This year will see small captives come under increasing pressure as calls for tax reform grow, according to Thomas Stokes, managing principal and US consulting practice leader for JLT Towner Insurance Management.
In 2016, the captive insurance industry will continue to see small captives attracting scrutiny, predicted Stokes. The Internal Revenue Service previously gave notice that it would audit a handful of managers of small captives organised under Internal Revenue Code 831(b).
The audit may come to a head in Arizona later this year, where a tax court case will look at a micro captive formed in St Kitts.
A new bill was also proposed in December that could increase the premium limit of the 831(b) election from $1.2 million to $2.2 million.
The amendment to a Senate-proposed change to HR 34, introduced in the House of Representatives, would increase the premium limit and mean that a greater number of small insurance companies, including micro captives, would only pay income tax on their investment income.
But the bill also seeks to prevent abuses of the 831(b) election, proposing that no more than 20 percent of net written premiums for a tax year would be attributable to any one policyholder.
If enacted, it would also eliminate the ability of small insurance companies to meet the tax tests for risk distribution through risk pooling arrangements.
Stokes commented: “Our guess is that the provisions will be watered down or removed from the bill, as was the case in prior years, the courts will be left to continue fashioning the boundaries of IRC 831(b) captives.”
Stokes also predicted that the captive insurance industry will see an increase in the use of captive insurance for less traditional risks, as well as interest rate hikes and escalating terrorism.
He believes that the upcoming US presidential election will put pressure on interest rates and could cause economic issues. He argued that regardless of the election results, captives will continue to thrive because of their ability to adapt to changing economic conditions.
Sudden or unexpected interest rate moves can negatively influence the economy, but according to Stokes, the dynamics of captives generally improve as interest rates rise. He suggested the impact on captives would be neutral to slightly positive if the rate increases are moderate.
Stokes expects the industry to see new types of risk emerging in 2016, including cyber breaches and cyber crime, which will need resolving solutions. He believes that captives will play a part in those solutions.
He concluded: “Captive owners can expect the industry to remain strong and continue to grow, providing business and industry with the ability to better manage risk in an increasingly complex and expensive world.”
