Continuing the controversy first discussed in our earlier article (a copy of which can be accessed here), uncertainty remains over whether the self-procurement tax and regulatory provisions of the Non-admitted and Reinsurance Reform Act, enacted as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, apply to non-admitted insurance procured from a captive insurance company. This uncertainty continues despite several statements from individuals involved with the passage of NRRA indicating “unequivocally” that such provisions were not intended to apply to captive insurance providers. On the other side of the equation, proponents of the application of the law to captives reference the broad scope of its provisions and the seeming application of such provisions to captive insurance arrangements.
What remains clear in the midst of all the uncertainty is that NRRA’s provisions do not grant any new regulatory or taxing authority to the states. Nor do they expand the taxing power of the states or require states to enact laws taxing non-admitted, independently procured insurance if they do not currently tax such insurance. In fact, an argument can be, and often is, made that NRRA’s provisions protect captive insurance arrangements from the same potential complication and double taxation related to the issuance of surplus lines insurance that were clearly targeted by the act. So, why then the controversy? Simply stated, opponents of the application of the Act to captive insurance arrangements cite the potential for insureds to relocate their captive insurers to their home state in order to avoid the potential for additional taxes. This relocation, it is argued, would result in a dilution of the administrative and regulatory clarity currently enjoyed through the selected domicile of captive insurers in states with an established captive history.
Also clear is the fact that most captive insurance companies and their insureds appear to have adopted a wait-and-see approach to the current situation, choosing not to implement extensive restructuring in advance of a clearer indication of the potential application of NRRA and of the strategy that the states will adopt in its wake. Taxpayers with captive insurance companies, however, may want to examine their current structures and the taxing policies of the relevant states to be prepared to react to any clarification of NRRA’s scope in this regard.