11 March 2019Law & regulation

Captive insurance industry continues to be misunderstood: CICA president

Against a backdrop of increased scrutiny, high-profile tax court cases, and regulatory overreach by home state regulators, the captive industry continues to be misunderstood, according to Dan Towle, president of the Captive Insurance Companies Association (CICA).

Speaking to Captive International ahead of the annual CICA conference, Towle explained that the association has expanded its advocacy activities to champion the valuable role of captive insurance in today’s marketplace where captives continue to face threats from being misunderstood.

One such example brought to light by Washington State issuing a cease and desist letter to Microsoft’s captive, Cypress Insurance Company, many captives may find themselves subject to unexpected premium tax liabilities in states outside their domicile.

“In the US, the concern of regulatory overreach by home state regulators on captives domiciled in other jurisdictions is of very high concern. This is potentially the biggest threat the US industry may have in 2019,” said Towle.

More misunderstanding arises from the US captives that make the 831(b) election, which have come under increased scrutiny from the Internal Revenue Service (IRS) after being labelled a 'transaction of interest' in Notice 2016-66 in November 2016.

“Continued IRS scrutiny surrounding small captives has led to a slowdown in the growth of the small captive space,” Towle added. “CICA has always advocated for forming and operating captives for the right reasons, and we are known for our published statement “Do 831(b)s Right or Don’t Do Them at All.” This mantra applies to captives of all sizes, and if some captives are not doing them right, increased scrutiny of these captives might be good for our industry.

Subsequent US Tax Court cases Avrahami v Commissioner and the more recent Reserve Mechanical v Commissioner have added to this scrutiny.

“High-profile cases such as Reserve Mechanical v. Commissioner paint activities like risk pooling with a negative brush that spills onto the commercial and captive insurance industries,” said Towle. “We feel it’s important for a domicile-neutral organisation like CICA to help explain the commonly accepted practices for creating and operating a risk pool.”

Earlier in the year, CICA published a guidance document, 'Commercial Insurance and Captive Insurance Industry: Commonly Accepted Practices', providing a review of the structure and use of risk pools, addresses some of the common misperceptions, and provides guidance on commonly accepted insurance practices.

Towle added: “A clear majority of captives are formed and operated for risk management reasons. However, if some are formed for the wrong reasons, this hurts the entire industry and does not align with the values CICA has put forth.”