Laws: The Insurance Act of 2006
In 2006, the Fourteenth (14th) Congress of Federated States of Micronesia during its fourth (4th) regular session passed Congressional Bill 14-170. Congressional Bill 14-170 was signed into Public Law 14-66 on June 20, 2006 by President Joseph Urusemal. Public Law 14-66 enacts Title 37 of the Code of the Federated States of Micronesia to establish the “The Insurance Act of 2006” (Act) for the country.
The Act, as amended by Public Laws 14-87, 14-88, 15-34, 16-17, and 16-38 serves as the enabling legislation for the FSM Insurance Board (Board), as well as the legal and regulatory framework for which the Board conducts and undertakes its regulatory and supervisory functions and activities.
“Insurance Business” is defined under Subsection 12 of Section 102 of the Act to mean soliciting, effecting or carrying out contracts of insurance, including reinsurance, and the following transactions:
- Making or negotiating an insurance policy,
- Making or negotiating a guaranty or surety contract not merely incidental to another legitimate business or activity,
- Taking, forwarding or receiving an insurance application,
- Disseminating information concerning coverage and rates,
- Receiving or collecting any consideration for insurance,
- Issuing or delivering an insurance policy to a resident of, or a person authorized to do business in the FSM,
- Directly or indirectly acting as an agent, broker or solicitor, or any other form of representative of an insurer,
- Setting rates,
- Inspecting a risk,
- Investigating or adjusting a claim or loss,
- Doing or proposing to do any activity that is in substance equivalent to conduct described in this provision.
Chapter 3 of the Act stipulates the general requirements for licensing of domestic insurers and intermediaries, registration of foreign insurers, licensing of captive insurance companies, reporting requirements, disclosure of information, among other requirements. Only domestic insurance company, agent, broker and solicitor are qualified for license. A company is a body corporate formed under the laws of and having its head office in the FSM.
Section 301 of the Act stipulates that “No insurance business shall be carried on in the Federated States of Micronesia except pursuant to the provisions of this Act.” In other words, in order for a person to engage or transact insurance business in the FSM, the person must first be licensed or registered. Licensing of a person applies to domestic insurer and intermediary, while registration applies to only foreign insurers that want to be registered with the Board in order to engage in the business of insurance through a domestic licensed agent. A foreign insurer is an insurer incorporated and/or registered in a jurisdiction other than the Federated States of Micronesia.
Subsection 5 of Section 301 stipulates that “A foreign insurer who receives two million dollars or more in income from premiums collected in the Federated States of Micronesia in each fiscal year for three consecutive fiscal years shall be required to become licensed as an insurer.” Note further that Subsection 6 of Section 301 requires that “A foreign insurer who does not make the premium collections described in [Subsection 5] shall be permitted to do business through a person licensed as an agent if the foreign insurer is registered, unless such foreign insurer chooses to be licensed as an insurer instead.” It is also important to note the statutory language in Subsection 7 of Section 301 which states that a licensed agent may conduct business on behalf of more than one insurer, provided the agent applies for a separate license for each insurer it represents.
Section 302 enumerates the general requirements for licensing of domestic insurer, agent, broker and solicitor, while Section 307 provides for general registration requirements for foreign insurers.
Domestic Insurer: A domestic insurer is an insurance company incorporated and having its head office in the Federated States of Micronesia. Only domestic insurer, agent, broker and solicitor are qualified for license. They must first be licensed prior to engaging in the business of insurance pursuant to Section 301 of the Act. An insurer must be a company incorporated under the laws of the country, while an agent, broker or solicitor could be a legal person as a sole proprietorship, partnership or corporation. The minimum capital requirement for an insurer is USD $100,000.
For incorporation of business (i.e. an insurer), refer to Title 36 of FSMC or contact the FSM Department of Justice, Registrar of Corporations.
Foreign Insurer: A foreign insurer, on the other hand, if not meeting the premium threshold requirement stipulated in Subsection 5 of Section 301, may opt for registration in order to engage in insurance business in the FSM through a licensed agent, unless the foreign insurer wishes to become a domestic insurer, instead. Registration requirements for foreign insurers are spelled out in Section 307 of 37 FSMC, including but not limited to the appointment of a licensed agent in the FSM by the foreign insurer, posting of a bond or deposit into an escrow account of USD $100,000, standing and clearance from the foreign insurer’s home regulatory authority, designation of a person for service of process, among a few other requirements. A foreign insurer applying for marine, aviation and transportation (MAT) is exempt from posting the bond or establishment of the escrow account of USD$100,000. A registered foreign insurer is deemed and held to be doing business in the Federated States of Micronesia. You may refer to the registration application form which spells out additional requirements for registration, or contact us if you wish to learn more about registration.
Captive Insurance: The Act, as amended by Public Law 14-88, Public Law 15-34 and Public Law 16-17, establishes the legal framework for licensing of captive insurance companies and captive insurance managers. Like any other businesses, a captive insurance company or captive manager must obtain its legal nexus or presence in the country prior to conducting captive business or captive management services, respectively.
