurance companies 17 18 19 HISTORY OF LEGISLATIVE ACTIONS 20 21 Date Body Action Description with journal page number 22 1/24/2018 House Introduced and read first time ( House Journalpage 27) 23 1/24/2018 House Referred to Committee on Labor, Commerce and Industry (House 24 Journalpage 27) 25 2/13/2018 House Committee report: Favorable Labor, Commerce and Industry (House 26 Journalpage 11) 27 2/14/2018 House Read second time ( House Journalpage 23) 28 2/14/2018 House Roll call Yeas103 Nays0 ( House Journalpage 24) 29 2/14/2018 Scrivener's error corrected 30 2/15/2018 House Read third time and sent to Senate ( House Journalpage 8) 31 2/15/2018 Senate Introduced and read first time ( Senate Journalpage 9) 32 2/15/2018 Senate Referred to Committee on Banking and Insurance ( Senate Journalpage 9) 33 4/25/2018 Senate Committee report: Favorable Banking and Insurance ( Senate Journalpage 14) 34 5/1/2018 Senate Read second time ( Senate Journalpage 40) 35 5/1/2018 Senate Roll call Ayes41 Nays0 ( Senate Journalpage 40) 36 37 View the latest legislative information at the website 38 39 40 VERSIONS OF THIS BILL 41 42 1/24/2018 43 2/13/2018 44 2/14/2018 45 4/25/2018 46 1 Indicates Matter Stricken 2 Indicates New Matter 3 4 COMMITTEE REPORT 5 April 25, 2018 6 7 H. 4675 8 9 Introduced by Reps. Sandifer and Spires 10 11 S. Printed 4/25/18--S. 12 Read the first time February 15, 2018. 13 14 15 THE COMMITTEE ON BANKING AND INSURANCE 16 To whom was referred a Bill (H. 4675) to amend Article 1, 17 Chapter 90, Title 38, Code of Laws of South Carolina, 1976, 18 relating to captive insurance companies, so as to remove references 19 to captive, etc., respectfully 20 REPORT: 21 That they have duly and carefully considered the same and 22 recommend that the same do pass: 23 24 RONNIE W. CROMER for Committee. 25

[4675-2] 1 2 3 4 5 6 7 8 9 A BILL 10 11 TO AMEND ARTICLE 1, CHAPTER 90, TITLE 38, CODE OF 12 LAWS OF SOUTH CAROLINA, 1976, RELATING TO 13 CAPTIVE INSURANCE COMPANIES, SO AS TO REMOVE 14 REFERENCES TO CAPTIVE REINSURANCE COMPANIES, 15 TO REQUIRE A CAPTIVE INSURANCE COMPANY TO 16 POSSESS AND MAINTAIN FREE AND UNIMPAIRED 17 PAIDIN CAPITAL, SURPLUS, OR A COMBINATION 18 THEREOF AND ESTABLISH REQUIREMENTS, TO DELETE 19 CERTAIN SURPLUS REFERENCES AND INCORPORATION 20 REQUIREMENTS, TO PROVIDE THE PROVISIONS OF 21 CHAPTER 90 APPLY TO CAPTIVE INSURANCE 22 COMPANIES FORMED AS A MUTUAL INSURER, TO 23 ESTABLISH REPORTING REQUIREMENTS FOR CAPTIVE 24 INSURANCE COMPANIES AND REMOVE CERTAIN 25 PROVISIONS, TO ALLOW A CAPTIVE INSURANCE 26 COMPANY TO DISCOUNT ITS LOSS AND LOSS 27 ADJUSTMENT WITH APPROVAL BY THE DIRECTOR, TO 28 ESTABLISH OVERSIGHT REQUIREMENTS FOR RISK 29 RETENTION GROUPS AND CAPTIVE INSURANCE 30 COMPANIES, TO ALLOW FOR CERTAIN CAPTIVE 31 INSURANCE COMPANIES TO MAKE LOANS TO ITS 32 PARENT COMPANY AND AFFILIATES WITH APPROVAL 33 BY THE DIRECTOR, TO ESTABLISH STANDARDS FOR 34 AGGREGATE TAXES FOR PROTECTED CELLS, TO ALLOW 35 THE DIRECTOR TO REDUCE CAPITAL REQUIREMENTS 36 FOR AN INACTIVE CAPTIVE INSURANCE COMPANY, TO 37 REMOVE CERTAIN ASSET REQUIREMENTS, AND TO 38 ALTER PARTICIPANT REQUIREMENTS FOR A 39 SPONSORED CAPTIVE INSURANCE COMPANY; AND TO 40 REPEAL ARTICLE 5, CHAPTER 90, TITLE 38 RELATING TO 41 THE COASTAL CAPTIVE INSURANCE COMPANY ACT. 42

[4675] 3 1 Be it enacted by the General Assembly of the State of South 2 Carolina: 3 4 SECTION 1. Article 1, Chapter 90, Title 38 of the 1976 Code, as 5 last amended by Act 191 of 2016, is further amended to read: 6 7 “Article 1 8 Captive Insurance Companies 9 10 Section 389010. As used in this chapter, unless the context 11 requires otherwise: 12 (1) ‘Alien captive insurance company’ means an insurance 13 company formed to write insurance business for its parents and 14 affiliates and licensed pursuant to the laws of an alien jurisdiction 15 which imposes statutory or regulatory standards in a form 16 acceptable to the director on companies transacting the business of 17 insurance in such jurisdiction. 18 (2) ‘Affiliated company’ means a company in the same 19 corporate system as a parent, an industrial insured, or a member 20 organization by virtue of common ownership, control, operation, 21 or management. ‘Affiliate’ of or “affiliated” with means a specific 22 person who directly, or indirectly through one or more 23 intermediaries, controls, is controlled by, or is under common 24 control with the person specified. 25 (3) ‘Association’ means a legal association of individuals, 26 corporations, limited liability companies, partnerships, political 27 subdivisions, or associations that has been in continuous existence 28 for at least one year: 29 (a) the member organizations of which collectively, or 30 which does itself: 31 (i) own, control, or hold with power to vote all of the 32 outstanding voting securities of an association captive insurance 33 company incorporated as a stock insurer or organized as a limited 34 liability company; or 35 (ii) have complete voting control over an association 36 captive insurance company organized as a mutual insurer; or 37 (b) the member organizations of which collectively 38 constitute all of the subscribers of an association captive insurance 39 company formed as a reciprocal insurer. 40 (4) ‘Association captive insurance company’ means a company 41 that insures risks of the member organizations of the association 42 and their affiliated companies.

[4675] 4 1 (5) ‘Branch business’ means any insurance business transacted 2 by a branch captive insurance company in this State. 3 (6) ‘Branch captive insurance company’ means an alien captive 4 insurance company licensed by the director to transact the business 5 of insurance in this State through a business unit with a principal 6 place of business in this State. 7 (7) ‘Branch operations’ means any business operations of a 8 branch captive insurance company in this State. 9 (8) ‘Captive insurance company’ means a pure captive 10 insurance company, association captive insurance company, 11 captive reinsurance company, sponsored captive insurance 12 company, special purpose captive insurance company, risk 13 retention group, or industrial insured captive insurance company 14 formed or licensed under this chapter. For purposes of this chapter, 15 a branch captive insurance company must be a pure captive 16 insurance company with respect to operations in this State, unless 17 otherwise permitted by the director. 18 (9) ‘Captive reinsurance company’ means a reinsurance 19 company that is formed or licensed pursuant to this chapter and is 20 wholly owned by a qualifying reinsurance parent company. A 21 captive reinsurance company is a stock corporation. 22 (10) ‘Consolidated debt to total capital ratio’ means the ratio of 23 the sum of (a) all debts and hybrid capital instruments including, 24 but not limited to, all borrowings from banks, all senior debt, all 25 subordinated debts, all trust preferred shares, and all other hybrid 26 capital instruments that are not included in the determination of 27 consolidated GAAP net worth issued and outstanding to (b) total 28 capital, consisting of all debts and hybrid capital instruments as 29 described in subitem (a) plus owners’ equity determined in 30 accordance with GAAP for reporting to the United States 31 Securities and Exchange Commission. 32 (11) ‘Consolidated GAAP net worth’ means the consolidated 33 owners’ equity determined in accordance with GAAP for reporting 34 to the United States Securities and Exchange Commission. 35 (10) ‘Control’, including the terms ‘controlling,’ ‘controlled by’, 36 and ‘under common control with’, means the possession, direct or 37 indirect, of the power to direct or cause the direction of the 38 management and policies of a person, whether through the 39 ownership of voting securities, by contract other than a 40 commercial contract for goods or nonmanagement services, or 41 otherwise, unless the power is the result of an official position with 42 or corporate office held by the person. Control is presumed to exist 43 if any person, directly or indirectly, owns, controls, holds with the

[4675] 5 1 power to vote, or holds proxies representing ten percent or more of 2 the voting securities of any other person. This presumption may be 3 rebutted by a showing made in the manner provided by Section 38- 4 21-220 that control does not exist in fact. The director may 5 determine, after furnishing all persons in interest notice and 6 opportunity to be heard and making specific findings of fact to 7 support his determination, that control exists in fact, 8 notwithstanding the absence of a presumption to that effect. 9 (12)(11) ‘Controlled unaffiliated business’ means a company 10 person that: 11 (a) that is not in the corporate system an affiliate of a parent 12 and affiliated companies; and 13 (b) that has an existing contractual relationship with 14 pursuant to which a parent or affiliated company exercises control 15 of the risk management function of the person; and 16 (c) whose risks are managed by a captive insurance 17 company in accordance with Section 3890190. 18 (13)(12) ‘Director’ means the Director of the South Carolina 19 Department of Insurance or the director’s designee. 20 (14)(13) ‘Department’ means the South Carolina Department of 21 Insurance. 22 (15)(14) ‘GAAP’ means generally accepted accounting 23 principles. 24 (16)(15) ‘General account’ means the assets and liabilities of a 25 sponsored captive insurance company other than protected cell 26 assets and protected cell liabilities. 27 (17)(16) ‘Industrial insured’ means an insured as defined in 28 Section 3825150(8). 29 (18)(17) ‘Industrial insured captive insurance company’ means 30 a company that insures risks of the industrial insureds that 31 comprise the industrial insured group and their affiliated 32 companies. 33 (19)(18) ‘Industrial insured group’ means a group that meets 34 either of the following criteria: 35 (a) a group of industrial insureds that collectively: 36 (i) own, control, or hold with power to vote all of the 37 outstanding voting securities of an industrial insured captive 38 insurance company incorporated as a stock insurer or limited 39 liability company; or 40 (ii) have complete voting control over an industrial 41 insured captive insurance company incorporated as a mutual 42 insurer; or

