Texas Gov. Signs Windstorm Bill, Measure Affecting Surplus Lines

Legislative measures passed during the special session of the 82nd Legislature that impact the insurance industry in Texas have been signed by the governor. On July 19, Gov. Rick Perry signed Senate Bill 1 and Senate Bill 2, which finalize a balanced budget for the 2012-13 biennium, and House Bill 3, which reforms the Texas Windstorm Insurance Association (TWIA).

SB 1 contains several articles relating to the business of insurance in the state.

SB 1 Article 2 repeals insurance premium tax credits for examination fees. This provision would apply to examination fees or evaluations paid in calendar year 2012 or 2013 and the provision would expire on Jan. 1, 2014.

According to a legislative analysis, Article 2 would result in a revenue gain of $7.1 in General Revenue Related Funds in fiscal year 2013. To estimate the provisions of Article 2, data from the Texas Department of Insurance and the Comptroller were used to calculate the amount of examination fee and overhead assessment credits that would be available, the proportion of available examination fee credits that would be applied towards premium tax liability under current law, and the extent to which the repeal of these credits would increase the use of other types of premium tax credits.

SB1 Article 16 changes the Insurance Code in response to the Nonadmitted Insurance and Reinsurance Reform Act of 2010 (NRRA). NRRA provides that only an insured’s home state may tax or regulate surplus lines transactions.

According to the analysis published by the Legislature, Article 16:

• Amends the Insurance Code to specify that the applicability of provisions of law relating to the surplus lines insurance premium tax to a surplus lines agent who collects gross premiums for surplus lines insurance be for any risk in which Texas is the home state of the insured.
• Prohibits the state, consistent with federal law, from imposing a premium tax on nonadmitted insurance premiums other than premiums paid for insurance in which Texas is the home state of the insured.
• Authorizes the comptroller to establish an alternate basis for taxation for multistate and single-state policies for the purpose of achieving uniformity.
• Increases the basis on which the surplus lines insurance premium tax is computed, if a surplus lines insurance policy covers risks or exposures only partially located in Texas, from the portion of the premium that is properly allocated to a risk or exposure located in Texas to the entire policy premium for any policy in which Texas is the home state of the insured. It adds the condition that the state not have entered into a cooperative agreement, reciprocal agreement, or compact with another state for the collection of surplus lines tax.
• Removes a provision exempting premiums properly allocated to another state that are specifically exempt from taxation in that state from taxation in Texas.
• Establishes that the surplus lines insurance premium tax is a transaction tax collected by the surplus lines agent of record and is in lieu of any other transaction taxes on these premiums, rather than in lieu of all other insurance taxes.
• Requires the surplus lines insurance premium tax, if the state enters a cooperative agreement, reciprocal agreement, or compact with another state for the allocation of the surplus lines tax, to be allocated and reported in accordance with the terms of the agreement or compact.
• Makes provisions of law relating to an independently procured insurance premium tax applicable to an insured who procures an independently procured insurance contract for any risk in which Texas is the home state of the insured, rather than to an insured who procures an insurance contract in accordance with provisions of law relating to unauthorized insurance.
• Increases the basis on which the independently procured insurance premium tax is computed, if an independently procured insurance policy covers risks or exposures only partially located in Texas, from the portion of the premium that is properly allocated to a risk or exposure located in Texas to the entire policy premium for any policy in which Texas is the home state of the insured. It adds the condition that the state not have entered into a cooperative agreement, reciprocal agreement, or compact with another state for the allocation of nonadmitted insurance taxes.
• Requires the tax due on multistate policies, if the state enters into a cooperative agreement, reciprocal agreement, or compact with another state for the allocation of nonadmitted insurance taxes, to be allocated and reported in accordance with the agreement or compact.
• Repeals provisions establishing criteria for determining if a gross premium for surplus lines insurance is considered to be written on property or risks located or resident in Texas and authorizing the comptroller by rule to establish that all premiums are considered to be on risks located in Texas if the insured’s home office or state of domicile or residence is located in Texas or to accommodate changes in federal statutes or regulations that would otherwise limit the comptroller’s ability to directly collect the surplus lines insurance premium tax or the independently procured insurance premium tax.
• Defines “affiliate,” “affiliated group,” “control,” “home state,” and “independently procured insurance” and redefines “premium” for purposes of certain provisions of law relating to surplus lines insurance premium tax and relating to unauthorized and independently procured insurance premium tax.
• Makes the changes in law made by this article relating to the surplus lines insurance premium tax and the independently procured insurance premium tax applicable only to an insurance policy that is delivered, issued for delivery, or renewed on or after July 21, 2011.

SB 1 Article 37 extends the small business franchise tax exemption at $1,000,000 until 2014.