A recent ruling by a US district court in Texas flashed a yellow caution signal to certain segments of the captive insurance industry.
In one instance, some micro captives that may be organised specifically to meet the requirements of section 831(b) of the Internal Revenue Code, may need to recheck their captive’s priorities to ensure legitimate business purposes support their creation.
The court ruled that premiums paid into a captive insurance company and then used to purchase offshore business protection policies did not have legitimate business purpose, and instead were simply an estate planning strategy.
Captive manager, JLT Towner, feel that 831(b) captives—when structured and maintained properly—give smaller companies an opportunity to take advantage of insurance benefits large companies have long enjoyed.
The firm highlights that while the court ruling doesn’t change these advantages, nor does it specifically target micro captives. Though it is a sign that the Internal Revenue Service are looking into captives that are designed primarily for estate planning, and not insurance purposes.
The purpose of the statute is to promote the dedication of capital to insurance ventures, with the ultimate intent of having the insurer grow well past $1.2 million in premiums so that it eventually will be taxed in parity with other insurers.
Thomas Stokes, managing principal and US consulting practice leader of JLT Towner, said: “Small captives with a valid business purpose and a solid insurance programme shouldn’t have to worry too much about this ruling.”
“Owners of poorly assembled or pre-packaged 831(b)s, however, may want to reexamine the way their captives are set up.”
Stokes urges micro captives owners to revisit the underlying business rationale for establishing their captives. The key, he says, is to make sure the strategy and execution of these captives meet the established industry standards.