[4675] 6 1 (b) a group which is created under the Liability Risk 2 Retention Act of 1986, 15 U.S.C. Section 3901, et seq., as 3 amended, and Chapter 87, Title 38, as a corporation or other 4 limited liability association taxable as a stock insurance company 5 or a mutual insurer under this title a risk retention group. 6 (20)(19) ‘Member organization’ means any individual, 7 corporation, limited liability company, partnership, or association 8 that belongs to an association. 9 (21)(20) ‘Parent’ means any corporation, limited liability 10 company, partnership, or individual that directly or indirectly 11 owns, controls, or holds with power to vote more than fifty percent 12 of the outstanding voting interests of a captive insurance company. 13 (22)(21) ‘Participant’ means an entity as defined in Section 14 3890240, and any affiliates of that entity, that are insured by a 15 sponsored captive insurance company, where the losses of the 16 participant are limited through a participant contract to the assets 17 of a protected cell. 18 (23)(22) ‘Participant contract’ means a contract by which a 19 sponsored captive insurance company insures the risks of a 20 participant and limits the losses of the participant to the assets of a 21 protected cell. 22 (23) ‘Person’ means an individual, corporation, partnership, 23 association, joint stock company, trust, unincorporated 24 organization, or any similar entity or combination thereof. 25 (24) ‘Principal place of business’ means the physical location in 26 the State of South Carolina where the complete books and records 27 of the captive company are available for examination by the 28 director. 29 (24)(25) ‘Protected cell’ means an identified pool of assets and 30 liabilities of a sponsored captive insurance company for one or 31 more participants that is segregated and insulated from the 32 remainder of the sponsored captive insurance company’s assets 33 and liabilities as set forth in this chapter. A protected cell may be 34 unincorporated or incorporated. 35 (25)(26) ‘Protected cell account’ means a specifically identified 36 bank or custodial account established by a sponsored captive 37 insurance company for the purpose of segregating the protected 38 cell assets of one protected cell from the protected cell assets of 39 other protected cells and from the assets of the sponsored captive 40 insurance company’s general account. 41 (26)(27) ‘Protected cell assets’ means all assets, contract rights, 42 and general intangibles, identified with and attributable to a 43 specific protected cell of a sponsored captive insurance company.

[4675] 7 1 (27)(28) ‘Protected cell liabilities’ means all liabilities and 2 other obligations identified with and attributable to a specific 3 protected cell of a sponsored captive insurance company. 4 (28)(29) ‘Pure captive insurance company’ means a company 5 that insures risks of its parent, affiliated companies, controlled 6 unaffiliated business, or a combination thereof or cedes or assumes 7 business from a risk pool for the purpose of risk sharing. 8 (29) ‘Qualifying reinsurer parent company’ means a reinsurer 9 authorized to write reinsurance by this State and that has a 10 consolidated GAAP net worth of not less than five hundred million 11 dollars and consolidated debt to total capital ratio not greater than 12 0.50. 13 (30) ‘Risk retention group’ means a captive insurance company 14 formed under the Product Liability Risk Retention Act of 1986, 15 15 U.S.C. Section 3901, et seq., as amended. 16 (31) ‘Special purpose captive insurance company’ means a 17 captive insurance company that is formed or licensed under this 18 chapter that does not meet the definition of any other type of 19 captive insurance company defined in this section. 20 (32) ‘Sponsor’ means an entity that is approved by the director 21 to provide all or part of the capital and surplus required by 22 applicable law and to organize and operate a sponsored captive 23 insurance company. 24 (33) ‘Sponsored captive insurance company’ means a captive 25 insurance company: 26 (a) in which the minimum capital and surplus required by 27 applicable law is provided by one or more sponsors; 28 (b) that is formed or licensed under this chapter; 29 (c) that segregates liability through one or more protected 30 cells; and 31 (d) that insures the risks of participants through participant 32 contracts. 33 (34) ‘Treasury rates’ means the United States Treasury strips 34 asked yield as published in the Wall Street Journal as of a balance 35 sheet date. 36 37 Section 389020. (A) A captive insurance company, when 38 permitted by its articles of incorporation, articles of organization, 39 operating agreement, or charter, may apply to the director for a 40 license to provide any and all insurance, except workers’ 41 compensation insurance written on a direct basis, authorized by 42 this title; however:

[4675] 8 1 (1) a pure captive insurance company may not insure any 2 risks other than those of its parent, affiliated companies, controlled 3 unaffiliated business, risks assumed from a risk pool for the 4 purpose of risk sharing, or a combination of them; 5 (2) an association captive insurance company may not insure 6 any risks other than those of the member organizations of its 7 association and their affiliated companies; 8 (3) an industrial insured captive insurance company may not 9 insure any risks other than those of the industrial insureds that 10 comprise the industrial insured group and their affiliated 11 companies; 12 (4) in general, a special purpose captive insurance company 13 only may insure the risks of its parent. Notwithstanding any other 14 provisions of this chapter, a special purpose captive insurance 15 company may provide insurance or reinsurance, or both, for risks 16 as approved by the director; 17 (5) a captive insurance company may not provide personal 18 motor vehicle or homeowner’s insurance coverage written on a 19 direct basis; 20 (6) a captive insurance company may not accept or cede 21 reinsurance except as provided in Section 3890110. 22 (B) To conduct insurance business in this State a captive 23 insurance company shall: 24 (1) obtain from the director a license authorizing it to 25 conduct insurance business in this State; 26 (2) beginning the year immediately following the issuance of 27 its license, annually hold at least one board of director’s meeting, 28 or in the case of a reciprocal insurer, a subscriber’s advisory 29 committee meeting, or in the case of a limited liability company a 30 meeting of the managing board, each year at which a majority of 31 the directors are physically present in this State; 32 (3) maintain its principal place of business in this State, or in 33 the case of a branch captive insurance company, maintain the 34 principal place of business for its branch operations in this State; 35 and 36 (4) appoint a resident registered agent to accept service of 37 process and to otherwise act on its behalf in this State. In the case 38 of a captive insurance company: 39 (a) formed as a corporation, a nonprofit corporation, or a 40 limited liability company, whenever the registered agent cannot 41 with reasonable diligence be found at the registered office of the 42 captive insurance company, the director must be an agent of the

[4675] 9 1 captive insurance company upon whom any process, notice, or 2 demand may be served; 3 (b) formed as a reciprocal insurer, whenever the registered 4 agent cannot with reasonable diligence be found at the registered 5 office of the captive insurance company, the director must be an 6 agent of the captive insurance company upon whom any process, 7 notice, or demand may be served. 8 (C)(1) Before receiving a license, a captive insurance company: 9 (a) formed as a corporation or a nonprofit corporation, 10 shall file with the director a certified copy of its articles of 11 incorporation and bylaws, a statement under oath of its president 12 and secretary showing its financial condition, and any other 13 statements or documents required by the director; 14 (b) formed as a limited liability company, shall file with 15 the director a certified copy of its articles of organization and 16 operating agreement, a statement under oath by its managers 17 showing its financial condition, and any other statements or 18 documents required by the director; 19 (c) formed as a reciprocal shall: 20 (i) file with the director a certified copy of the power of 21 attorney of its attorneyinfact, a certified copy of its subscribers’ 22 agreement, a statement under oath of its attorneyinfact showing its 23 financial condition, and any other statements or documents 24 required by the director; and 25 (ii) submit to the director for approval a description of 26 the coverages, deductibles, coverage limits, and rates and any other 27 information the director may reasonably require. If there is a 28 subsequent material change in an item in the description, the 29 reciprocal captive insurance company shall submit to the director 30 for approval an appropriate revision and may not offer any 31 additional kinds of insurance until a revision of the description is 32 approved by the director. The reciprocal captive insurance 33 company shall inform the director of any material change in rates 34 within thirty days of the adoption of the change. 35 (2) In addition to the information required by item (1), an 36 applicant captive insurance company shall file with the director 37 evidence of: 38 (a) the amount and liquidity of its assets relative to the 39 risks to be assumed; 40 (b) the adequacy of the expertise, experience, and 41 character of the person or persons who will manage it; 42 (c) the overall soundness of its plan of operation;

[4675] 10 1 (d) the adequacy of the loss prevention programs of its 2 parent, member organizations, or industrial insureds as applicable; 3 and 4 (e) such other factors considered relevant by the director 5 in ascertaining whether the proposed captive insurance company 6 will be able to meet its policy obligations. 7 (3) In addition to the information required by items (1) and 8 (2) an applicant sponsored captive insurance company shall file 9 with the director: 10 (a) a business plan demonstrating how the applicant will 11 account for the loss and expense experience of each protected cell 12 at a level of detail found to be sufficient by the director, and how it 13 will report the experience to the director; 14 (b) a statement acknowledging that all financial records of 15 the sponsored captive insurance company, including records 16 pertaining to any protected cells, must be made available for 17 inspection or examination by the director; 18 (c) all contracts or sample contracts between the 19 sponsored captive insurance company and any participants; and 20 (d)(c) evidence a statement that expenses will be allocated 21 to each protected cell in an equitable manner. 22 (4) Information submitted pursuant to this section is 23 confidential as provided in Section 389035 except that information 24 is discoverable by a party in a civil action or contested case to 25 which the captive insurance company that submitted the 26 information is a party, upon a specific finding by the court that: 27 (a) the captive is a necessary party to the action and not 28 joined only for the purposes of evading the confidentiality 29 provisions of this chapter; 30 (b) the information sought is relevant, material to, and 31 necessary for the prosecution or defense of the claim asserted in 32 litigation; and 33 (c) the information sought is not available through another 34 source. 35 (D)(1) A captive insurance company shall pay to the department 36 a nonrefundable fee of two hundred dollars for processing its 37 application for license. In addition, the director may retain legal, 38 financial, and examination services from outside the department to 39 examine and investigate the application, the reasonable cost of 40 which may be charged against the applicant or the director may use 41 internal resources to examine and investigate the application for a 42 fee of two thousand four hundred dollars or such other in an 43 amount that is determined to be appropriate by the director or his

