President Trump

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I think most of us were surprised that Donald Trump won the election last week based on all the polling data that was out there. Just goes to show you that even in the risk management world with all its data, analytics, actuaries and experts, there was no figuring out this election!

That being said, just what might a Trump presidency mean for captives? Well, quite honestly, I would be surprised if captive insurance makes any list the transition team may be preparing right now; however, there may be some areas that could impact captives:

1. Dodd-Frank. Trump has said all along he wants to repeal the regulations set out in Dodd-Frank, but I think that is easier said than done. There are numerous interest groups on all sides who have a stake in the Act, and it will be slow going to push through reform even though the Republicans control Congress. That being said, House Financial Services Chair Jeb Hensarling outlined a bill earlier this year that would change some key provisions of the Act, without repealing the whole thing – provisions that might have a chance to pass. The Nonadmitted & Reinsurance Reform Act (NRRA) that was attached to Dodd-Frank when it was passed, is not in anyone’s crosshairs as far as I can tell, but VCIA’s work to seek clarification of the NRRA might move more quickly.

2. 831(b)s. It is no secret that Republicans have no love-lost for the IRS. Perhaps we will see a change in attitude regarding micro-captives (and all captives) once a new commissioner is confirmed.

3. FHLBs. Similarly, with a change in leadership at the Federal Housing Finance Agency (FHFA), perhaps we will see an acquiescence allowing captives to be able to “rejoin” the Federal Home Loan Bank program.

4. FIO. With a new Secretary of the Treasury, there will be wholesale changes throughout Treasury. The Federal Insurance Office within Treasury will most likely take more of a backseat to the NAIC on insurance issues, and probably let go of any concerns with the captive insurance industry it may be harboring. We may even see less cooperation between the US and Europe (and the rest of the OECD) on insurance regulation harmonization.

Now there are a whole slew of issues that President-elect Trump can and will affect in his tenure that can impact captives, from taxes to the economy to foreign policy, outside some of the more direct issues outlined above. Time for all you analytic gurus to get to work!

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

Rich Smith
VCIA President

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