The Oklahoma Insurance Department (OID) has submitted comment in reference to regulations proposed by the U.S. Treasury Department and the Internal Revenue Service (IRS).
The comment, published in respect to disclosure and reporting obligations for ‘micro captives’, has been submitted on behalf of Oklahoma insurance commissioner, Glen Mulready.
The IRS’ Proposed Rule 109309–22 seeks to over-regulate certain 831(b)-electing captives by creating loss ratio requirements of 65 per cent, loan back limitations and 10-year retroactive provisions.
The proposed regulation could severely limit access to captive insurance programmes for small- and medium-sized businesses in the US if passed.
The ruling would designate some captive arrangements as ‘listed transactions’ within the remit of US tax laws, and others as ‘transactions of interest’. Two tests were proposed for these categories, a ‘loss ratio’ test and a ‘financing’ or loan-back test.
The OID has opposed the proposed rule changes because captive insurance transactions, which insure low frequency but high severity risks, will be “needlessly designated listed transactions or transactions of interest”.
Low frequency risks, such as terrorism and pandemic cover, will “very likely” fail the 65 per cent loss ratio test applied to the captive insurer’s most recent nine taxable years, the OID adds.
Mulready says: “Captive insurers that insure such risks for legitimate risk management reasons, should not be burdened with the administrative and legal expenses associated with being in the category of tax evasion or avoidance by failing the loss ratio test.
“The OID opposes the financial factor with a related party that does not produce taxable income for the receiver of the funds within the last five tax years and the 65 per cent loss ratio.
“Both conflict with the Oklahoma Captive Insurance Company Act in the Oklahoma Insurance Code because the IRS is engaging in the business of insurance by regulating the business of insurance. The McCarran-Ferguson Act preempts the IRS from doing so.”
The McCarran–Ferguson Act, passed in 1945, is a US federal law that exempts the business of insurance from most federal regulation, including federal antitrust laws (to a limited extent).
Mulready proposes that the IRS withdraw its proposed rule and engage with state captive insurance regulators and the wider industry to find agreeable solutions to the IRS’ reasons for issuing the new proposed rule.
