20 December 2012Actuarial & underwriting

Dodd-Frank and the home state advantage

We spoke with USA Risk a time ago about the implications of the US’s Dodd-Frank Act for the captive sector in the US. Here we return to the subject with Andy Sargeant, chief operating officer at USA Risk, to discuss issues including captive clarity and the home state advantage.

Has Dodd-Frank continued to strengthen the home state advantage?

Dodd Frank has created some confusion over the applicability of self-procurement tax to captive insurance premiums. Although there is a belief by many in the industry that this does not apply to captive insurance, there is still uncertainty. Some captive owners will want to play it safe, and avoid the potential of this increased cost, so it does strengthen the home state advantage.

How has this affected formations and redomestications?

Although there is no sweeping movement away from the established domiciles, we have seen some redomestications within our client base, as well as a couple of new captives deciding to set up in their home state. There has clearly been some affect.

What can states do to strengthen their position within the outline of Dodd-Frank?

There is the Clarity for Captive Insurers Coalition (CCIC) for the Nonadmitted and Reinsurance Reform Act (NRRA) which is seeking clarification at a federal level that the NRRA was not intended to cover captive insurers. This is a positive step, however, the potential for taxing captive insurers now has a higher profile, which clearly isn’t good. I think those ‘home’ states which may benefit from the NRRA can strengthen their positions by emulating established domiciles through captive-friendly regulations (and regulators) and a strong supporting infrastructure of service providers.

What further clarification do you expect as regards the application of Dodd-Frank to the captive sector?

As noted above, I think we will get some clarification at a federal level. All the major domiciles and service providers want to see something definitive, if they can get it, so I think the captive lobby will continue to pursue this until there is some clarification.