IRS Withdrawal Paves Way for Continued Captive Growth
Last week the IRS announced that it was withdrawing its proposed Regulation §1.1502-13(e) on the treatment of insurance between members of a consolidated group.
These proposed regulations would have had an adverse impact on many single parent captives, as they would not have been able to take a tax deduction on loss reserves. Its withdrawal removes a source of uncertainty for current and propective captive owners.With the passing of this storm cloud, we expect the captive industry to continue to thrive with new formations continuing at the same pace as the past few years. There is often a perception in the industry that a soft commercial market has a negative impact on captive formation. While this is true to an extent for group captives, this is not the case for single parent captives.
Most single parent captives are created to formalize the funding of retained risk, not as an alternative to commercial insurance. The key issues are the amount of risk being retained and the structure of the funding for those retentions. In the right situation a captive can provide significant benefits over other forms of funding. The ability to take a tax deduction on loss reserves is just one of them.
Based on our experience, several captive formations have been on hold pending the outcome of the IRS proposed regulations. With its withdrawal we expect to see an increase in single parent captive formations through the balance of the year.
brady.young@strategicrisks.com phone: 781 672 3460 web: www.strategicrisks.com
