Captive insurers are losing some of their tax benefits after the U.S. tax overhaul, but the new law is not expected to result in a decline in captive formations for owners creating captives for risk management reasons.

“People should go into captives for the right reasons, and tax should not be your primary motivating factor,” said Anne Marie Towle, Indianapolis-based executive vice president and captive practice leader for JLT Insurance Management, a unit of London-based Jardine Lloyd Thompson Group P.L.C. “It’s based on risk management, the control and the ability to smooth out your cost of risk over time and having consistency.”

“I don’t see that there’s a mad rush to make significant changes because of the loss of some of the tax benefit,” she said, adding that a “good portion of our clients” do not take the tax benefit for the captive, instead using it for risk management or to access the reinsurance market. “For them, this is a nonevent because they’re not going to make changes just because the tax law changed.”

In December, President Donald Trump signed the Tax Cuts and Jobs Act, which replaced the graduated corporate income tax structure and its previous top rate of 35% with a 21% rate and included new rules for computing discounted loss reserves, namely a switch to using a corporate bond yield curve to calculate discount factors instead of the applicable federal rate, which will result in smaller deductions for the reserves, experts say.

“That aspect of the change in law is likely going to offset a big portion of that rate reduction,” said Matt Gravelin, a Burlington, Vermont-based principal with tax and audit consulting firm Johnson Lambert L.L.P.

The rule determining what constituted a controlled foreign corporation was also changed. A CFC is generally defined as a foreign corporation in which U.S. persons owned more than 50% of the corporation’s stock, with the standard for insurers being that the combined voting power of all classes of stock had to exceed 25%. However, the definition of U.S. shareholder, which had been defined as a U.S. person that owns 10% or more of the voting stock of a foreign corporation, was expanded to also include U.S. persons that own 10% or more of the value of the stock of the foreign corporation.

“If you own a lot of nonvoting stock, the entity might not have been a controlled foreign corporation, but it may become one now,” said Charles Lavelle, senior partner in the tax and employee benefits department of Bingham Greenebaum Doll L.L.P. based in Louisville, Kentucky.

Meanwhile, the passive foreign investment company rules are essentially designed to prevent U.S. persons from investing in corporations with a view toward not reporting the earnings and profits as if they were earned in a foreign corporation, with penalties imposed on the taxes that must be paid on this income.

A company is defined as a PFIC based on either income, meaning at least 75% of the corporation’s gross income is “passive” income that is derived from investments rather than from the company’s regular business operations; or based on assets, meaning at least 50% of the company’s assets are investments that produce passive income or are held for the production of passive income.

Companies in the “active conduct” of the insurance business were exempt under the old law and can remain so under the new law, but they must now meet a test that their active insurance assets constitute more than 25% of the insurer’s total assets.

Foreign companies that become CFCs or PFICs under the new law will likely face the biggest impact, Mr. Lavelle said.

“I don’t think these two changes will affect a huge number of captives, but those that it does affect are seriously reviewing the law and beginning to consider their options,” he said. “My sense is that people are still assessing.”

The U.S. tax overhaul also included the Base Erosion Anti-Abuse Tax provision, which imposes a minimum tax on certain deductible payments made to a foreign affiliate, including payments such as management fees and royalties, but excluding costs of goods sold, beginning in tax years after Dec. 31, 2017. The BEAT provision applies a minimum tax of 10% of taxable income.

“They’re trying to cut down on shifting of profits between the U.S. and low-tax jurisdictions, which has been an issue for at least the last five to 10 years,” Mr. Gravelin said. “The BEAT tax is only going to impact really large captives because there is a threshold of essentially a three-year average gross receipt that has to exceed $500 million. I don’t think a lot of captives will meet that.”