Why is this Topic Important to Wealth Managers? This blogticle discusses captive insurance companies and how the number of captives worldwide continues to grow. Also discusses the proposed Federal Regulations which would greatly expand flexibility in the captive market. Now is a good time to explore captive options for those wealth managers who are working with clients who may not have yet considered how to more efficiently self-insure risk.

Business Insurance‘s 2011 captive insurance report estimates the ongoing operation of over 5,617 captive insurance companies worldwide by the end of 2010. In addition, new captive domiciles include, Denmark, Finland, Norway and Sweden. [1]

Vermont leads the U.S. captive market with over 570 captives and Utah places second on the list with over 188 captives.

The number of captive insurance companies is growing. The growth can partly be attributed to the captive cell company laws that are enacted in many foreign jurisdictions.

In fact in 2010, the Internal Revenue Service (IRS), Department of the Treasury of the United States issued a notice of proposed rulemaking regarding, in part, the classification for U.S. Federal tax purposes of a foreign series or cell that conducts an insurance business. [2] The proposed regulations provide that, whether or not a foreign series or cell that conducts an insurance business is a juridical person for local law purposes, for U.S. Federal tax purposes it is treated as an entity formed under local law. The proposed regulations would affect foreign series or cells that conduct insurance businesses and their owners.

By issuing the prosed guidance in 2010 the United States Treasury attempts to remedy the situation that under current U.S.  law that there is little specific statutory guidance regarding whether for U.S. Federal tax purposes a captive cell is treated as an entity separate from other cells or the cell company, as the case may be, or whether the company and all of its series (or cells) should be treated as a single entity.

The rule provided in the proposed regulations is designed to provide greater certainty to both U.S. taxpayers and the IRS regarding the tax status foreign captive cells that conduct insurance businesses. In effect, taxpayers that establish cells are placed in the same position as persons that file necessary documentation for a separate legal entity. The IRS and the Treasury Department believe that a rule generally treating foreign insurance cells as separate legal entities would be consistent with taxpayers’ current ability to create similar structures using multiple legal entities that can elect their Federal tax classification pursuant to Federal Regulations.

The cell captive insurance models provide for some of the very same benefits as ownership of a traditional captive insurance company, which include, but may not be limited to:

• Individualized underwriting and premium allocations
• retained underwriting profits depending on claims experience
• access to insurance products currently unavailable or too costly to insure

These models can also offer a lower price point for businesses who may be considering using alternative risk transfer products for the first time.

Some considerations wealth managers should account for include, but are not limited to:

• upfront and annual cost to insureds
• jurisdiction and regulatory oversight of the cell captive insurance company

For further discussion on captive cells see: AdvisorFY:I LLC Series and Cell Companies.

Tomorrow’s blogticles will discuss topics relating to insurance and financial planning.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

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[1] Business Insurance. Business Insurance ranks captive domiciles worldwide. http://www.businessinsurance.com/article/20110314/NEWS/110319954. Posted March 14, 2011. Last Accessed March 16, 2011.

[2] See 75 Federal Register55699-01. “Series LLCs and Cell Companies”. Tuesday, September 14, 2010.

Tags: Business, captive insurance, insurance, Internal Revenue Service, Legal personality, Limited Liability Company, Tax rates around the world, United States

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