STAND. COM. REP. NO. 904

                                 Honolulu, Hawaii
                                                   , 1999

                                 RE: H.B. No. 1623
                                     H.D. 1

Honorable Calvin K.Y. Say
Speaker, House of Representatives
Twentieth State Legislature
Regular Session of 1999
State of Hawaii


     Your Committee on Consumer Protection and Commerce, to which
was referred H.B. No. 1623 entitled: 


begs leave to report as follows:

     The purpose of this bill is to expand the definition of
"captive insurance company" (CIC) to:

     (1)  Establish five classes of captive insurance companies,
          subject to specified minimum capital or surplus
          requirements that may be increased by the Insurance
          Commissioner as necessary to preserve solvency;

     (2)  Limit the first two classes to pure captive CICs and
          the third class to companies formed as association and
          risk retention CICs;

     (3)  Designate class 4 as being composed of leased capital
          facilities, CICs that, as newly authorized under the
          law, are allowed to be owned by persons or entities
          that are not members of the CIC;

     (4)  Establish CICs called reinsurance companies, that are
          formed for the primary purpose of reinsuring liability,
          property, or life and health businesses, and that are
          class 5 CIC's that are not class 1 through 4 companies;
                                 STAND. COM. REP. NO. 904
                                 Page 2

     (5)  Exempt class 3 to 5 CICs from any National Association
          of Insurance Commissioners (NAIC) risk-based capital
          reports filing requirement; and

     (6)  Subject class 4 and 5 CICs to the same one percent tax
          imposed on the gross premiums of association CICs and
          risk retention CICs.

     Your Committee received testimony in support of this measure
from J&H Marsh & McLennan (JHMM), 50th State Risk Management
Services, Inc. (RMS), and the Hawaii Captive Insurance Council
(HCIC).  The Department of Commerce and Consumer Affairs (DCCA)
testified in support of part of the bill, suggesting an
amendment.  The Reinsurance Association of America (RAA) provided
comments about the bill, suggesting an amendment.

     JHMM stated that Hawaii's captive insurance industry had
demonstrated strong growth over the past five years, and that
there are now over sixty licensed companies.  RMS testified that
Hawaii has become the second largest home for captive insurance
companies in the U.S., is the premier domicile in the Pacific
basin, and that the industry has steadily contributed to the
economic diversification of the State.  RMS stated its belief
that the bill would create a basis for further development of the
industry.  HCIC testified that the bill's expansion of the
definition of a captive insurer was consistent with the
progression of the industry into alternative risk financing.
HCIC stated that Hawaii's status as a State would allow
reinsurers to write directly to any multinational in the U.S.,
and that this, and the exemption provided from NAIC filing
requirements would be attractive to reinsurers.  HCIC also
testified that the amount of capital required of reinsurers under
the bill would help to eliminate disreputable companies.

     DCCA supported class 1 through 4, but opposed class 5
companies, stating that its concern was that class 5 CICs would
cover the risk of unrelated companies.  DCCA stated that CICs are
exempt from many of the requirements of the insurance laws
because they are self insurers covering only related risks.  DCCA
requested that class 5 be removed and the capital or surplus
requirements for class 4 companies be amended consistent with
current minimum capital guidelines for association and risk
retention CICs.

     RAA submitted testimony stating its belief that absent a
change in U.S. corporate income tax law, the bill would not
provide an incentive for captive reinsurer formation and would
not make Hawaii competitive with tax-free domiciles such as
Bermuda.  RAA also stated that provisions for a one percent gross
                                 STAND. COM. REP. NO. 904
                                 Page 3

premium tax on CIC reinsurers might be read to subject them to
double taxation, and suggested an amendment.

     It is not your Committee's intention to subject reinsurers
to double taxation on premiums.  Your Committee notes that
section 431:19-116(b), Hawaii Revised Statutes, contains express
language exempting reinsurers from double taxation by stating
that the tax on gross premiums is upon risks or property "upon
which no premium tax is otherwise paid."  Your Committee
therefore has not amended the premium tax provisions of the bill.

     Your Committee understands that additional parameters will
have to be crafted for the oversight and regulation of the new
classes of insurers set forth in this bill.  These matters can be
accomplished by subsequent amendments to Article 19 of the
Insurance Code and by the Insurance Commissioner's rulemaking

     Your Committee also wants to emphasize that minimum capital
requirements in the bill are to allow the Commissioner discretion
in setting the minimum capital and surplus requirements for
insurers licensed under Article 19 of the Insurance Code.  In the
case of reinsurers, for example, the bill would allow for the
Commissioner to set lower minimum capital requirements writing
limited business than might be set for reinsurers writing a
larger or riskier book of business.  Thus, the bill sets only
minimum requirements and the Commissioner may set higher
requirements, depending upon the individual circumstances of each

     Your Committee is interested in continued discussion and
refinement of policies and programs that would benefit the
State's economy by attracting captive insurers and reinsurance
companies, while retaining a reasonable and prudent level of
protection for the community.  Your Committee has made a
technical amendment to this bill so that section 431:19-107,
Hawaii Revised Statutes, is not repealed on June 30, 2000, and
reenacted as it read on June 20, 1994.  Other technical,
nonsubstantive amendments have been made to conform the bill to
standard drafting conventions.

     As affirmed by the record of votes of the members of your
Committee on Consumer Protection and Commerce that is attached to
this report, your Committee is in accord with the intent and
purpose of H.B. No. 1623, as amended herein, and recommends that
it pass Second Reading in the form attached hereto as H.B. No.
1623, H.D. 1, and be placed on the calendar for Third Reading.

                                 STAND. COM. REP. NO. 904
                                 Page 4

                                   Respectfully submitted on
                                   behalf of the members of the
                                   Committee on Consumer
                                   Protection and Commerce,

                                   RON MENOR, Chair