[4675] 11 1 designee given the nature, scale, and complexity of the application 2 being investigated. 3 (2) Section 381360 applies to examinations, investigations, 4 and processing conducted pursuant to the authority of this section. 5 (3) In addition, a captive insurance company shall pay a 6 license fee for the year of registration of three hundred dollars and 7 an annual renewal fee of five hundred dollars. 8 (4) The department may charge a fifteendollar fee for any 9 document requiring certification of authenticity or the signature of 10 the director or his designee. 11 (E) If the director is satisfied that the documents and statements 12 filed by the captive insurance company comply with the provisions 13 of this chapter, the director may grant a license authorizing the 14 company to do insurance business in this State until March first at 15 which time the license may be renewed. 16 (F) A foreign or alien captive insurance company, upon 17 approval of the director or his designee, may become a domestic 18 captive insurance company by complying with all of the 19 requirements of law relative to the organization and licensing of a 20 domestic captive insurance company of the same or equivalent 21 type in this State and by filing with the Secretary of State its 22 articles of association, charter, or other organizational document, 23 together with appropriate amendments to them adopted in 24 accordance with the laws of this State bringing those articles of 25 association, charter, or other organizational document into 26 compliance with the laws of this State. After this is accomplished, 27 the captive insurance company is entitled to the necessary or 28 appropriate certificates and licenses to continue transacting 29 business in this State and is subject to the authority and jurisdiction 30 of this State. In connection with this redomestication, the director 31 may waive any requirements for public hearings. It is not 32 necessary for a company redomesticating into this State to merge, 33 consolidate, transfer assets, or otherwise engage in any other 34 reorganization, other than as specified in this section. 35 36 Section 389025. (A) A captive reinsurance company, if 37 permitted by its articles of incorporation or charter, may apply to 38 the director for a license to write reinsurance covering property 39 and casualty insurance or reinsurance contracts. A captive 40 reinsurance company authorized by the director may write 41 reinsurance contracts covering risks in any state. 42 (B) To conduct business in this State, a captive reinsurance 43 company shall:

[4675] 12 1 (1) obtain from the director a license authorizing it to 2 conduct business as a captive reinsurance company in this State; 3 (2) hold at least one board of directors’ meeting each year in 4 this State; 5 (3) maintain its principal place of business in this State; and 6 (4) appoint a registered agent to accept service of process 7 and act otherwise on its behalf in this State. 8 (C) Before receiving a license, a captive reinsurance company 9 shall file with the director: 10 (1) a certified copy of its charter and bylaws; 11 (2) a statement under oath of its president and secretary 12 showing its financial condition; and 13 (3) other documents required by the director. 14 (D) In addition to the information required by subsection (C), 15 the applicant captive reinsurance company shall file with the 16 director evidence of: 17 (1) the amount and liquidity of its assets relative to the risks 18 to be assumed; 19 (2) the adequacy of the expertise, experience, and character 20 of the person who manages it; 21 (3) the overall soundness of its plan of operation; and 22 (4) other overall factors considered relevant by the director 23 in ascertaining if the proposed captive reinsurance company is able 24 to meet its policy obligations. 25 (E) Information submitted pursuant to this section is 26 confidential as provided in Section 389035, except that 27 information is discoverable by a party in a civil action or contested 28 case to which the captive insurance company that submitted the 29 information is a party, upon a finding by the court that: 30 (1) the captive is a necessary party to the action and not 31 joined only for the purposes of evading the confidentiality 32 provisions of this chapter; 33 (2) the information sought is relevant, material to, and 34 necessary for the prosecution or defense of the claim asserted in 35 litigation; and 36 (3) the information sought is not available through another 37 source Reserved. 38 39 Section 389030. A captive insurance company may not adopt a 40 name that is the same as, deceptively similar to, or likely to be 41 confused with or mistaken for any other existing business name 42 registered in this State. 43

[4675] 13 1 Section 389035. (A) Information submitted pursuant to the 2 provisions of this chapter is confidential and may not be made 3 public by the director or an agent or employee of the director 4 without the written consent of the company, except that 5 information may be discoverable by a party in a civil action or 6 contested case to which the submitting captive insurance company 7 is a party, upon a showing by the party seeking to discover the 8 information that: 9 (1) the information sought is relevant to and necessary for 10 the furtherance of the action or case and the information sought is 11 unavailable from other nonconfidential sources; or 12 (2) a subpoena applicable to the information is issued by a 13 judicial or administrative law officer of competent jurisdiction has 14 been submitted to the director. 15 (B) The director may disclose the information to the public 16 officer having jurisdiction over the regulation of insurance in 17 another state if: 18 (1) the public official agrees in writing to maintain the 19 confidentiality of the information; and 20 (2) the laws of the state in which the public official serves 21 require the information to be confidential. 22 23 Section 389040. (A)(1) The director may not issue a license to a 24 captive insurance company unless the company possesses and 25 maintains free and unimpaired paidin capital, surplus, or 26 unrestricted net assets for a nonprofit corporation, or a 27 combination thereof of: 28 (a) in the case of a pure captive insurance company, not 29 less than one hundred two hundred and fifty thousand dollars; 30 (b) in the case of an association captive insurance 31 company incorporated as a stock insurer, mutual insurer, or 32 organized as a limited liability company, not less than four 33 hundred seven hundred and fifty thousand dollars; 34 (c) in the case of an industrial insured captive insurance 35 company incorporated as a stock insurer or organized as a limited 36 liability company, or in the case of a captive insurance company 37 formed as a or risk retention group, not less than two five hundred 38 thousand dollars; 39 (d) in the case of a sponsored captive insurance company, 40 not less than five hundred thousand dollars; however, if the 41 sponsored captive insurance company does not assume any risk, 42 the risks insured by the protected cells are homogeneous and there

[4675] 14 1 are no more than ten cells, the director may reduce this amount to 2 an amount not less than one two hundred fifty thousand dollars; 3 (e) in the case of a special purpose captive insurance 4 company that is not a special purpose captive insurance company 5 formed as a risk retention group, an amount determined by the 6 director after giving due consideration to the company’s business 7 plan, feasibility study, and pro formas, including the nature of the 8 risks to be insured. 9 (2)(a) Except for a sponsored captive insurance company 10 that does not assume any risk, the unimpaired, paidin capital 11 required in subsection (A)(1) must be in the form of: 12 (i) cash on deposit with a bank located in South 13 Carolina; 14 (ii) cash equivalent accessible through a bank or 15 investment manager located in South Carolina; or 16 (iii) an irrevocable letter of credit in a form approved by 17 the director and issued by a bank chartered by this State or a 18 member bank of the Federal Reserve System with a branch office 19 in this State or as approved by the director. 20 (b) For a sponsored captive insurance company that does 21 not assume any risk, the capital also may be in the form of other 22 high quality securities as approved by the director. 23 (B)(1) The director may not issue a license to a captive 24 insurance company incorporated as a nonprofit corporation unless 25 the company possesses and maintains unrestricted net assets of: 26 (a) in the case of a pure captive insurance company, not 27 less than two hundred fifty thousand dollars; 28 (b) in the case of a special purpose captive insurance 29 company formed as a risk retention group, not less than five 30 hundred thousand dollars; and 31 (c) in the case of a special purpose captive insurance 32 company that is not a special purpose captive insurance company 33 formed as a risk retention group, an amount determined by the 34 director after giving due consideration to the company’s business 35 plan, feasibility study, and pro formas, including the nature, scale, 36 and complexity of the risks to be insured. 37 (2) Contributions to a captive The director may prescribe 38 additional capital and surplus requirements based upon the type, 39 volume, and nature of insurance company incorporated as a 40 nonprofit corporation must conform with the requirements of 41 subsection (A)(2)(a) business to be transacted. 42 (3) The free and unimpaired paidin capital, surplus, or 43 combination thereof required by this section must be in the form of

[4675] 15 1 cash, securities approved by the director, a clean irrevocable letter 2 of credit issued by a bank approved by the director, or other form 3 approved by the director. 4 (C)(B) For purposes of subsections (A) and (B) subsection (A), 5 the director may issue a license expressly conditioned upon the 6 captive insurance company providing to the director satisfactory 7 evidence of possession of the minimum required free and 8 unimpaired paidin capital, surplus, or combination thereof. Until 9 this evidence is provided, the captive insurance company may not 10 issue any policy, assume any liability, or otherwise provide 11 coverage. The director summarily may revoke the conditional 12 license without legal recourse by the company if satisfactory 13 evidence of the required capital, surplus, or combination thereof is 14 not provided within a maximum period of time, not to exceed one 15 year, to be established by the director at the time the conditional 16 license is issued. 17 (D) Notwithstanding the provisions of this section, the director 18 may prescribe additional capital or net assets based upon the type, 19 volume, and nature of insurance business transacted including, but 20 not limited to, the net amount of risk retained for an individual 21 risk. Contributions in connection with these prescribed additional 22 net assets or capital must be in the form of: 23 (1) cash; 24 (2) cash equivalent; 25 (3) an irrevocable letter of credit issued by a bank chartered 26 by this State or a member bank of the Federal Reserve System with 27 a branch office in this State or as approved by the director; or 28 (4) securities invested as provided in Section 3890100. 29 (E)(C) In the case of a branch captive insurance company, as 30 security for the payment of liabilities attributable to branch 31 operations, the director shall require that a trust fund account, 32 funded by an irrevocable letter of credit or other acceptable asset, 33 be established and maintained in the United States for the benefit 34 of United States policyholders and United States ceding insurers 35 under insurance policies issued or reinsurance contracts issued or 36 assumed, by the branch captive insurance company through its 37 branch operations. The amount of the security may be no less than 38 the capital and surplus required by this chapter and the reserves on 39 these insurance policies or reinsurance contracts, including 40 reserves for losses, allocated loss adjustment expenses, incurred 41 but not reported losses and unearned premiums with regard to 42 business written through branch operations; however, the director 43 may permit a branch captive insurance company that is required to

[4675] 16 1 post security for loss reserves on branch business by its reinsurer 2 or front company to reduce the funds in the trust account required 3 by this section by the same amount so long as the security remains 4 posted with the reinsurer or front company. If the form of security 5 selected is a letter of credit, the letter of credit must be established 6 by, or issued or confirmed by, a bank chartered in this State or a 7 member bank of the Federal Reserve System. 8 (F)(1)(D) A captive insurance company may not pay a dividend 9 out of, or other distribution with respect to, capital or surplus, in 10 excess of the limitations set forth in Section 3821250 through 11 Section 3821270, without the prior approval of the director. 12 Approval of an ongoing plan for the payment of dividends or other 13 distributions must be conditioned upon the retention, at the time of 14 each payment, of capital or surplus in excess of amounts specified 15 by, or determined in accordance with formulas approved by, the 16 director. 17 (2) A captive insurance company incorporated as a nonprofit 18 corporation may not make any distributions without the prior 19 approval of the director. 20 (G)(E) An irrevocable letter of credit, which is issued by a 21 financial institution other than a bank chartered by this State or a 22 member bank of the Federal Reserve System, shall meet the same 23 standards as an irrevocable letter of credit which has been issued 24 by either entity must be in a form as prescribed by the director. 25 26 Section 389045. (A) The director may not issue a license to a 27 captive reinsurance company unless the company possesses and 28 maintains capital or free surplus of not less than the greater of 29 three hundred million dollars or ten percent of reserves. The 30 surplus may be in form of cash or securities. 31 (B) The director may prescribe additional capital or surplus 32 based upon the type, volume, and nature of the insurance business 33 transacted including, but not limited to, the net amount of risk 34 retained for an individual risk. 35 (C) A captive reinsurance company may not pay a dividend out 36 of, or other distribution with respect to, capital or surplus in excess 37 of the limitations, without the prior approval of the director. 38 Approval of an ongoing plan for the payment of dividends or other 39 distributions must be conditioned upon the retention, at the time of 40 each payment, of capital or surplus in excess of amounts specified 41 by, or determined in accordance with formulas approved by, the 42 director. Reserved. 43

