Despite statements from individuals involved in crafting the Nonadmitted and Reinsurance Reform Act of the Dodd-Frank Wall Street Reform and Consumer Protection Act that the act was never intended to apply to captive insurance, confusion remains over the measure's applicability to captives.

At issue is whether the NRRA subjects insurance business placed in captives operating outside their parent's home states to self-procurement taxes imposed by the parents' home states.

The confusion is being exacerbated, some in the captive industry say, by some states that are using the act to drive captives to form or redomicile in their states.

“I think the level of confusion is pretty high,” said Robert H. Myers Jr., partner at the Morris, Manning & Martin L.L.P. law firm in Washington.

“We're at the point where we don't know what to advise our clients,” said Les Boughner, managing director of Willis Group Holdings P.L.C.'s North American captive practice in Burlington, Vt. “Some states are really trying to strong-arm captives into locating in their states.

In February, a co-author and sponsor of the NRRA, Rep. Scott Garrett, R-N.J., said in a statement for the Congressional Record that the act was never intended to apply to captive insurance. “Unfortunately, several states have indicated that they plan to interpret the NRRA to apply to the captive insurance industry,” Rep. Garrett said. “In drafting this legislation, it was never contemplated to have the captive industry fall under the NRRA.” The congressman noted that the intent of the legislation was stated in the bill's summary as applying only to surplus lines insurance and reinsurance.

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Rep. Garrett's statement came after a December letter from Illinois Republican Judy Biggert, the outgoing chair of the House Committee on Financial Services' Subcommittee on Insurance, in which she told the committee's new chairman, Rep. Jeb Hensarling, R-Texas, and the committee's new ranking member, Rep. Maxine Waters, D-Calif., that the NRRA was never meant to apply to captive insurance.

The NRRA “was intended to create certainty in the tax treatment and regulation of the surplus lines and in the reinsurance industry,” Ms. Biggert said in her letter. “Despite this very specific purpose, a couple of states are misinterpreting the application of NRRA's definition” of what is considered nonadmitted insurance.

In his statement, Rep. Garrett said: “I look forward to working with my colleagues on the Financial Services Committee to address this issue if necessary in the future.”

That congressional clarification is a goal of the Coalition for Captive Insurance Clarity, an organization formed under the leadership of the Vermont Captive Insurance Association that has gained support from captive industry participants in other domiciles.

Mr. Myers suggested that the CCIC's efforts are “laying a foundation for technical corrections which will be necessary.”

“I think we need something definitive,” said Andrew Sargeant, chief operating officer of USA Risk Group Inc. in Montpelier, Vt.

“I think they are making a lot of progress with the VCIA getting that coalition of folks and at least one active congressman saying that was not the intent of the legislation,” said David F. Provost, deputy commissioner of the Captive Insurance Division in the Vermont Department of Financial Regulation. “It really does impact everybody.”

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While states might see a short-term gain by interpreting Dodd-Frank and the self-procurement tax issue in a way that prompts captives with home-state parents to relocate or form in their domicile, Mr. Provost said he thinks that if domiciles are limiting their focus to home-state companies, their growth potential is limited. “Unless you're New York or California, you've got a really small pool,” he said.

Brady Young, president and CEO of Strategic Risk Solutions Inc. in Concord, Mass., said that while confusion exists, he's not certain the debate over Dodd-Frank's applicability to captives is relevant.

“Self-procurement tax has been on the books for many years,” Mr. Young said. “The unintended consequence of this whole Dodd-Frank thing is the self-procurement tax is now more visible. My view is the genie's out of the bottle. I don't think we as an industry can put the genie back in the bottle and ignore it.”