Captive RRG Legal and Regulatory Environment
Captive RRG Legal and Regulatory Environment – I actually attended five different sessions on Day Two of the conference. There was a common theme in two of the sessions. This article will be a combo article of that theme.
Captives and RRGs have always drawn the attention of regulators and taxing authorities- (not always deservedly so). These two sessions covered the recent and upcoming legal and tax changes
Legal and Regulatory Update for Risk Retention Groups (RRGs)
- Presenters-Sandra A. Bigglestone CPA, CFE, CPM Director of Captive Insurance State of Vermont; Pamela E. Davis Founder and CEO Alliance of Nonprofits for Insurance, RRG; Robert H. Myers, Jr. Partner Morris, Manning & Martin, LLP; John Svoboda President National Home Insurance Company(RRG)
- New Developments in State and Federal Income Taxes and how they may Impact Captive Strategies
- Presenters-Rick Irvine PwC Bermuda,; Tom Jones, McDermott, Will & Emery LLP; P. Bruce Wright, Sutherland, Asbill & Brennan, LLP
Risk Retention Groups
Risk Retention Groups (RRGs) are alternative risk transfer entities created by the federal Liability Risk Retention Act (LRRA). RRGs are basically specialized insurance companies where the policyholders are also stockholders.
The upcoming, new, and changes to existing RRG accreditation requirements can be found on this NAIC webpage. The NAIC seems to be stepping up its regulation of RRGs.
There is a concerted effort to amend the LRRA to include modernizing the Act.
Many State Insurance Commissioners have actually fought against RRGs and even took the opposing views in lawsuits against RRGs.
A.M. Best’s study showed that RRGs have better loss ratios than traditional commercial insurance.
Only four RRGs have $100+ million in capital. Most RRGs are actually smaller than the perception of these huge pools of money.
New Developments- State/Federal Income Taxes
This was a very heavily attended session even though it was the last one of the conference. The IRS included 831 (b) Captive designations on their list of the “dirty dozen” for tax abuse.
IR 2015-19-(one can see why the IRS became concerned with 831 (b) captives)
Poorly drafted insurance binders and policies to cover ordinary business risks or esoteric, implausible risks for exorbitant premiums while maintaining their economical commercial coverage with traditional insurers – (double dipping?)
- Underwriting or actuarial support for insurance premiums is either missing or insufficient (no documentation?)
The new proposed legislation enacted a cap of 2.2 million on 831(b) captives which was a great turn of events. However, no one policyholder can have more than 20% of the direct written premium. The one very odd requirement is that none of the risks can be insured with reinsurance.
There is a new draft of proposed legislation that leaves the $2.2 million cap in place and removes the 20% limit along with the no reinsurance requirement.
The Rent-A-Center and Securitas Holding cases were hallmark cases for captives that prevailed in court against the IRS.
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