Marsh: Majority Of U.S.-Owned Captives Not Producing Tax Benefits
Marsh's annual captive benchmarking report, released at the 2014
In a release, the company said the finding suggests that captives are being used more as a tool to generate operational and risk management value rather than for their tax efficiencies.
The report, The Evolution of Captives: 50 Years Later, is based on the activities of 1,148 captives under Marsh's management, including a vast array of all types of captives, risk retention groups, non-traditional captives, and life insurance company captives. It found that of the 664 captives benchmarked with a US parent, only 37 percent are deducting captive premiums on US federal income taxes.
Among the captives that are being treated as insurance companies for tax purposes, the number of new small captives - or so-called 831(b) captives - is trending upwards. These captives - typically created by midsize companies writing less than
According to the report, a majority of small captives - 68 percent - are opting for the brother/sister approach - where a captive owner is a holding company with several subsidiaries - in order to qualify as insurance companies for tax purposes. Twenty- two percent are taking a hybrid approach (brother/sister and third party writings), and only 10 percent are achieving it with a third party risk approach. With the growing popularity of smaller pooling facilities, which is an approach to securing third-party risk, Marsh expects the pooling approach to grow significantly in the future.
"Marsh has always advocated that captives be viewed as a tool to help companies better deal with fluctuating market conditions, unstable regulatory environments, and global economic shifts, rather than just view them as a tax benefit," said
For example, more real estate investment trusts (REITs) are forming captives today to access funding from the
Other highlights from Marsh's report include:
-More captives are underwriting voluntary employee benefits, such as critical illness, ID theft, pet insurance, group home, group auto, and group umbrella.
-Thirty-four percent of the captives benchmarked enter into intercompany investments with their parent companies, of which 18 percent are securitized by the captives for added regulatory comfort. This trend is expected to grow in the near future as a result of increased regulatory flexibility.
-Captive growth in US domiciles, including
-Compared to 2012 when 16 captives re-domesticated from offshore to onshore jurisdictions, only 11 captives did so in 2013, demonstrating no large-scale trend.
-Nearly 12 percent of Marsh's captives under management participate in a terrorism program, with a majority - 71 percent - accessing the Terrorism Risk Insurance Program Reauthorization Act in the US.
Marsh is a provider of insurance broking and risk management.
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