13 May 2014USA analysis

831(b) captives forming bulk of global growth

Captive insurance growth in the United States is heavily concentrated among small to medium sized private companies taking the fashionable 831(b) election.

This is the current situation according to Les Boughner, managing director at Willis North America, who tells Captive International that US parented companies of all industry groups are choosing to go down this route, and are becoming an increasingly important part of the marketplace.

The net growth of captives worldwide in 2013 was 470, almost 90 percent of which were located in US domiciles or offshore locations catering to US parentcompanies.

320 of these new captives took the 831(b) election, highlighting their popularity in the current market. Yet, Boughner says there may be a reputational risk associated with this type of captive, and would advise to "only get involved with those with very sustainable business plans.”

Boughner also warns that there are firms that promote 831(b)’s utilisation of a pooling structure, which he suggests should be avoided. “Right now we’re uncomfortable promoting the concept of inter-company pooling in order to get risk distribution.”

Mike Mead, president of M.R. Mead & Co, supports Boughner’s argument and tells Captive International that while those companies qualifying for the 831(b) tax exemption are very hot at the moment, there are a lot of mistakes being made. “The IRS is all over them even though they’re totally legitimate.” says Mead.

Mead says that despite complex legal structures and potential organizational issues, small captives opting for tax advantages are a huge driver in the captive business today.

Nonetheless, incorrect promotion of 831(b)’s by small manufacturers, real estate companies and private health care groups may prove to be a thorn in the side of small farm bureau insurance companies for which the exemption is tailored for.

Mead believes that this exemption will not be going away anytime soon because of this, and argues that a massive reason for its popularity is regulatory reform. “There are a lot of people who do not want to be subjected to PPACA Obamacare- who see that they can become self insured for their employee benefits, putting their excess losses in a captive and therefore avoiding a lot of taxes and regulatory burden.” says Mead.