20-1098.01. Licensing; authority

A. If allowed by its articles of incorporation, bylaws or other organizational document, an applicant may apply to the director for a license to transact captive insurance, except that:

1. A pure captive insurer shall not insure risks other than the risks of its affiliates and controlled unaffiliated business.

2. A group captive insurer, other than a risk retention group, shall not insure risks other than the risks of its group members, its affiliates and controlled unaffiliated business. A risk retention group shall insure only the risks of its group members.

3. An agency captive insurer shall not:

(a) Insure any risks other than those placed by or through its owners.

(b) Directly insure life or disability insurance risks without the approval of the director. The insurance risks that the director may approve are limited to employer group term life insurance, employer group disability income insurance and reimbursement of employer health plan deductibles. The director may require the business written by an agency captive insurer to be any of the following:

(i) Fronted by an insurer that holds a certificate of authority under the laws of any state.

(ii) Reinsured by a reinsurer authorized, accredited or approved by the director.

(iii) Secured by a trust fund in the United States for the benefit of policyholders and claimants or funded by an irrevocable letter of credit or other arrangement that is acceptable to the director. The director may require the agency captive insurer to increase the funding of any security arrangement established under this item. If the form of security is a letter of credit, the letter of credit shall be issued or confirmed by a bank approved by the director. A trust maintained pursuant to this item shall be established in a form and on terms approved by the director.

4. A protected cell captive insurer shall not insure any risks other than those prescribed in its participant contracts.

B. The following apply to the transaction of insurance by a captive insurer on a direct basis:

1. A captive insurer shall not directly insure any of the following types of insurance business:

(a) Hospital service corporations, medical service corporations, dental service corporations, optometric service corporations or hospital, medical, dental and optometric service corporations as defined in section 20-822.

(b) Health care services organizations as defined in section 20-1051.

(c) Prepaid dental plan organizations as defined in section 20-1001.

(d) Prepaid legal insurance contracts as defined in section 20-1097.

(e) Business of title insurance as defined in section 20-1562.

(f) Personal motor vehicle or homeowner's insurance coverage or any component of that insurance coverage.

(g) Mortgage guaranty insurance as defined in section 20-1541.

(h) Workers' compensation or employers' liability insurance policies except in connection with a self-insurance program as prescribed in this subsection.

2. A pure captive insurer shall not provide direct coverage of workers' compensation or employers' liability in this state unless the coverage is provided under a self-insurance program that is approved by the industrial commission of Arizona pursuant to section 23-961. A captive insurance program that is authorized by section 23-961 is subject to and shall comply with all requirements of title 23, chapter 6 that are applicable to self-insurance.

3. A pure captive insurer shall not provide direct coverage of workers' compensation or employers' liability insurance in another state unless the coverage is provided under a self-insurance program that is qualified as a self-insurance program under the applicable state or federal law, as determined by the agency or other entity that has jurisdiction over the self-insurance program.

4. An agency captive insurer directly insuring life or disability income insurance risk as specified in subsection A, paragraph 3 of this section:

(a) Shall mark each policy and certificate with a conspicuously stamped or written notice in bold-faced type that states the following:

This policy is issued by an insurer that is not a member of an Arizona insurance guaranty fund. If the insurer that issued this policy becomes insolvent, insureds or claimants will not be eligible for insurance guaranty fund protection pursuant to title 20, Arizona Revised Statutes.

(b) May insure only life and disability income insurance risks as specified in subsection A, paragraph 3 of this section for employers that maintain their principal place of business within this state.

(c) May not be owned or controlled by an insurer that is granted authority by the director to transact insurance in this state.

(d) Shall have its financial statements audited by an independent certified public accountant pursuant to section 20-1098.07, subsection B.

(e) May not directly insure life or disability income insurance risks as specified in subsection A, paragraph 3 of this section in this state unless all of the following apply:

(i) An insurance producer or managing general agent that owns the agency captive insurer remains in regulatory good standing in all states in which it is licensed.

