The two largest U.S. captive insurance trade groups announced they are banding together in a coalition to combat a proposed Internal Revenue regulation they say would increase their tax burden.

Captive Insurance Companies Association (CICA) and the Vermont Captive Insurance Association (VCIA) said they have formed the Coalition for Fairness to Captive Insurers (CFCI), to develop a coordinated response to an IRS rule that would “significantly alter the landscape for captive insurers should it become final.”

The organizations said in a statement that achieving the withdrawal of the proposal by the IRS is “critical to their missions of promoting the strength of the captive insurance industry and the members that they serve.”

The IRS proposal, that caught the captive industry by surprise, would reverse a longstanding tax benefit for captive insurers and put them on the same footing as self-insureds.

With no prior hint of its plans, the IRS published its proposals in the Federal Register on Sept. 28. Its notice said that, since issuing the regulations that are currently in place, the agency determined it would “no longer invoke the 'economic family theory' in addressing whether captive insurance transactions constituted insurance for federal income tax purposes.” (NU Online News Services, Oct. 8.)

VCIA and CICA officials said they have hired the firms of McDermott Will & Emery LLP, Dewey & LeBoeuf LLP, and McIntyre Law Firm, PLLC to develop a coordinated response to the proposed regulation.

According to AM Best, more than 50 percent of the commercial insurance market in the U.S. is in the alternative market. Captive insurance accounts for at least 15 percent of that amount. The use of captive insurance by corporations and associations has grown exponentially during the last 30 years in the U.S.

The associations said that the use of captives has reduced overall commercial insurance costs through making the global reinsurance market directly accessible. The result has been stabilization of overall insurance costs making the alternative market a vital risk management tool.

Confidence in the U.S. regulatory environment at the State and Federal levels, the associations said, has encouraged the formation of new captive insurance companies and has resulted in the redomestication of several captives from foreign locations.

The U.S. captive insurance marketplace comprises 1,200 companies in 26 states throughout the country. Implementation of the proposed regulation would change this environment dramatically, they said.

According to CICA President Dennis Harwick, “Captive insurance companies pay taxes just like commercial insurance companies, but this proposed regulation would suddenly penalize legitimate, fully regulated captive insurance companies.”

Molly Lambert, president of VCIA added, “A change in the IRS rules of this magnitude creates uncertainty in the federal regulatory environment. Businesses may continue to use the captive insurance tool, but the U.S. industry would be significantly affected if this proposed regulation were implemented.”

The Coalition said its effort will begin immediately and those interested in supporting its efforts can contact Molly Lambert of the VCIA or Dennis Harwick of CICA.

Special Reports /

CFCI Formed To Fight IRS Captive Proposal

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