29 June 2023Analysis

NCOIL objects to proposed IRS microcaptive regulation

The National Council of Insurance Legislators (NCOIL) has submitted a comment letter to the Internal Revenue Service (IRS) urging it to retract a proposed rule which poses a significant threat to the longstanding framework of the state regulation of insurance and violates the McCarran-Ferguson Doctrine.

“The Proposed Rule undermines the well-established and continually reaffirmed framework of the state-based system of insurance regulation,” said Arkansas Representative Deborah Ferguson,
DDS, NCOIL president. “This system has created the strongest, safest, and most successful insurance market in the world, and it is imperative that state insurance legislators and regulators
work together to prevent federal encroachment that has no basis in law.”

NCOIL said that if promulgated, the rule would abrogate the States’ authority in a number of ways related to the captive insurance area. Many businesses across America have established captive insurance companies to mitigate against a wide range of extremely relevant risks. A significant subset of these are on the smaller to medium size of the range and are able to make a small insurance company election, known as an 831(b) tax election.

The IRS has apparently expressed concerns regarding certain companies’ utilization of Section 831(b), something that NCOIL takes no position on other than to condemn fraud in all instances.
However, in its attempt to address its concerns, the IRS goes too far and seeks to insert itself into captive insurance companies’ loss ratios, an insurance business aspect which constitutes the very
heart and core of “the business of insurance” which, pursuant to the McCarran Ferguson Act, shall be “regulated by the States.”

NCOIL chief executive, commissioner Tom Considine said, “We at NCOIL urge the IRS to retract the Proposed Rule and return to the drawing board to address its stated concerns in a way that is narrow, tailored, non-retroactive, and most importantly does not violate the McCarran-Ferguson Doctrine by infringing on the Congressionally-delegated rights of the States to regulate the
business of insurance.”

A public hearing on this matter will be held on July 19th.