The Captive Insurance Companies Association (CICA) has told the Internal Revenue Service (IRS) it believes that using a 65% loss ratio threshold as the measuring stick for whether a micro-captive transaction is abusive is the “wrong instrument”.
Captive Intelligence reported in April that the IRS had proposed new regulations for “micro captives”, which have divided opinion across America’s captive landscape and prompted a flurry of responses to the Service.
“The underlying premise appears to be that a small captive insurance company that writes property and casualty insurance must look something like an “average” non-captive insurance company,” Dan Towle, preside of CICA said in a letter to the IRS.
“The reality is that every commercial insurance company has its own risk profile, loss ratios, expenses, and profit and contingencies levels; and none of them are “average.’”
The Association said that the inherent problem is that losses are evidence of risk, “but lack of losses is not evidence of lack of risk.”
“If my house burns down, but my neighbour’s house does not, I have substantial losses, but my risk was no different than my neighbour’s.”
CICA said that it is imperative the IRS does not label transactions as “listed transactions” that are properly characterised as “transactions of interest”, and that the IRS does not label transactions as “transactions of interest” when they do not have the potential for tax avoidance.
“The proposed regulations do not accomplish this task,” Towle said.
CICA added the proposed regulations and their suggested tests for identifying abusive transactions will not succeed in identifying abusive versus non-abusive transactions.
The Association said the proposed regulations will not work because of a lack of a precise definition for “insurance” in a tax or insurance context, and the loss ratio is an improper test to identify a “listed transaction”.
The National Council of Insurance Legislators (NCOIL) has also submitted a comment letter to the IRS urging it to retract its proposed rule.
NCOIL said that the IRS proposals are a significant threat to the longstanding framework of the state regulation of insurance and violates the McCarran-Ferguson Doctrine.
NCOIL CEO, Commissioner Tom Considine, said: “We at NCOIL urge the IRS to retract the proposed rule and return to the drawing board to address its stated concerns in a way that is narrow, tailored, non-retroactive, and most importantly does not violate the McCarran-Ferguson Doctrine by infringing on the Congressionally-delegated rights of the States to regulate the business of insurance.”
Earlier this week, the 831(b) Institute launched in the US and asked for clarity from the IRS on how it regulates micro-captives, arguing that it “unfairly” scrutinises them.
Oklahoma’s Insurance Commissioner Glen Mulready recently called on the IRS to withdraw its Notice of Proposed Rulemaking (NPR) concerning micro captives and form a joint task force consisting of the IRS, regulators and representatives of the captive insurance industry.