[4675] 17 1 Section 389050. (A)(1) The director may not issue a license to a 2 captive insurance company unless the company possesses and 3 maintains free surplus of: 4 (a) in the case of a pure captive insurance company, not 5 less than one hundred fifty thousand dollars; 6 (b) in the case of an association captive insurance 7 company incorporated as a stock insurer or organized as a limited 8 liability company, not less than three hundred fifty thousand 9 dollars; 10 (c) in the case of an industrial insured captive insurance 11 company incorporated as a stock insurer or organized as a limited 12 liability company, or in the case of a captive insurance company 13 formed as a risk retention group, not less than three hundred 14 thousand dollars; 15 (d) in the case of an association captive insurance 16 company incorporated as a mutual insurer, not less than seven 17 hundred fifty thousand dollars; 18 (e) in the case of an industrial insured captive insurance 19 company, or a captive insurance company formed as a risk 20 retention group incorporated as a mutual insurer, not less than five 21 hundred thousand dollars; 22 (f) in the case of a sponsored captive insurance company, 23 not less than five hundred thousand dollars; however, if the 24 sponsored captive insurance company does not assume any risk, 25 the risks insured by the protected cells are homogeneous and there 26 are no more than ten cells, the director may reduce this amount to 27 an amount not less than one hundred fifty thousand dollars; and 28 (g) in the case of a special purpose captive insurance 29 company that is not a special purpose captive insurance company 30 formed as a risk retention group, an amount determined by the 31 director after giving due consideration to the company’s business 32 plan, feasibility study, and pro formas, including the nature of the 33 risks to be insured. 34 (2)(a) Except for a sponsored captive insurance company 35 that does not assume any risk, the free surplus required in 36 subsection (A)(1) must be in the form of: 37 (i) cash on deposit with a bank located in South 38 Carolina; 39 (ii) cash equivalent accessible through a bank or 40 investment manager located in South Carolina; or 41 (iii) an irrevocable letter of credit in a form approved by 42 the director and issued by a bank chartered by this State or a

[4675] 18 1 member bank of the Federal Reserve System with a branch office 2 in this State or as approved by the director. 3 (b) For a sponsored captive insurance company that does 4 not assume any risk, the surplus also may be in the form of other 5 high quality securities as approved by the director. 6 (B) Notwithstanding the requirements of subsection (A), a 7 captive insurance company organized as a reciprocal insurer under 8 this chapter may not be issued a license unless it possesses and 9 thereafter maintains free surplus of one million dollars. 10 (C) For purposes of subsections (A) and (B), the director may 11 issue a license expressly conditioned upon the captive insurance 12 company providing to the director satisfactory evidence of 13 possession of the minimum required free surplus. Until this 14 evidence is provided, the captive may not issue any policy, assume 15 any liability, or otherwise provide coverage. The director 16 summarily may revoke the conditional license without legal 17 recourse by the company if satisfactory evidence of the required 18 capital is not provided within a maximum period of time, not to 19 exceed one year, to be established by the director at the time the 20 conditional license is issued. 21 (D) Notwithstanding another provision of this section, the 22 director may prescribe additional surplus based upon the type, 23 volume, and nature of insurance business transacted including, but 24 not limited to, the net amount of risk retained for an individual 25 risk. This additional surplus must be in the form of: 26 (1) cash; 27 (2) cash equivalent; 28 (3) an irrevocable letter of credit issued by a bank chartered 29 by this State, or a member bank of the Federal Reserve System 30 with a branch in this State or as approved by the director; or 31 (4) securities invested as provided in Section 3890100. 32 (E) A captive insurance company may not pay a dividend out 33 of, or other distribution with respect to, capital or surplus in excess 34 of the limitations set forth in Section 3821270, without the prior 35 approval of the director. Approval of an ongoing plan for the 36 payment of dividends or other distribution must be conditioned 37 upon the retention, at the time of each payment, of capital or 38 surplus in excess of amounts specified by, or determined in 39 accordance with formulas approved by the director. 40 (F) An irrevocable letter of credit, which is issued by a 41 financial institution other than a bank chartered by this State or a 42 member bank of the Federal Reserve System, shall meet the same

[4675] 19 1 standards as an irrevocable letter of credit which has been issued 2 by either entity Reserved. 3 4 Section 389055. (A) A captive reinsurance company must be 5 incorporated as a stock insurer with its capital divided into shares 6 and held by its shareholders. 7 (B) At least one of the members of the board of directors of a 8 captive reinsurance company incorporated in this State must be a 9 resident of this State. Reserved. 10 11 Section 389060. (A) A captive insurance company may be: 12 (1) incorporated as a stock insurer; 13 (2) incorporated as a nonprofit corporation; 14 (3) organized as a limited liability company; 15 (4) incorporated as a mutual insurer without capital stock, 16 the governing body of which is elected by the members of the 17 insurer; or 18 (5) organized as a reciprocal insurer pursuant to Chapter 17. 19 (B) No captive insurance company shall do any business in this 20 State unless it first obtains from the director a certificate of 21 authority authorizing it to do business in this State. In determining 22 whether to issue a certificate of authority to a captive insurance 23 company, the director may consider: 24 (1) the character, reputation, financial responsibility, 25 insurance experience, and business qualifications of the 26 incorporators, officers, and directors or managers; and 27 (2) the nature, scale, and complexity of the risks to be 28 insured; and 29 (3) other aspects the director considers advisable. 30 (C) In the case of a captive insurance company licensed as a 31 branch captive insurance company, the alien captive insurance 32 company must register to do business in this State after the 33 certificate of authority has been issued. 34 (D) The articles of incorporation, articles of organization, or the 35 application of a branch captive insurance company to qualify to do 36 business in South Carolina, and the organization fees required by 37 Section 331220, 3331122, or 33441204, as applicable, must be 38 transmitted to the Secretary of State, who shall record the articles 39 of incorporation, articles of organization, or application to qualify 40 to do business in South Carolina. 41 (E) A captive insurance company formed as a corporation, a 42 nonprofit corporation, or a limited liability company, pursuant to 43 the provisions of this chapter has the privileges and is subject to

[4675] 20 1 the provisions of the general corporation law, including the South 2 Carolina Nonprofit Corporation Act of 1994 for nonprofit 3 corporations and the South Carolina Uniform Limited Liability 4 Company Act of 1996 for limited liability companies, as 5 applicable, as well as the applicable provisions contained in this 6 chapter. If a conflict occurs between a provision of the general 7 corporation law, including the South Carolina Nonprofit 8 Corporation Act of 1994 for nonprofit corporations and the South 9 Carolina Uniform Limited Liability Company Act of 1996 for 10 limited liability companies, as applicable, and a provision of this 11 chapter, the latter controls. The provisions of this title pertaining to 12 mergers, consolidations, conversions, mutualizations, and 13 redomestications apply in determining the procedures to be 14 followed by a captive insurance company in carrying out any of 15 the transactions described in those provisions, except the director 16 may waive or modify the requirements for public notice and 17 hearing in accordance with regulations which the director may 18 promulgate addressing categories of transactions. If a notice of 19 public hearing is required, but no one requests a hearing, the 20 director may cancel the hearing. 21 (F) A captive insurance company formed as a reciprocal 22 insurer pursuant to the provisions of this chapter has the privileges 23 and is subject to Chapter 17 in addition to the applicable 24 provisions of this chapter. If a conflict occurs between the 25 provisions of Chapter 17 and the provisions of this chapter, the 26 latter controls. To the extent a reciprocal insurer is made subject to 27 other provisions of this title pursuant to Chapter 17, the provisions 28 are not applicable to a reciprocal insurer formed pursuant to the 29 provisions of this chapter unless the provisions unless they are 30 expressly made applicable to a captive insurance company 31 pursuant to the provisions of this chapter. 32 (G) A captive insurance company formed as a mutual insurer 33 pursuant to the provisions of this chapter has the privileges and is 34 subject to the provisions of Chapter 19 in addition to the applicable 35 provisions of this chapter. If a conflict occurs between the 36 provisions of Chapter 19 and this chapter, the latter controls. To 37 the extent a mutual insurer is made subject to other provisions of 38 this title, those provisions are not applicable unless they are 39 expressly made applicable to a captive insurance company 40 pursuant to this chapter. 41 (H) In the case of a captive insurance company formed as a 42 corporation, a mutual insurer, or a nonprofit corporation, at least

[4675] 21 1 one of the members of the board of directors of a captive insurance 2 company incorporated in this State must be a resident of this State. 3 (H)(I) In the case of a captive insurance company formed as a 4 limited liability company, at least one of the managers of the 5 captive insurance company must be a resident of this State. 6 (I)(J) In the case of a captive insurance company formed as a 7 reciprocal insurer, at least one of the members of the subscribers’ 8 advisory committee must be a resident of this State. 9 (J)(K) The articles of incorporation or bylaws of a captive 10 insurance company may authorize a quorum of a board of directors 11 to consist of no fewer than onethird of the fixed or prescribed 12 number of directors as provided for in Section 338240(b). In the 13 case of a limited liability company, the articles of organization or 14 operating agreement of a captive insurance company may 15 authorize a quorum to consist of no fewer than onethird of the 16 managers required by the articles of organization or the operating 17 agreement. 18 19 Section 389070. (A) A captive insurance company may not be 20 required to make an annual report except as provided in this 21 chapter. The director has the authority to waive or grant an 22 extension to the requirements of this section. 23 (B)(1) Before March first of each year, a captive insurance 24 company or a captive reinsurance company A captive insurance 25 company shall submit annually to the director a report of its 26 financial condition, verified by oath of two of its executive 27 officers. The report must be submitted no later than March first for 28 risk retention groups and no later than July first for all other 29 captive insurance companies. 30 (2) A captive insurance company, other than a risk retention 31 group, may make a written application to file the annual report on 32 a fiscal year end that is consistent with the parent company’s fiscal 33 year end. If an alternative date is granted, the: 34 (a) income statement and premium schedule of the annual 35 report must be filed before March first of each year for each 36 calendar yearend, verified by oath of two of its executive officers; 37 and 38 (b) entire annual report must be filed no more than sixty 39 days after the fiscal year end, except as otherwise approved by the 40 director. 41 (C) In addition to the annual report, a branch captive insurance 42 company shall file with the director a copy of all reports and 43 statements required to be filed under the laws of the jurisdiction in

