18 January 2016Actuarial & underwriting

Small insurers sees limit on premiums increase to $2.2m in US

As part of the national budget agreement signed into law last month, Congress has included expanded benefits and a definition change for allowable ownership of small insurance companies that qualify for the benefits of Internal Revenue Code 831(b).

This means that from January 1, 2017, the limit on premiums increases to $2.2 million, indexed for inflation, from its previous limit of $1.2 million.

However, it also means insurers qualifying for IRC 831(b) must either demonstrate they are sufficiently diversified so that no policy owner comprises more than 20 percent of net written premiums (or if greater, direct written premiums) for a tax year; or meet a complicated formula that requires a captive owner to essentially own about the same percentage of the captive as it does of the insured business.

Small insurers, including captives, seeking to achieve or maintain qualification have until December 31, 2016 to comply with these new rules.

“This second requirement is intended to address perceived estate planning strategies by placing restrictions on ownership inside trusts and business entities, as well as familial participation in captive insurance profits,” says Tom Stokes, managing principal and US consulting practice leader for JLT Towner Insurance Management (USA).

“Regardless of these changes, the Internal Revenue Service will continue to examine abusive practices of small insurance companies.

“As always, owners should take steps to ensure their captives continue to have a legitimate insurance purpose.”

JLT Towner said it will give more guidance on the changes in the coming weeks.