Certain provisions of the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act may affect state premium tax obligations resulting from premium payments made to a captive insurer for U.S. risks.

"Approximately two thirds of U.S. states impose a premium tax, known as ‘self procurement tax’ or ‘direct placement tax,’ on the purchaser of insurance procured directly from a non-admitted insurer, which may include a captive insurance company outside its state of domicile,” noted Michael Serricchio, senior vice president, Marsh Captive Management.  “Prior to the financial reform act, the responsibility for the assessment and collection of the premium tax was limited to the various states in which the insured was determined to have risk.”

With the passage of the law, only the insured’s home state—where the buyer maintains its principal place of business—may require any premium tax or self procurement tax for non-admitted insurance.

Arthur Koritzinsky, managing director, Marsh Captive Advisory, added, “Dodd-Frank does not provide specific uniform procedures for states to report, pay, collect, and allocate the non-admitted premium tax due in the buyer’s home state.  However, it is expected that the National Association of Insurance Commissioners (NAIC) will establish a multistate compact for the distribution of tax revenue for non-admitted lines.”

The timeline for the implementation of such a multi-state compact is still uncertain.

Marsh will keep clients apprised of developments by the NAIC, and the potential impact on captive insureds.