[4675] 22 1 which the alien captive insurance company is formed, verified by 2 oath of two of its executive officers. The reports and statements of 3 the alien captive insurance company must be submitted within 4 sixty days after the fiscal year end of the alien captive insurance 5 company except as otherwise approved by the director. If the 6 director finds that the reports and statements filed by the alien 7 captive insurance company in its domiciliary jurisdiction provides 8 adequate information concerning the financial condition of the 9 alien captive insurance company to satisfy the laws of this State, 10 the director may waive the requirement for completion of the 11 Captive Annual Report for business written in the alien 12 jurisdiction. 13 (D) Except as provided in Sections Section 389040 and 14 389050, a captive insurance company or a captive reinsurance 15 company shall report using generally accepted accounting 16 principles, unless the director approves the use of statutory 17 accounting principles, with useful or necessary modifications or 18 adaptations required or approved or accepted by the director for 19 the type of insurance and kinds of insurers to be reported upon, 20 and as supplemented by additional information required by the 21 director. Except as otherwise provided, an association captive 22 insurance company, an industrial insured group, and a captive 23 insurance company formed as a risk retention group shall file its 24 report in the form and manner required by Section 381380, and 25 each industrial insured group and each captive insurance company 26 formed as a risk retention group shall comply with the 27 requirements provided for in Section 381385. The director by 28 regulation shall prescribe the forms in which pure captive 29 insurance companies and industrial insured captive insurance 30 companies shall report. Information submitted pursuant to this 31 section is confidential as provided in Section 389035, except for 32 reports submitted by a captive insurance company formed as a risk 33 retention group under the Product Liability Risk Retention Act of 34 1986, 15 U.S.C. Section 3901, et seq., as amended risk retention 35 group. 36 (C) A pure captive insurance company may make written 37 application for filing the required report on a fiscal yearend that is 38 consistent with the parent company’s fiscal year. If an alternative 39 reporting date is granted: 40 (1) the annual report is due sixty days after the fiscal 41 yearend: 42 (2) in order to provide sufficient detail to support the 43 premium tax return, the pure captive insurance company shall file

[4675] 23 1 before March 1 of each year for each calendar yearend, pages 1 2 through 7 of the ‘Captive Annual Statement: Pure or Industrial 3 Insured’, verified by oath of two of its executive officers. 4 (D) Sixty days after the fiscal year end, a branch captive 5 insurance company shall file with the director a copy of all reports 6 and statements required to be filed under the laws of the 7 jurisdiction in which the alien captive insurance company is 8 formed, verified by oath by two of its executive officers. If the 9 director is satisfied that the annual report filed by the alien captive 10 insurance company in its domiciliary jurisdiction provides 11 adequate information concerning the financial condition of the 12 alien captive insurance company, the director may waive the 13 requirement for completion of the captive annual statement for 14 business written in the alien jurisdiction. Such waiver must be in 15 writing and subject to public inspection. 16 17 Section 389075. (A) A captive insurance company may 18 discount its loss and loss adjustment expense reserves with prior 19 written approval by the director or his designee. 20 (B) A captive insurance company shall file annually an 21 actuarial opinion on loss and loss adjustment expense reserves 22 provided by an independent actuary. The actuary may not be an 23 employee of the captive company or its affiliates. 24 (B) A captive insurance company may discount its loss and loss 25 adjustment expense reserves with prior written approval by the 26 director. 27 (C) The director may disallow the discounting of loss and loss 28 adjustment expense reserves if a captive insurance company 29 violates a provision of this title. 30 31 Section 389080. (A)(1) At least once every five years, and 32 whenever the director determines it to be prudent, the director 33 personally, or by a competent person appointed by the director, 34 shall visit each captive insurance company and thoroughly inspect 35 and examine its affairs each risk retention group or industrial 36 insured insurance company to ascertain its financial condition, its 37 ability to fulfill its obligations, and whether it has complied with 38 this chapter. The director, at his discretion, may waive the 39 requirement for a physically visit to the captive insurance company 40 the risk retention group or industrial insured insurance company. 41 The expenses and charges of the examination must be paid to the 42 State by the company or companies examined and the department

[4675] 24 1 shall issue its warrants for the proper charges incurred in all 2 examinations. 3 (2) A captive insurance company that is not a risk retention 4 group or industrial insured captive insurance company must be 5 examined three years following the date of licensure and at the 6 discretion of the director thereafter. 7 (B) All examination reports, preliminary examination reports or 8 results, working papers, recorded information, documents and 9 copies of documents produced by, obtained by, or disclosed to the 10 director or any other person in the course of an examination made 11 under this section are confidential and are not subject to subpoena 12 and may not be made public by the director or an employee or 13 agent of the director without the prior written consent of the 14 company, except to the extent provided in this subsection. 15 (1) Nothing in this subsection prevents the director from 16 using this information in furtherance of the director’s regulatory 17 authority under this title. 18 (2) The director may grant access to this information to 19 public officers having jurisdiction over the regulation of insurance 20 in any other state or country, or to law enforcement officers of this 21 State or any other state or country or agency of the federal 22 government at any time, so long as the officers receiving the 23 information agree in writing to hold it in a manner consistent with 24 this section. 25 (3) The confidentiality provisions of this subsection do not 26 extend to final reports produced by the director in inspecting or 27 examining a captive insurance company formed as a Risk 28 Retention Group under the Product Liability Risk Retention Act of 29 1986, 15 U.S.C. Section 3901, et seq., as amended risk retention 30 group. In addition, nothing contained in this subsection limits the 31 authority of the director or his designee to use and, if appropriate, 32 make public a preliminary examination report, examiner or insurer 33 work papers or other documents, or other information discovered 34 or developed during the course of an examination in the 35 furtherance of a legal or regulatory action which the director or his 36 designee, in his sole discretion, considers appropriate. 37 (C)(1) This section applies to all business written by a captive 38 insurance company; however, the examination for a branch captive 39 insurance company must be of branch business and branch 40 operations only, as long as the branch alien captive insurance 41 company provides annually to the director, a certificate of 42 compliance, or its equivalent, issued by or filed with the licensing 43 authority of the jurisdiction in which the branch alien captive

[4675] 25 1 insurance company is formed and demonstrates to the director’s 2 satisfaction that it is operating in sound financial condition in 3 accordance with all applicable laws and regulations of that 4 jurisdiction. 5 (2) As a condition of licensure, the alien captive insurance 6 company shall grant authority to the director for examination of 7 the affairs of the alien captive insurance company in the 8 jurisdiction in which the alien captive insurance company is 9 formed. 10 (D) To the extent that the provisions of Chapter 13 do not 11 contradict the provisions of this section, Chapter 13 applies to 12 captive insurance companies licensed under this chapter. 13 14 Section 389090. (A) The license of a captive insurance 15 company to conduct an insurance business in this State may be 16 suspended or revoked by the director for: 17 (1) insolvency or impairment of capital or surplus; 18 (2) failure to meet the requirements of Sections Section 19 389040 or 389050; 20 (3) refusal or failure to submit an annual report, as required 21 by Section 389070, or any other report or statement required by 22 law or by lawful order of the director; 23 (4) failure to comply with its own charter, bylaws, or other 24 organizational document; 25 (5) failure to submit to examination or any legal obligation 26 relative to an examination, as required by Section 389080; 27 (6) refusal or failure to pay the cost of examination as 28 required by Section 389080; 29 (7) use of methods that, although not otherwise specifically 30 prohibited by law, nevertheless render its operation detrimental or 31 its condition unsound with respect to the public or to its 32 policyholders; or 33 (8) failure otherwise to comply with laws of this State. 34 (B) If the director finds, upon examination, hearing, or other 35 evidence, that a captive insurance company has committed any of 36 the acts specified in subsection (A) of this section, the director may 37 suspend or revoke such license if the director considers it in the 38 best interest of the public and the policy holders of the captive 39 insurance company, notwithstanding any other provision of this 40 title. 41 (C) In lieu of suspending or revoking the license of a captive 42 insurance company, the director may impose fines as provided for 43 in Section 38210.

[4675] 26 1 2 Section 3890100. (A) An association captive insurance 3 company, an industrial insured captive insurance company 4 insuring the risks of an industrial insured group, and a captive 5 insurance company formed as a risk retention group shall comply 6 with the investment requirements contained in this title. 7 Notwithstanding any other provision of this title, the director may 8 approve the use of alternative reliable methods of valuation and 9 rating. 10 (B) A pure captive insurance company, a captive reinsurance 11 company, a special purpose captive insurance company, other than 12 a risk retention group formed as a special purpose captive 13 insurance company formed as a risk retention group, and a 14 sponsored captive insurance company are not subject to any 15 restrictions on allowable investments contained in this title; 16 however, the director may request a written investment plan and 17 may prohibit or limit an investment that threatens the solvency or 18 liquidity of the company. 19 20 (C) Section 3890105. Upon approval by the director, only a pure 21 captive insurance company, a special purpose captive insurance 22 company, or a sponsored captive insurance company may make 23 loans to its parent company or affiliates and only by order of the 24 director and must be evidenced by a note in a form acceptable to 25 and approved by the director. Loans of minimum capital and or 26 surplus funds or a combination thereof required by Sections 27 Section 389040(A) and 389050(A) are prohibited. 28 29 Section 3890110. (A) A captive insurance company may 30 provide reinsurance, as authorized in this title, on risks ceded by 31 any other insurer. 32 (B)(1) A captive insurance company may take credit for 33 reserves on risks or portions of risks ceded to reinsurers complying 34 with the provisions of Sections 389200, 389210, and 389220. 35 (2) An industrial insured captive insurance company or a 36 captive insurance company formed as a risk retention group may 37 not take credit for reserves on risks or portions of risks ceded to a 38 reinsurer if the reinsurer is not in compliance with Sections 39 389200, 389210, and 389220. 40 (3) All other captive insurance companies may not take 41 credit for reserves on risks or portions of risks ceded to a reinsurer 42 if the reinsurer is not in compliance with Sections 389200, 389210, 43 and 389220, unless specific approval has been granted for this

[4675] 27 1 credit or the reinsurer by order of the director approval of the 2 director, or the captive insurance company is participating in a risk 3 pool for the purpose of risk sharing, as approved by the director. 4 5 Section 3890120. A captive insurance company may not be 6 required to join a rating organization. 7 8 Section 3890130. A captive insurance company, including a 9 captive insurance company organized as a reciprocal insurer under 10 this chapter, may not join or contribute financially to a plan, pool, 11 association, or guaranty or insolvency fund in this State, and a 12 captive insurance company, or its insured or its parent or any 13 affiliated company or any member organization of its association, 14 or in the case of a captive insurance company organized as a 15 reciprocal insurer, a subscriber of the company, may not receive a 16 benefit from a plan, pool, association, or guaranty or insolvency 17 fund for claims arising out of the operations of such captive 18 insurance company. Subject to the prior written approval of the 19 director or his designee, participation by a captive insurance 20 company, including a pure captive insurance company, in a pool 21 for the purpose of commercial risk sharing is not prohibited under 22 this section. Nothing in this section may be interpreted to permit 23 the writing of thirdparty risk by a captive insurance company 24 outside of a commercial risk sharing arrangement approved by the 25 director. 26 27 Section 3890140. (A) A captive insurance company shall pay 28 to the department by March first of each year, a tax at the rate of 29 fourtenths of one percent on the first twenty million dollars and 30 threetenths of one percent on each dollar after that, up to a 31 maximum tax of one hundred thousand dollars. Taxes are based on 32 the direct premiums written or contracted for on policies or 33 contracts of insurance written by the captive insurance company 34 during the year ending December thirtyfirst next preceding, after 35 deducting from the direct premiums subject to the tax the amounts 36 paid to policyholders as return premiums which must include 37 dividends on unabsorbed premiums or premium deposits returned 38 or credited to policyholders. 39 (B) A captive insurance company shall pay to the department 40 by March first of each year, a tax at the rate of two hundred and 41 twentyfive thousandths of one percent on the first twenty million 42 dollars of assumed reinsurance premium, and one hundred fifty 43 thousandths of one percent on the next twenty million dollars and

