Obscene Captive Domicile Growth Report
We interrupt our regularly scheduled programming for this Obscene Captive Domicile Growth Report. Despite the IRS putting captive insurance companies (CICs) on its “dirty dozen” list for 2015 (CLICK HERE to read about captives and the “dirty dozen”), the captive industry continues to grow, largely fueled by up-and-coming domiciles in the United States. Here are just a few recent headlines:
- Fifty seven new captive insurance companies chose Tennessee as their domicile in 2015
- North Carolina adds 42 new captives in 2015
- Vermont licensed 33 new captive insurers in 2015
- Oklahoma licenses 26 captive insurers in 2015
- Hawaii licensed 19 new captive insurance companies in 2015
- Texas Department of Insurance (TDI) issued 11new licenses in 2015
- Seven New Captive Insurers Licensed in Arizona in 2015
- Alabama licensed 16 new captives in 2014 and has not yet released 2015 numbers
- Delaware licensed its 1,000th captive insurance company on November 9, 2015
It’s important to note that while the IRS has a strong dislike for captive insurance companies and “small” captives that make an 831(b) tax election, nevertheless the service has regularly conceded that CICs are legitimate and their tax advantages are legally protected (CLICK HERE).
Perspective On The Growth In The Number Of Captives Licensed
Continued growth in the captive industry is not surprising. It has been largely fueled by business owners of small and mid-market companies, making a choice to own their own insurance company. This choice has significant risk management, asset protection and wealth accumulation advantages. Also, insurance companies benefit from favorable tax treatment, and CICs are no exception.
The growth has also been encouraged by competition among U.S. domiciles to attract and educate business owners, CFOs and risk managers on the value of owning their own insurance company.
Domicile Math
Four years ago, Tennessee had only licensed 2 captive insurance companies. Today the total is 126. Captives help grow employment and also bring premium tax revenue into state coffers. In its most recent press release, the Tennessee Department of Captive Insurance noted:
“The Department welcomes the new captive insurance companies to Tennessee and we continue to maintain the proper regulation of the captive insurance market,” TDCI Commissioner Julie Mix McPeak said. The captive insurance industry has created numerous jobs and invested assets under management in Tennessee, including an estimated $2.6 million in (state) revenues projected to be generated in Fiscal Year 2016.
In addition to premium taxes and licensing fees, prudent states that domicile captives recognize that captives help protect businesses and keep them healthy. Healthy businesses protect and grow jobs. Importantly, jobs and job growth boost state and local tax revenues as most states and municipalities collect taxes on property, income and retail sales.
What Is A Captive Insurance Company?
Simply put, businesses or their owners can choose to OWN THEIR OWN INSURANCE COMPANY. A captive insurance company is a licensed insurance company. Captives are formed to provide insurance protection to businesses and related entities. They are usually owned by the business, business owners or other related parties. Businesses pay premiums as an ordinary business expense to their captive insurance company. The captive issues insurance policies to the company. Captive policies are priced by an actuary. When the business files an insured claim, the captive pays it. Like commercial insurance companies, captives also accumulate loss reserves. Reserves can be invested in accordance with the captive’s Investment Policy Statement (IPS). The IPS is approved by the domicile.
What Is An 831(b) Tax Election?
Small captive insurance companies may make an 831(b) tax election. “Small” captives are defined as having underwriting profits of less than $1.2 million annually. This amount will increase to $2.2 million in 2017 and be indexed to inflation going forward. Underwriting profit is simply calculated as premiums received less claims paid. Captives making an 831(b) election are taxed at a rate of 0% (zero percent) on their underwriting profits. For example, if a business pays premiums of $1.2 million to its small captive insurance company, and the captive makes an 831(b) tax election, it is taxed at a rate of zero percent. Assuming combined state and federal income tax rates of 50%, this would result in annual tax savings of $600,000 for the captive owner.