(ii) The agency captive insurer insures only the risks of employer group term life insurance, employer group disability income insurance and reimbursement of employer health plan deductibles that are placed by or through an insurance producer or managing general agent that owns the agency captive insurer and, if required by the director, provides the director the form of such policies.

(iii) The agency captive insurer discloses to the original policyholder or policyholders, in a form or manner approved by the director, all limitations, rights and obligations held by the agency captive insurer as a result of its affiliation with an insurance producer or managing general agent.

5. This subsection does not prohibit a captive insurer from directly insuring deductible reimbursement risk.

6. This subsection does not prohibit a captive insurer from directly insuring employment practices liability risk.

C. A captive insurer shall not accept or cede reinsurance except as provided in section 20-1098.11.

D. A captive insurer that writes life insurance or disability insurance shall comply with all applicable state and federal laws.

E. A captive insurer shall:

1. Hold at least one meeting of its board of directors or, for reciprocal insurers, its subscribers' advisory committee each year in this state.

2. Maintain its principal place of business in this state.

3. Appoint a resident statutory agent to accept service of process and to otherwise act on its behalf in this state and shall file the appointment with the director. In the case of a captive insurer formed as a corporation or reciprocal insurer, if the statutory agent cannot with reasonable diligence be found at the registered office of the captive insurer, the director is an agent of the captive insurer on whom any process, notice or demand may be served.

F. Before receiving a license, an applicant for a captive insurer license shall file with the director the following:

1. If formed as a corporation, a certified copy of its articles of incorporation, articles of organization or other organizational document, a copy of its duly adopted bylaws or other governance rules, a statement under oath of its president and secretary showing its financial condition and any other statement or document required by the director.

2. If formed as a reciprocal insurer, a copy of the power of attorney of its attorney-in-fact, a copy of its subscribers' agreement, a copy of its duly adopted bylaws or other governance rules, a statement under oath of its attorney-in-fact showing its financial condition and any other statement or document required by the director.

G. In addition to the information required by subsection F of this section, each applicant for a captive insurer license shall file with the director evidence of all of the following:

1. The amount and liquidity of its assets relative to the risks to be assumed.

2. The adequacy of the expertise, experience and character of the directors and officers of the captive insurer.

3. The overall soundness of its plan of operation.

4. The adequacy of the loss prevention programs of its insureds.

5. The engagement of a competent manager that does business at a location in this state.

6. The establishment of business relationships with any accountants, banks, attorneys and other professionals that are acceptable to the department.

7. The ability of the captive insurer's owners or members to pay claims to third parties if the captive insurer is unable to pay those claims.

8. Other factors deemed relevant by the director in ascertaining whether the proposed captive insurer will be able to meet its policy obligations.

H. In addition to the information required by subsections F and G of this section, if the applicant is seeking authority as a protected cell captive insurer, the applicant shall file:

1. A business plan that demonstrates, in a manner acceptable to the director, how the applicant will account for the loss and expense experience of each protected cell and report that information to the director.

2. A statement acknowledging that all financial records of the protected cell captive insurer, including records pertaining to protected cells, shall be available for inspection or examination by the director or the director's designee.

3. Its form for all participant contracts.

4. Evidence that the protected cell captive insurer will allocate expenses fairly and equitably to each protected cell.

I. Before the issuance of a license, an applicant shall promptly notify the director of any material change in the information filed pursuant to this section.

J. An applicant for a captive insurer license shall pay to the director a nonrefundable fee for the issuance of a captive insurance license pursuant to section 20-167. The captive insurer shall pay the license renewal fee pursuant to section 20-167 when the captive insurer files the annual report prescribed in section 20-1098.07.

K. If the director is satisfied that the documents and statements that the applicant has filed comply with this article, the director may grant the applicant a captive insurer license that authorizes the captive insurer to transact captive insurance business in this state.

L. The director shall approve or deny an application for a license to transact captive insurance business within thirty days after the director deems the application complete.