[4675] 28 1 fifty thousandths of one percent on the next twenty million dollars 2 and twentyfive thousandths of one percent of each dollar of 3 assumed reinsurance premium after that up to a maximum tax of 4 one hundred thousand dollars. However, reinsurance tax does not 5 apply to premiums for risks or portions of risks which are subject 6 to taxation on a direct basis pursuant to subsection (A). A premium 7 tax is not payable in connection with the receipt of assets in 8 exchange for the assumption of loss reserves and other liabilities of 9 another insurer or other funding mechanism under common 10 ownership and control if the transaction is part of a plan to 11 discontinue the operations related to the loss reserves and other 12 liabilities being assumed of the other insurer or funding 13 mechanism and if the intent of the parties to the transaction is to 14 renew or maintain business with the captive insurance company. 15 (C)(1) If the aggregate taxes to be paid by a captive insurance 16 company calculated under subsections (A) and (B) amount to less 17 than five thousand dollars in any year, the captive insurance 18 company shall pay a minimum tax of five thousand dollars for that 19 year. However, in the calendar year in which a captive is first 20 licensed, the minimum tax must be prorated on a quarterly basis. 21 (2) For captives licensed in the: 22 (a) first quarter, the prorated minimum tax is five 23 thousand dollars; 24 (b) second quarter, the prorated minimum tax is three 25 thousand seven hundred fifty dollars; 26 (c) third quarter, the prorated minimum tax is two 27 thousand five hundred dollars; and 28 (d) fourth quarter, the prorated minimum tax is one 29 thousand two hundred fifty dollars. 30 (3) In the calendar year in which a captive is first licensed, if 31 the aggregate taxes to be paid by a captive insurance company 32 calculated under subsections (A) and (B) amount to less than the 33 minimum tax prorated on a quarterly basis, the captive insurance 34 company shall pay the prorated minimum tax for that calendar 35 year. 36 (4) If the aggregate taxes to be paid by a captive insurance 37 company calculated under subsections (A) and (B) amount to more 38 than one hundred thousand dollars in any year, the captive 39 insurance company shall pay a maximum tax of one hundred 40 thousand dollars for that year. 41 (D) A captive insurance company failing to make returns or to 42 pay all taxes required by this section, is subject to the relevant 43 sanctions of this title.

[4675] 29 1 (E) Two or more captive insurance companies under common 2 ownership and control must be taxed, as separate captive insurance 3 companies. 4 (F) For the purposes of this section, ‘common ownership and 5 control’ means: 6 (1) in the case of stock corporations or limited liability 7 companies, the direct or indirect ownership of eighty percent or 8 more of the outstanding voting stock or membership interests of 9 two or more corporations or limited liability companies by the 10 same person or entity; 11 (2) in the case of nonprofit corporations, the direct or 12 indirect ownership of eighty percent or more of the voting power 13 of two or more nonprofit corporations by the same member or 14 members; and 15 (3) in the case of mutual corporations, the direct or indirect 16 ownership of eighty percent or more of the surplus capitalization 17 and the voting power of two or more corporations by the same 18 member or members. 19 (G) In the case of a branch captive insurance company, the tax 20 provided for in this section applies only to the branch business of 21 the company. 22 (H) In the case of a sponsored captive insurance company, with 23 respect to any: 24 (1) unincorporated protected cells, the aggregate taxes to be 25 paid as calculated under subsections (A) and (B) must be 26 calculated and paid on a consolidated basis; 27 (2) incorporated protected cells that are affiliates of the 28 sponsor, the aggregate taxes to be paid as calculated under 29 subsections (A) and (B) must be calculated and paid on a 30 consolidated basis; and 31 (3) incorporated protected cells that are not affiliates of the 32 sponsor, the aggregate taxes to be paid as calculated under 33 subsections (A) and (B) shall apply to each incorporated protected 34 cell. 35 (H)(I) The tax provided for in this section constitutes all taxes 36 collectible under the laws of this State from a captive insurance 37 company, and no other occupation tax or other taxes may be levied 38 or collected from a captive insurance company by the State or a 39 county, city, or municipality within this State, except ad valorem 40 taxes on real and personal property used in the production of 41 income. 42

[4675] 30 1 Section 3890145. (A) A captive reinsurance company shall 2 pay to the department by March first of each year a captive 3 reinsurance tax of five thousand dollars. 4 (B) The tax provided in this section is the only tax collectible 5 pursuant to the laws of this State from a captive reinsurance 6 company, and no tax on reinsurance premiums, other than 7 occupation tax, nor any other taxes may be levied or collected 8 from a captive reinsurance company by the State or a county, city, 9 or municipality within this State, except ad valorem taxes on real 10 and personal property used in the production of income. 11 (C) A captive reinsurance company failing to make returns or 12 to pay all taxes required by this section is subject to sanctions 13 provided in this title. Reserved. 14 15 Section 3890150. The director may promulgate and, from time 16 to time, amend rules and regulations and issue orders or written 17 approvals relating to captive insurance companies as are necessary 18 to enable the director to carry out the provisions of this chapter. 19 20 Section 3890160. (A) No provisions of this title or 21 regulations, other than those contained in this chapter or contained 22 in specific references contained in this chapter and regulations 23 applicable to them, apply to captive insurance companies. 24 (B) The director may exempt, by rule, regulation, or order 25 written approval, special purpose captive insurance companies, 26 other than a risk retention group formed as a special purpose 27 captive insurance company formed as a risk retention group, on a 28 case by case basis, from provisions of this chapter that he 29 determines to be inappropriate given the nature, scale, and 30 complexity of the risks to be insured. 31 (C) The provisions of Sections 385120(A)(5), 385120(B), 32 385120(D)(1), 385120(D)(2), 389225, 389230, 382110, 382130, 33 382160, 382170, 382180, 382190, 382195, 3821100, 3821110, 34 3821120, 3821130, 3821140, 3821150, 3821160, 3821170, 35 3821220, 3821225, 3821230, 3821250, 3821270, 3821280, 36 3821285, 3821290, 3821310, 3821320, 3821330, 3821360, 37 385575 and Chapters 44 and 46, Title 38 and applicable 38 regulations apply in full to a risk retention group licensed as a 39 captive insurance company and, if a conflict occurs between those 40 code sections and chapters referenced in this subsection and this 41 chapter (Chapter 90, Title 38), then the code sections and chapters 42 referenced in this subsection control.

[4675] 31 1 (D) Except as provided elsewhere in this chapter, the provisions 2 of Chapter 87, Title 38 apply to a risk retention group licensed as a 3 captive insurance company. The provisions of Section 388730(D) 4 apply in full to a risk retention group licensed as a captive 5 insurance company and control if a conflict occurs between that 6 code section and this chapter. 7 (E)(1) Except for Section 389330(F) and Section 389440, the 8 provisions of Article 3 and Article 5, Chapter 9, Title 38 apply in 9 full to a risk retention group licensed as a captive insurance 10 company, and if a conflict occurs between those provisions and 11 this chapter, the provisions of this subsection control. 12 (2) The director may elect not to take regulatory action as 13 otherwise required by Sections 389330, 389340, 389350, and 14 389360 if any of the following conditions exist: 15 (a) the director establishes that the risk retention group’s 16 members, sponsoring organizations, or both, are wellcapitalized 17 entities whose financial condition and support for the risk retention 18 group is adequately documented. In making this determination, the 19 director shall, at a minimum, require the filing of at least three 20 years of historical, audited financial statements of the members, 21 sponsor, or both, to assess the financial ability of the members’, 22 sponsor’s, or both, support of the risk retention group. In addition, 23 one year of projected financial information must be reviewed if 24 available. The members, sponsor, or both, shall have: 25 (i) an investment grade rating from a nationally 26 recognized statistical rating organization or A.M. Best rating of A 27 or better; or 28 (ii) equity equal to or greater than one hundred million 29 dollars or equity equal to or greater than ten times the risk 30 retention group’s largest net retained per occurrence limit; 31 (b) each policyholder qualifies as an industrial insured in 32 their state or this State, depending on which has the greater 33 requirements, provided that if the policyholder’s home state does 34 not have an industrial insured exemption or equivalent, the 35 policyholder must qualify under the industrial insured requirement 36 of this State; or 37 (c) the risk retention group’s certificate of authority date 38 of issue was before January 1, 2011, and, based on a minimum 39 fiveyear history of successful operations, is specifically exempted, 40 in writing, from the requirements for mandatory riskbased capital 41 action by the director. 42

[4675] 32 1 Section 3890165. (A) The director may declare inactive by 2 order a captive insurance company other than a risk retention 3 group or association captive if such captive insurance company has 4 no outstanding insurance liabilities and agrees to cease providing 5 insurance coverage. 6 (B) During the period the captive insurance company is 7 inactive, the director may by order written approval: 8 (1) reduce the minimum free and unimpaired paidin capital 9 or surplus, or combination thereof, to no less than twentyfive 10 thousand dollars; 11 (2) modify the minimum premium tax applicable to the 12 captive insurance company to an amount no less than two thousand 13 dollars and the captive insurance company shall pay no other 14 premium taxes; and 15 (2)(3) exempt the captive insurance company from the 16 requirement to file such reports as set forth in the order. 17 18 Section 3890175. (A) There is created a fund to be known as 19 the ‘Captive Insurance Regulatory and Supervision Fund’ for the 20 purpose of providing the financial means for the director to 21 administer Chapter 87 and Chapter 90 of this title and for 22 reasonable expenses incurred in promoting the captive insurance 23 industry in the State. The transfer of twenty percent of the taxes 24 collected by the department pursuant to Chapter 90 of this title, 25 and all fees and assessments received by the department pursuant 26 to the administration of this chapter must be credited to this fund. 27 All fees received by the department from reinsurers who assume 28 risk only from captive insurance companies, must be deposited 29 into the Captive Insurance Regulatory and Supervision Fund. All 30 fines and administrative penalties must be deposited directly into 31 the general fund. 32 (B) All payments from the Captive Insurance Regulatory and 33 Supervision Fund for the maintenance of staff and associated 34 expenses including contractual services as necessary, shall be 35 disbursed from the state treasury only upon warrants issued by the 36 director, after receipt of proper documentation regarding services 37 rendered and expenses incurred. 38 39 Section 3890180. (A) Except as otherwise provided in this 40 section, the terms and conditions set forth in Chapters 26 and 27 of 41 this title pertaining to insurance reorganizations, receiverships, and 42 injunctions apply in full to captive insurance companies formed or 43 licensed under this chapter.