Currently, three types or Classes of captives are allowed:
- Class 1 or pure captive – allows the captive to insure the risks of its parent and affiliated companies or associations.
- Class 2 - allows the captive to insure the risks of its parent and affiliated companies or associations and/or related third-party businesses.
- Class 3 or Multiple Corporate Captive (MCC) – one or more corporations organized, or with the intent to organize, as a group of corporate captive insurance companies under the laws of the Federated States of Micronesia. MCC requires (1) each member captive is formed and owned by a different parent company for the purpose of insuring risks of its parent company or related third party businesses respectively, (2) each member captive that make up the MCC is deemed an individual captive insurance company for purpose of the law of the FSM, (3) the core MCC must be licensed first before any of its member captives, and (4) all member captive insurance companies are together deemed to constitute a group under the laws of the Federated States of Micronesia, subject to the following conditions:
- The core MCC member captive insurance shall hold at least 5% shares in each member captive,
- Each MCC member captive shall permit one or more directors from the core member captive on its board of directors,
- The core MCC captive must maintain a minimum paid in capital and surplus of at least USD $1,000,000, and
- Each MCC member captive must maintain a minimum paid in capital and surplus of at least USD $100,000
Note: The Act also allows for other classes of captives by way of an amendment to the title. If you are interested in other classes, give us a call or send us an email.
Redomestication Allowed: Generally, any foreign captive may become a domestic captive in the FSM.
- The redomesticating applicant must comply with the registration and licensing requirements.
- The redomesticating applicant must amend or restate its constitutional or organization documents in compliance with the FSM laws.
- The redomesticating applicant must file a Certificate of Good Standing with the Board not earlier than forty-five (45) days prior to the filing of the Articles of Redomestication, constitutional or organizational or restated Articles of Incorporation.
- The redomesticating applicant must also file its certified constitutional or organization documents from its home jurisdiction.
- The redomesticating applicant must petition the Board to issue a Certificate setting forth the Board’s finding that the redomestication and maintenance of the captive insurance company shall promote the general good of the Federated States of Micronesia.
- If findings pursuant to the petition are satisfactory, the Board or Commissioner will advise the Department of Justice, Registrar of Corporations to consider incorporation of the redomesticating applicant.
The redomestication process is quite easy and starts with the Insurance Board. It is nevertheless slightly different than incorporation of a new captive insurance company. Feel free to contact us directly for guidance or assistance or have your proposed captive manager or any of the licensed captive managers in the FSM assists you. The standard application form for licensing a new captive is also used for Redomestication.
Loss Portfolio Transfer (LPT) / Buyout Allowed:The LPT/Buyout is an option that may provide a creative risk management solution for any prospective licensee, especially where redomestication may be difficult or too costly. The LPT/Buyout option is applicable for all Classes and is carefully reviewed prior to approval.
Engagement of Independent Reviewer: A service of an independent reviewer may be retained by the Commissioner for an objective or independent assessment review or opinion on an application, the reasonable cost of which shall be paid by the applicant. The Board may also engage an independent examination team or expert in the examination process, the reasonable cost of which shall be paid by the applicant or licensee.
Application Fee: Application fee is USD $500 and must be paid at the time when the application is filed. The payment should be endorsed to: FSM Insurance Board, National Government, Federated States of Micronesia in the form of a check or wire-transfer. Wire-transfer details could be provided. An application will not be processed until and unless the fee is paid in full.
License Fee: License fee is USD $500 payable to the FSM Insurance Board, National Government, Federated States of Micronesia in the form of a check or wire-transfer, whichever is most convenient for the license-holder. The license fee must be paid (for new or renew license) prior to the issuance of the License or Certificate of Authority. A license is valid until March 31 each year, during which time it must be renewed.
Initial Minimum Capital: Initial minimum capital for Class 1, Class 2 and MCC Core Member is USD $1,000,000. For an MCC baby member, it’s USD $100,000. Capital can be in the form of cash, Letter of Credit, investments pursuant to Section 1013, or any other security deemed appropriate by the Commissioner. An applicant is encouraged to capitalize its captive as early as possible after incorporation. Issuance of license is also contingent upon presentation of authentic document from a bank that the applicant has in fact met the minimum capitalization requirement.
General Information on Tax: Tax rate is set at 21% on net income [Section 321 of Title 54 of FSMC]. Tax on gross premiums may be applicable pursuant to provisions under Section 1015 of Title 37 of FSM Code.
Appointment of Principal Representative: Captive insurance applicants are required to appoint their principal representative in the FSM. The captive’s principal representative could be an individual or corporation registered and in good standing with the Federated States of Micronesia, operating in or from within the Federated States of Micronesia who, not being a bona fide employee of the captive insurance company, maintains for the captive insurance company full, proper and true records in English of the business activities of the captive insurance company.