SECTION 1. The State of Hawaii, through the department of accounting and general services, currently purchases third-party insurance to cover the State's property and casualty insurance risks. In an effort to reduce the State's insurance premium costs, the legislature finds that it may be worthwhile to explore the possibility of having the State of Hawaii establish a captive insurance company to insure all or a portion of the State's property and casualty insurance risks. Before moving forward with such a proposal, the legislature finds that it would be prudent to initiate a feasibility study to establish the scope of the proposed captive insurance company relative to issues involving control, cost, and capacity.

The purpose of this Act is to require the auditor to conduct a study on the feasibility of having the State of Hawaii establish a captive insurance company to manage the State's property and casualty insurance risks.

SECTION 2. (a) The auditor shall conduct a study on the feasibility of having the State of Hawaii establish a captive insurance company to manage the State's property and casualty insurance risks. The auditor shall review and use the insurance division's Findings and Recommendations on a Potential Captive Insurance Company for State Risks, 2001, report as a baseline from which to conduct its feasibility study.

(b) When conducting the feasibility study, the auditor shall examine the following:

(1) The general purpose and main objectives of the proposed captive insurance company;

(2) The initial capital of the proposed captive insurance company and how the proposed captive insurance company will be funded;

(3) If the proposed captive insurance company will be a reinsurer, the assumed net limits and retentions and how much of the underlying liability will be ceded to reinsurers;

(4) The assumptions underlying the determination of the premium rates and projected premium growth, including the basis for determining rates and projected premium growth;

(5) Expense assumptions regarding potential change relative to economic conditions, growth, and economies of scale;

(6) Estimated gross premium income, net premium income after reinsurance ceded, expenses, and taxes for the first five years of operation;

(7) The expected leverage ratio of the proposed captive insurance company;

(8) Net premium and capital ratios;

(9) Whether the proposed captive insurance company meets preliminary tests for regulatory compliance related to minimum capital and mandatory provisions under section 431:6-201, Hawaii Revised Statutes;

(10) Assumptions with regard to:

(A) Economic and inflation adjustments;

(B) Expected number of claims;

(D) Unallocated loss expense ratio;

(E) Policy regarding discounting and reserves; and

(F) Method by which incurred but not reported losses are treated;

(11) The proposed captive insurance company's investment philosophy and cash flow position, including cash flow exhibits, interest rate assumptions, and portfolio assumptions;

(12) Pro forma balance sheet, including:

(A) Assets (including cash, investments, real property, and other assets);

(B) Liabilities (including loss reserves, other liabilities, and paid capital);

(D) Tax impacts;

(E) Underwriting profit and loss;

(F) Dividends, whether paid or declared; and

(G) Capital and surplus;

(13) An objective comparison among options, presented in a format that includes the respective benefits and shortcomings of each, and that the experts selected to explore feasibility include in their reports, comprehensive findings, conclusions, recommendations, and plans for implementation; and

(14) Any other consideration deemed necessary by the auditor.

(c) In conducting the feasibility study, the auditor shall consult with the comptroller, director of finance, insurance commissioner, and individuals possessing expertise in the formation, management, and examination of captive insurance companies, and possessing knowledge and experience in forming and developing captive insurance programs.

(d) The auditor shall submit the feasibility study, including its findings and recommendations, to the legislature no later than twenty days prior to the convening of the regular session of 2016.

SECTION 3. There is appropriated out of the general revenues of the State of Hawaii the sum of $ or so much thereof as may be necessary for fiscal year 2015-2016 for the auditor to conduct a study on the feasibility of having the State of Hawaii establish a captive insurance company to manage the State's property and casualty insurance risks.

The sum appropriated shall be expended by the auditor for the purposes of this Act.

SECTION 4. This Act shall take effect on July 1, 2015.

HOUSE OF REPRESENTATIVES	H.B. NO.	281
TWENTY-EIGHTH LEGISLATURE, 2015		H.D. 1
STATE OF HAWAII