IRS and 831(b)s… Here we go again!

rich-groundhogThis past Tuesday, the Internal Revenue Service called for more information on microcaptives, as it seeks to determine whether the companies are used as tax shelters.  This has become a never-ending story in some respects. Even with the recent Congressional action to curtail the abuse of some captive insurance companies using the tax election, 831(b) captive insurers have, for the second year in a row, ended up on the IRS annual Dirty Dozen list of “tax scams” this year.

Through the end of this year, parents of 831(b) captives can make up to $1.2 million in tax-deductible premium contributions to the captives each year, and such captives’ underwriting income is exempt from federal taxes.  Legislation passed last year, raises, effective in 2017, the maximum tax-deductible annual premium contribution to $2.2 million but imposes new limits on how much in 831(b) written premiums can come from any one policyholder.

In its latest notice on 831(b) captives the IRS states 831(b) transactions have “a potential for tax avoidance or evasion” and that it lacks “sufficient information to identify which 831(b) arrangements should be identified specifically as a tax avoidance transaction…”  It goes on to describe various types of transactions involving 831(b) captives that it is looking into and asks for comments to be submitted by January 30, 2017 on “how the transaction might be addressed in published guidance.”

I agree with our good friends Chaz Lavelle at Bingham Greenebaum Doll and Mike Serricchio with Marsh Captive Solutions that the notice seems to suggest that the IRS isn’t condemning all captives that take the 831(b) election as fraudulent.  As we see the growth of captives for small-to mid-sized enterprises, it behooves us all to support better regulation of captives at all levels, and especially microcaptives. To me, the 831(b) concern points to state regulators who haven’t done enough to police this activity. Perhaps all this attention will help to correct that. And it is another example where we often see a backlash, either in the press or in public policy, that have consequences potentially harming our industry as a whole.

Thank you all very much, and I look forward to hearing from you.

Rich Smith,
VCIA President

The Numbers Are In!

powerball hostCongratulations to the State of Vermont on licensing 33 new captives in the State in 2015!  The list is made up of 12 pure captives, 7 Risk Retention Groups (RRGs), 7 sponsored captives, 4 special purpose financial insurers, 2 industrial insured captives, and 1 association captive.  Growth in 2015 was up significantly from 2014 when 16 companies were licensed.  This growth is impressive especially when considering the prolonged soft market and added competition by other U.S. states.

What I thought was really impressive was that there were 11 ‘redomestications’, which is when an existing captive moves from another captive domicile to Vermont.  That is the largest number ever to occur in a single year in Vermont. The redomestications came from the following jurisdictions: South Carolina (3), Arizona (3), Bermuda (2), Cayman Islands, Nevada, and Kentucky.  This has more to do with Vermont providing a firm, fair, efficient and consistent regulatory environment than anything else.

Seven new RRGs were licensed in Vermont, bringing the active total to 89.  Vermont continues to hold a dominant market share with over 60% of all RRGs premium volume being written by Vermont companies.  Six of the 11 redomestications to Vermont were by Risk Retention Groups.  New captives were licensed in insurance, healthcare, construction, real estate, professional services, education, transportation, agriculture, retail, and other.

Besides the newly licensed captives in healthcare, notable captives in the class of 2015 include PricewaterhouseCoopers LLP; Syracuse University; Cummins, Inc.; Marubeni Corporation; Willis Management (Vermont), Ltd.; National Life Insurance Company; Wilbur-Ellis Company; Zurich Insurance Group; and 17 Universities/Colleges.

2015’s new licensees bring Vermont’s overall total licenses to 1062 with 588 active captive insurance companies. Compared to Cayman (22), Bermuda (22), South Carolina (21), Vermont’s 33 is proof there is no place like it for captives. One day we will rule the world (did I say that out loud?)…

Thank you all very much, and I look forward to hearing from you.

Rich Smith
VCIA President

Captives: America’s Pastime

A friend of mine gave me tickets to the Red Sox – Yankees game down in Fenway Park last week. Now normally those tickets would be next to impossible to get, but since the Sox were scraping the bottom of the standings there wasn’t quite the same hype for The Game as in years past. That being said, anytime you can get to Major League baseball’s holiest shrine is always fun – and the weather was great, hotdogs tasty and beer cold. What a night!

But as I was sipping my $8.00 can of beer, I couldn’t help reflect that MLB has a captive in Vermont (which delighted my 15 year-old to no end – yawn) and then slipped into what Dave Provost, Vermont’s Deputy Commissioner in charge of captives, does when he is travelling around the country: identifying all the companies and organizations you bump into that have captives in Vermont. Brushed my teeth with Crest in the morning, zipped up my jeans with a YKK zipper, checked the weather on CBS, closed my Marvin windows, got into my Toyota, buckled my seat belt made by Takata (maybe should double check those…), filled up at a Mobil station, and sipped my Starbucks on the way there… and I hadn’t even arrived in Boston yet! Next year, we’re going to Disney World!

Hope you can join us for our upcoming VCIA webinar: The Sweet Spot! Finding the Right Retention Level for Your Captive, on September 16.  Our expert speakers, including Google’s director of business risk and insurance, will share their thoughts and experiences on what to consider when determining how much risk to retain within your captive.

By the way, for all you Yankee fans out there, even though Sox pitcher Porcello pitched a good game Boston lost 3 – 1. Thanks and keep in touch!

Ignore the man behind the curtain!

static1.squarespaceWhy does the marketplace for captives continue to grow, especially in mid-sized enterprises? A big reason, as pointed out by Steve Bauman of Zurich Global in North America, is the ability to access and utilize data on the costs of risks within enterprises is more readily available and transparent. In the “old days” companies and organizations paid their premiums to insurance carriers with the hope that the risks would be whisked away. Without full access to data and transparency on risk cost, you paid up and crossed your fingers.

As Steve points out, now the managers of enterprises of all types and sizes realize that the more control they have over their risks, the more control they have over the success of their business. No longer should it be a mystery on what risks cost and how to better manage them. Captive insurance is the ultimate internal control!

Thank you all very much, and I look forward to hearing from you soon!

~Rich