30 April 2014Accounting & tax analysis

Marsh: majority of US-owned captives not generating tax benefits

Marsh’s annual captive benchmarking report, released at the 2014 RIMS Conference, finds that only one-third of US captive owners treat their captives as insurance companies for US federal income tax purposes.

The finding suggests that captives are being used more as a tool to generate operational and risk management value rather than for their tax efficiencies.

The report,  The Evolution of Captives: 50 Years Later, is based on the activities of 1,148 captives under Marsh’s management, including risk retention groups, non-traditional captives, and life insurance company captives.

It found that of the 664 captives benchmarked with a US parent, only 37 percent are deducting captive premiums on US federal income taxes, a far smaller figure than anticipated.

Among the captives that are being treated as insurance companies for tax purposes, the number of new small captives – or so-called 831(b) captives – is trending upwards.

These captives, typically created by midsize companies writing less than $1.2 million in premium, represent the most common new captive formations in the US over the last five years and have led to the significant growth of domiciles like Utah, Kentucky, Montana, and Delaware.

According to the report, a 68 percent majority of small captives are opting for the brother/sister approach — where a captive owner is a holding company with several subsidiaries — in order to qualify as insurance companies for tax purposes.

The report also found that 22 percent are taking a hybrid approach (brother/sister and third party writings), and only 10 percent are pursuing a third party risk approach. With the growing popularity of smaller pooling facilities, which is an approach to securing third-party risk, Marsh expects the pooling approach to grow significantly in the future.

“Marsh has always advocated that captives be viewed as a tool to help companies better deal with fluctuating market conditions, unstable regulatory environments, and global economic shifts, rather than just view them as a tax benefit,” says Julie Boucher, Marsh’s Americas captive leader. “We counsel our clients to explore innovative ways of using captives to manage risk.”