[4675] 33 1 (B) In the case of a sponsored captive insurance company: 2 (1) the assets of the protected cell may not be used to pay 3 expenses or claims other than those attributable to the protected 4 cell; and 5 (2) its capital and surplus at all times must be available to 6 pay expenses of or claims against the sponsored captive insurance 7 company and may not be used to pay expenses or claims 8 attributable to a protected cell. 9 (3) Notwithstanding another provision of law or regulation, 10 upon an order of conservation, rehabilitation, or liquidation of a 11 sponsored captive insurance company, the receiver shall deal with 12 the sponsored captive insurance company’s assets and liabilities, 13 including protected cell assets and protected cell liabilities, 14 pursuant to the requirements of this chapter. 15 16 Section 3890185. At least thirtyfive percent of the assets of a 17 captive reinsurance company must be managed by an asset 18 manager domiciled in this State. Reserved. 19 20 Section 3890190. The director shall promulgate regulations 21 establishing standards to ensure that a parent or affiliated company 22 is able to exercise control of the risk management function of any 23 controlled unaffiliated business to be insured by the pure captive 24 insurance company; however, until such time as these regulations 25 are promulgated, the director may by temporary order grant 26 authority to a pure captive insurance company to insure risks. 27 Reserved. 28 29 Section 3890200. (A) An association captive insurance 30 company or industrial insured group formed as a stock or mutual 31 corporation, or a limited liability company may be converted to or 32 merged with and into a reciprocal insurer in accordance with a plan 33 and the provisions of this section. 34 (B) A plan for this conversion or merger: 35 (1) must be fair and equitable to the: 36 (a) shareholders, in the case of a stock insurer; 37 (b) members, in the case of a limited liability company; or 38 (c) policyholders, in the case of a mutual insurer; and 39 (2) must provide for the purchase of the shares of any 40 nonconsenting shareholder of a stock insurer, of the member 41 interest of any nonconsenting member of a limited liability 42 company, of the policyholder interest of any nonconsenting 43 policyholder of a mutual insurer in substantially the same manner

[4675] 34 1 and subject to the same rights and conditions as are accorded a 2 dissenting shareholder, dissenting member, or a dissenting 3 policyholder pursuant to the provisions of Chapter 13 or Chapter 4 44, Title 33. Provided, however, that the merger of a limited 5 liability company requires the consent of all members unless this 6 requirement has been waived in an operating agreement signed by 7 all of the members of the limited liability company. 8 (C) In the case of a conversion authorized pursuant to the 9 provisions of subsection (A): 10 (1) the conversion must be accomplished under a reasonable 11 plan and procedure as may be approved by the director; however, 12 the director may not approve the plan of conversion unless the 13 plan: 14 (a) satisfies the provisions of subsection (B); 15 (b) provides for a hearing, of which notice has been given 16 to the insurer, its directors, officers, and stockholders, in the case 17 of a stock insurer; members and managers, in the case of a limited 18 liability company; or policyholders, in the case of a mutual insurer, 19 all of whom have the right to appear at the hearing, except that the 20 director may waive or modify the requirements for the hearing; 21 however, if a notice of hearing is required, but no hearing is 22 requested, the director may cancel the hearing; 23 (c) provides for the conversion of existing stockholder, 24 member, or policyholder interests into subscriber interests in the 25 resulting reciprocal insurer, proportionate to stockholder, member, 26 or policyholder interests in the stock or mutual insurer or limited 27 liability company; and 28 (d) is approved: 29 (i) in the case of a stock insurer or limited liability 30 company, by a majority of the shares or interests entitled to vote 31 represented in person or by proxy at a duly called regular or 32 special meeting at which a quorum is present; 33 (ii) in the case of a mutual insurer, by a majority of the 34 voting interests of policyholders represented in person or by proxy 35 at a duly called regular or special meeting at which a quorum is 36 present; 37 (2) the director shall approve the plan of conversion if the 38 director finds that the conversion will promote the general good of 39 the State in conformity with those standards provided in Section 40 389060(2); 41 (3) if the director approves the plan, the director shall amend 42 the converting insurer’s certificate of authority to reflect

[4675] 35 1 conversion to a reciprocal insurer and issue the amended certificate 2 of authority to the company’s attorneyinfact; 3 (4) upon issuance of an amended certificate of authority of a 4 reciprocal insurer by the director, the conversion is effective; and 5 (5) upon the effectiveness of the conversion, the corporate 6 existence of the converting insurer shall cease and the resulting 7 reciprocal insurer shall notify the Secretary of State of the 8 conversion. 9 (D) A merger authorized pursuant to the provisions of 10 subsection (A) must be accomplished substantially in accordance 11 with the procedures provided in this title except that, only for 12 purposes of the merger: 13 (1) the plan or merger must satisfy subsection (B); 14 (2) the subscribers’ advisory committee of a reciprocal insurer 15 must be equivalent to the board of directors of a stock or mutual 16 insurance company or the managers of a limited liability company; 17 (3) the subscribers of a reciprocal insurer must be the 18 equivalent of the policyholders of a mutual insurance company; 19 (4) if a subscribers’ advisory committee does not have a 20 president or secretary, the officers of the committee having 21 substantially equivalent duties are considered the president and 22 secretary of the committee; 23 (5) the director shall approve the articles of merger if the 24 director finds that the merger will promote the general good of the 25 State in conformity with those standards provided in Section 26 389060(D)(2). If the director approves the articles of merger, the 27 director shall endorse his or her approval on the articles and the 28 surviving insurer shall present the name to the Secretary of State at 29 the Secretary of State’s office; 30 (6) notwithstanding Section 389040, the director may permit 31 the formation, without surplus, capitalization, or a combination 32 thereof, of a captive insurance company organized as a reciprocal 33 insurer, into which an existing captive insurance company may be 34 merged for the purpose of facilitating a transaction provided for in 35 this section; however, there may be no more than one authorized 36 insurance company surviving the merger; 37 (7) an alien insurer may be a party to a merger authorized 38 pursuant to the provisions of subsection (A) if the requirements for 39 the merger between a domestic and a foreign insurer pursuant to 40 the provisions of Chapter 21 apply to a merger between a domestic 41 and an alien insurer provided by this subsection. The alien insurer 42 must be treated as a foreign insurer pursuant to the provisions of

[4675] 36 1 Chapter 21 and other jurisdictions must be the equivalent of a state 2 for purposes of Chapter 21. 3 (E) A conversion or merger pursuant to the provisions of this 4 section has all the effects set forth in Chapter 21, to the extent 5 these effects are not inconsistent with this chapter. 6 7 Section 3890210. (A) One or more sponsors may form a 8 sponsored captive insurance company under this chapter. 9 (B) A sponsored captive insurance company formed or licensed 10 under this chapter may establish and maintain one or more 11 protected cells to insure risks of one or more participants, subject 12 to the following conditions: 13 (1) the shareholders of a sponsored captive insurance 14 company must be limited to its participants and sponsors; 15 (2) each protected cell must be accounted for separately on 16 the books and records of the sponsored captive insurance company 17 to reflect the participants of the protected cell, the financial 18 condition and results of operations of the protected cell, net 19 income or loss, dividends or other distributions to participants, and 20 other factors may be provided in the participant contract or 21 required by the director; 22 (3) the assets of a protected cell must not be chargeable with 23 liabilities arising out of any other insurance business the sponsored 24 captive insurance company may conduct; 25 (4) no sale, exchange, or other transfer of assets may be 26 made by the sponsored captive insurance company between or 27 among any of its protected cells without the consent of the 28 protected cells; 29 (5) no sale, exchange, transfer of assets, dividend, or 30 distribution may be made from a protected cell to a sponsor or 31 participant without the director’s approval and in no event may the 32 approval be given if the sale, exchange, transfer, dividend, or 33 distribution would result in insolvency or impairment with respect 34 to a protected cell; 35 (6) a sponsored captive insurance company annually shall 36 file with the director financial reports the director requires, which 37 shall include, but are not limited to, accounting statements 38 detailing the financial experience of each protected cell; 39 (7) a sponsored captive insurance company shall notify the 40 director in writing within ten business days of a protected cell that 41 is insolvent or otherwise unable to meet its claim or expense 42 obligations;

[4675] 37 1 (8) no participant contract shall take effect without the 2 director’s prior written approval, and the addition of each new 3 protected cell and withdrawal of any participant of any existing 4 protected cell constitutes a change in the business plan requiring 5 the director’s prior written approval. 6 (C) The name of a sponsored captive insurance company shall 7 include the words ‘Sponsored Captive’ or the abbreviation ‘SC’. 8 Any captive insurance company or protected cell formed prior to 9 July 31, 2013, may not be required to change its name to comply 10 with the provisions of this subsection. 11 (D) A sponsored captive insurance company may establish one 12 or more protected cells with the prior written approval of the 13 director of a plan of operation or amendments submitted by the 14 sponsored captive insurance company with respect to each 15 protected cell. Upon the written approval of the director of the plan 16 of operation, which shall include, but is not limited to, the specific 17 business objectives and investment guidelines of the protected cell, 18 the sponsored captive insurance company, in accordance with the 19 approved plan of operation, may attribute to the protected cell 20 insurance obligations with respect to its insurance business and 21 assets to fund the obligations. The sponsored captive insurance 22 company shall transfer all assets attributable to a protected cell to 23 one or more separately established and identified protected cell 24 accounts bearing the name or designation of that protected cell. 25 Protected cell assets must be held in the protected cell accounts for 26 the purpose of satisfying the obligations of that protected cell. 27 (E) All attributions of assets and liabilities between a protected 28 cell and the general account must be in accordance with the plan of 29 operation approved by the director. No other attribution of assets 30 or liabilities may be made by a sponsored captive insurance 31 company between the sponsored captive insurance company’s 32 general account and its protected cells. 33 (F) A sponsored captive insurance company shall establish 34 administrative and accounting procedures necessary to properly 35 identify the one or more protected cells of the sponsored captive 36 insurance company and the protected cell assets and protected cell 37 liabilities attributable to the protected cells. The directors of a 38 sponsored captive insurance company shall keep protected cell 39 assets and protected cell liabilities: 40 (1) separate and separately identifiable from the assets and 41 liabilities of the sponsored captive insurance company’s general 42 account; and

