Clarity Needed in Dodd-Frank Reform for the Captive Insurance Industry

Clarity Needed in Dodd-Frank Reform for the Captive Insurance Industry

Clarity Needed in Dodd-Frank Reform for the Captive Insurance Industry

Last month in a letter to new members of the House Subcommittee on Insurance, the outgoing chairperson, former United States Congresswoman Judy Biggert (R-IL), wrote that the captive insurance industry should not fall under the auspices of the Dodd-Frank financial reform act that was passed in 2010. In her letter, Ms. Biggert stated that that several states have misinterpreted the Nonadmitted and Reinsurance Reform Act (NRRA), which is part of the Dodd-Frank Act, and have created confusion among captives about new tax requirements. The NRRA reforms the regulation of surplus lines insurance by limiting regulatory authority over surplus lines transactions to the home state of the insured and by setting federal standards for the collection of surplus lines premium taxes, insurer eligibility, and commercial purchaser exemptions.

“As a supporter of NRRA and an advocate for its inclusion and passage as part of Dodd-Frank, I can tell you unequivocally that the NRRA was never intended to include the captive insurance industry,” Biggert wrote. “[NRRA] was intended to create certainty in the tax treatment and regulation of the surplus lines and in the reinsurance industry. Despite this very specific purpose, a couple of states are misinterpreting the application of NRRAs definition of ‘non-admitted.'”

According to Biggert, the portion of the Dodd-Frank that covers the NRRA may require a technical amendment to provide more clarity to states on how it should be applied. Without the amendment that clarifies the NRRA, captives may face additional taxation under the law. As Biggert reinforced in her letter, “Captive insurance companies serve a vital role in the financial services industry and it is important that their industry not be negatively impacted by an incorrect interpretation of congressional record.”

Some companies are even delaying plans to place business in their existing captives, according to Richard Smith, president of the Vermont Captive Insurance Association (VCIA). In fact, the VCIA has formed the Coalition for Captive Insurance Clarity (CCIC) to push for increased clarification on how Dodd-Frank should affect captives. And Vermont Governor Peter Shumlin said the confusion could be damaging to the captive insurance industry. “The captive insurance industry expects and desires strong regulation. Companies need to have the choice of where they domicile based on regulatory strength, not based on tax ambiguity. Vermont has consistently proven itself as the ‘gold standard of domiciles.’ This fix is needed to ensure that companies continue to have a choice of where they domicile,” he said.

An Overview of Captives

Effectively an “in house” insurance provider formed primarily to insure its owner and affiliated companies, a captive insurance company is a risk management and financing vehicle that offers an alternative to conventional insurance. Captives are regulated entities within the domicile in which they operate, and have become an integral part of the global insurance market. Captives can operate as either insurance or reinsurance companies and as such issue insurance and reinsurance polices and bill and collect premium. Generally, they have no employees so all typical “insurance company” functions are outsourced to third parties.

The benefits of captives are manifold, including the ability to have customized insurance programs for the parent company, reducing risk management costs, greater control over processing and payment of claims, obtaining insurance for difficult risks, increased flexibility in hard or soft markets, potential tax advantages, among others.

Caitlin-Morgan provides captive solutions for companies and can help you determine the best avenue for your clients. Give us a call at 877.226.1027.