CIC Services
Captives power from strength to strength
Sean King of CIC Services casts an eye over what has been an interesting time for the captive insurance industry.
“The IRS seeks to obscure rather than to elucidate the line between valid and abusive captive insurance arrangements.”
Sean King
CIC Services
The COVID-19 pandemic, along with all the disruption and upheaval it caused, proved beyond doubt the need for, and the usefulness of, captive insurance.
That’s the view of Sean King, principal at CIC Services, who says that while nearly all commercial business interruption policies failed to cover losses due to technical exclusions in the policy language, captive insurance policies paid out tens, if not hundreds, of millions in valid covered COVID-19 claims. In some cases, King said, these payments saved the insured business and the jobs they had created.
“The pandemic proved the value of, and need for, captive insurance,” said King. “Interest in captives has exploded as a result. We’ve seen a considerable increase in inbound inquiries, although that interest had diminished in light of the Internal Revenue Service’s (IRS) proposed regulations.”
The recent decision by the IRS to propose regulation for microcaptives, effectively treating them as an abusive tax transaction, has caused a great deal of discussion and debate—as well as criticism.
King said that the IRS’s proposed regulations are “unworkable, arbitrary and capricious”. He predicted that if they become final in anything close to their present form, they will ultimately be overturned by the courts just as IRS Notice 2016-66 was.
IRS Notice 2016-66 was an attempt by the IRS to treat microcaptives as potentially abusive transactions. CIC and others, including the Captive Insurance Company Association, fought the IRS all the way to the US Supreme Court, where the IRS was finally defeated.
The IRS strikes back
However, the IRS has now made a new attempt at regulating microcaptives.
According to King, the IRS is not interested in providing the captives industry and taxpayers with actual guidance. On the contrary, he said: “Their goal is to suppress the Congressionally-incentivised captive insurance industry by creating and spreading fear, uncertainty and doubt.
“In particular the IRS seeks to obscure rather than to elucidate the line between valid and abusive captive insurance arrangements as evidenced by, among other things, the fact that the proposed regulations would place the ‘listed transaction’ label even on insurance arrangements that the courts have already validated as legitimate and proper.”
However, King said, there are reasons to be optimistic on this front. “Embodied by our court victory over the IRS that resulted in the overturning of IRS Notice 2016-66, the industry is for the first time in its history united against these unwarranted attacks,” he said. “The industry’s feedback on the new proposed regulation was devastating. Failure on the part of the IRS to take it seriously will show yet more bad faith and result in more court losses.”
He pointed out that the IRS could end any supposed “abuse” by simply publishing workable clarifying guidance that would distinguish the good from the bad. Were that to happen, he stressed, the industry would overwhelmingly comply with that guidance immediately—and the industry has made several proposals to aid the IRS in doing precisely that.
However, he added: “The IRS declines, because it does not believe as a policy matter that captives should exist. It knows it can suppress them best by not highlighting the cliff’s edges between right and wrong but rather by shrouding that cliff in a regulator-created fog of fear, uncertainty and doubt.”
According to King, CIC services is among the best at offering compliant insurance solutions that protect its clients from existential threats. The insurance provided by the captives it manages has, he said, saved dozens of businesses from bankruptcy.
“We have been and remain ready to defend our clients and the industry from any continued bad faith conduct from the IRS,” said King. “Captive insurance is critically important to the survival of our nation’s small and mid-market businesses, which comprise about half of our country’s economy.
“Congress recognises this. Actuaries recognise this. CPAs recognise this. Only the IRS refuses to.”
Sean King is principal at CIC Services. He can be contacted at: sean@cicservicesllc.com
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Image credit: Video by VisualVanguard on Envanto