[4675] 38 1 (2) attributable to one protected cell separate and separately 2 identifiable from protected cell assets and protected cell liabilities 3 attributable to other protected cells. 4 Notwithstanding the provisions of this subsection, if this 5 subsection is violated, the remedy of tracing is applicable to 6 protected cell assets when commingled with protected cell assets 7 of other protected cells or the assets of the sponsored captive 8 insurance company’s general account. The remedy of tracing must 9 not be construed as an exclusive remedy. 10 (G) When establishing a protected cell, the sponsored captive 11 insurance company shall attribute to the protected cell assets with a 12 value at least equal to the reserves and other insurance liabilities 13 attributed to that protected cell. 14 15 Section 3890215. (A) A protected cell may be either 16 unincorporated or incorporated. 17 (B) With regard to unincorporated protected cells: 18 (1) The unincorporated protected cell shall have its own 19 distinct name or designation, which shall include the words 20 ‘Protected Cell’ or the abbreviation ‘PC’. Any captive insurance 21 company or protected cell formed prior to the effective date of this 22 section may not be required to change its name to comply with the 23 provisions of this paragraph. 24 (2) An unincorporated protected cell must meet the free and 25 unimpaired paidin capital and free surplus requirements applicable 26 to a special purpose captive insurance company and either: 27 (a) establish loss and loss expense reserves for business 28 written through the unincorporated protected cell; or 29 (b) the business written through the unincorporated 30 protected cell must be: 31 (i) fronted by an insurance company licensed pursuant 32 to the laws of: 33 (A) any state; or 34 (B) any jurisdiction if the insurance company is a 35 wholly owned subsidiary of an insurance company licensed 36 pursuant to the laws of any state; 37 (ii) reinsured by a reinsurer authorized or approved by 38 this State; or 39 (iii) secured by a trust fund in the United States for the 40 benefit of policyholders and claimants funded by an irrevocable 41 letter of credit or other asset acceptable to the director. The amount 42 of security provided by the trust fund may not be less than the 43 reserves associated with those liabilities, including reserves for

[4675] 39 1 losses, allocated loss adjustment expenses, incurred but unreported 2 losses, and unearned premiums for business written through the 3 participant’s protected cell. The director may require the sponsored 4 captive to increase the funding of a trust established pursuant to 5 this item. If the form of security in the trust is a letter of credit, the 6 letter of credit must be established, issued, or confirmed by a bank 7 chartered in this State, a member of the federal reserve system, or a 8 bank chartered by another state if that statechartered bank is 9 acceptable to the director. A trust and trust instrument maintained 10 pursuant to this item must be in a form and upon terms approved 11 by the director. 12 (3) The creation of an unincorporated protected cell does not 13 create, with respect to that protected cell, a legal person separate 14 from the sponsored captive insurance company. Amounts 15 attributed to a protected cell, including assets transferred to a 16 protected cell account, are owned by the sponsored captive 17 insurance company of which the protected cell is a part, and the 18 sponsored captive insurance company may not be, or may not hold 19 itself out to be, a trustee with respect to those protected cell assets 20 of that protected cell account. Notwithstanding the provisions of 21 this subsection, the sponsored captive insurance company may 22 allow for a security interest to attach to protected cell assets or a 23 protected cell account when in favor of a creditor of the protected 24 cell and otherwise allowed under applicable law. 25 (4) This subsection may not be construed to prohibit the 26 sponsored captive insurance company from: 27 (a) entering into contracts of insurance on behalf of the 28 protected cell; or 29 (b) contracting with or arranging for thirdparty managers 30 or advisors to manage the protected cell to manage the assets of a 31 protected cell, if all remuneration, expenses, and other 32 compensation of the third-party manager or advisor is payable 33 from the protected cell assets of that protected cell and not from 34 the protected cell assets of other protected cells or the assets of the 35 sponsored captive insurance company’s general account. 36 (C) Incorporated protected cells shall be subject to all of the 37 following: 38 (1) An incorporated protected cell may be organized and 39 operated in any form of business organization set forth in Section 40 389060(A). 41 (2) Except as specifically set forth in this chapter, each 42 incorporated protected cell of a sponsored captive insurance

[4675] 40 1 company shall be licensed and treated as a special purpose captive 2 insurance company. 3 (3) A participant in an incorporated protected cell need not 4 be a shareholder of the protected cell or of the sponsored captive 5 insurance company or any affiliate thereof. 6 (D) The name of an incorporated protected cell must include 7 the words ‘Incorporated Cell’ or the abbreviation ‘IC’. 8 (E) Any captive insurance company or protected cell formed 9 prior to July 31, 2013, shall not be required to change its name to 10 comply with the provisions of subsection (D). 11 12 Section 3890220. (A) The sponsored captive insurance 13 company shall attribute all insurance obligations, assets, and 14 liabilities relating to a participant’s risks to the participant’s 15 protected cell. 16 (B) The protected cell assets of a protected cell may not be 17 charged with liabilities arising out of any other business the 18 sponsored captive insurance company may conduct. All contracts 19 or other documentation reflecting protected cell liabilities shall 20 clearly indicate that only the protected cell assets are available for 21 the satisfaction of those protected cell liabilities. Under no 22 circumstances may a protected cell be authorized to issue 23 insurance or reinsurance contracts directly to policyholders or 24 reinsureds or have any obligation to the policyholders or 25 reinsureds of the sponsored captive insurance company’s general 26 account. 27 (C) The income, gains and losses, realized or unrealized, from 28 protected cell assets and protected cell liabilities must be credited 29 to or charged against the protected cell without regard to other 30 income, gains or losses of the sponsored captive insurance 31 company, including income, gains or losses of other protected 32 cells. Investments must be handled pursuant to Section 33 3890100(B). 34 (D) In all sponsored captive insurance company transactions, 35 the contracts or other documentation effecting the transaction shall 36 contain provisions identifying the protected cell to which the 37 transaction will be attributed. In addition, the contracts or other 38 documentation must clearly disclose that the assets of that 39 protected cell, and only those assets are available to pay the 40 obligations of that protected cell. Notwithstanding the provisions 41 of this subsection and subject to the provisions of this chapter and 42 any other applicable law or regulation, the failure to include such 43 language in the contracts or other documentation may not be used

[4675] 41 1 as the sole basis by creditors, reinsurers, or other claimants to 2 circumvent the provisions of this chapter. 3 (E) Assets attributed to a protected cell must be valued at their 4 market value on the date of valuation or if there is no readily 5 available market, as provided in the contract or the rules or other 6 written documentation applicable to the protected cell. 7 (F) At the cessation of business of a protected cell in 8 accordance with the plan approved by the director, the sponsored 9 captive insurance company voluntarily shall close out the protected 10 cell account. 11 12 Section 3890225. (A) The following may be participants in a 13 sponsored captive insurance company formed or licensed pursuant 14 to this chapter: 15 (1) an association, corporation, limited liability company, 16 partnership, trust, or other business entity; and 17 (2) a sponsor. 18 (B) A participant does not need to be a shareholder of the 19 sponsored captive insurance company or an affiliate of the 20 company. 21 (C) A participant shall insure only its own risks through a 22 sponsored captive insurance company unless otherwise approved 23 by the director. 24 (D) A risk retention group may not be a sponsor or participant 25 in a sponsored captive insurance company. 26 27 Section 3890230. (A) Protected cell assets are only available 28 to the creditors of the sponsored captive insurance company that 29 are creditors with respect to that protected cell and are therefore 30 entitled, in conformity with this chapter, to have recourse to the 31 protected cell assets attributable to that protected cell. Protected 32 cell assets are absolutely protected from the creditors of the 33 sponsored captive insurance company that are not creditors with 34 respect to that protected cell and who, therefore, are not entitled to 35 have recourse to the protected cell assets attributable to that 36 protected cell. Creditors with respect to a protected cell are not 37 entitled to have recourse against the protected cell assets of other 38 protected cells or the assets or the sponsored captive insurance 39 company’s general account. Protected cell assets only are available 40 to creditors of a sponsored captive insurance company after all 41 protected cell liabilities have been extinguished or otherwise 42 provided for in accordance with the plan of operation relating to 43 that protected cell.

[4675] 42 1 (B) When an obligation of a sponsored captive insurance 2 company to a person arises from a transaction, or is otherwise 3 imposed, with respect to a protected cell: 4 (1) that obligation of the sponsored captive insurance 5 company extends only to the protected cell assets attributable to 6 that protected cell, and the person, with respect to that obligation, 7 is entitled to have recourse only to the protected cell assets 8 attributable to that protected cell; and 9 (2) that obligation of the sponsored captive insurance 10 company does not extend to the protected cell assets of any other 11 protected cell or the assets of the sponsored captive insurance 12 company’s general account, and that person, with respect to that 13 obligation, is not entitled to have recourse to the protected cell 14 assets of any other protected cell or the assets of the sponsored 15 captive insurance company’s general account. 16 (C) When an obligation of a sponsored captive insurance 17 company relates solely to the general account, the obligation of the 18 sponsored captive insurance company extends only to the 19 sponsored captive insurance company, and that person, with 20 respect to that obligation, is entitled to have recourse only to the 21 assets of the sponsored captive insurance company’s general 22 account. 23 (D) The establishment of one or more protected cells alone 24 does not constitute, and may not be deemed to be, a fraudulent 25 conveyance, an intent by the sponsored captive insurance company 26 to defraud creditors, or the carrying out of business by the 27 sponsored captive insurance company for any other fraudulent 28 purpose. 29 30 Section 3890240. (A) The following may be participants in a 31 sponsored captive insurance company formed or licensed pursuant 32 to this chapter: 33 (1) an association, a corporation, limited liability company, 34 partnership, trust, or other business entity; and 35 (2) a sponsor may be a participant in a sponsored captive 36 insurance company. 37 (B) A participant does not need to be a shareholder of the 38 sponsored captive insurance company or an affiliate of the 39 company. 40 (C) A participant shall insure only its own risks through a 41 sponsored captive insurance company, unless otherwise approved 42 by the director.

[4675] 43 1 (D) A risk retention group may not be either a sponsor or 2 participant in a sponsored captive insurance company. 3 (E) A sponsored captive insurance company established 4 pursuant to Section 3890210 may not be used to facilitate 5 insurance securitizations, but may be established for the purpose of 6 isolating the expenses and claims. Insurance securitization 7 transactions utilizing protected cells are governed by Chapter 10 of 8 this title. Reserved. 9 10 Section 3890250. A licensed captive insurance company that 11 meets the necessary requirements of this title imposed upon an 12 insurer must be considered for issuance of a certificate of authority 13 to act as an insurer in this State.” 14 15 SECTION 2. Article 5, Chapter 90, Title 38 of the 1976 Code is 16 repealed. 17 18 SECTION 3. This act takes effect upon approval by the 19 Governor. 20 XX 21

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