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Vermont hopes to woo captives onshore


Mapfre Re became the first affiliated reinsurer to form in Vermont under 2018 legislation that regulators hope will position the domicile as a viable domestic alternative for U.S. companies reinsuring offshore, but now subject to the Base Erosion Anti-Abuse Tax that could make such arrangements less attractive.

Prior to the passage of the 2017 tax overhaul, U.S. tax law allowed the investment of reinsurance premiums raised overseas without tax ramifications. Under the BEAT provisions, such investments are now taxed in an amount equal to the base erosion minimum tax amount for the taxable year. An applicable taxpayer as defined by the legislation would pay the excess of a certain percentage — 10% from 2019 through 2025, and 12.5% thereafter — of modified taxable income for a taxable year over a base erosion minimum tax amount.

“Many of the large (property/ casualty) insurers have offshore affiliates that they utilize for reinsurance. So when they were performing analysis of the impact of the Base Erosion Anti-Abuse Tax, many of them became very concerned about the amount of money that they would have to pay because of that change to the tax reform laws,” said Sandy Bigglestone, director of captive insurance for the Vermont Department of Financial Regulation in Montpelier.

Vermont regulators have had conversations with other companies about utilizing the alternative, but “nothing has materialized yet,” she said. “We don’t expect a huge influx of applications, but you never know,” she said.

“Maybe the impact will draw more attention to these vehicles,” Ms. Bigglestone said. “But having the affiliated reinsurance company solution is not the only solution. It only applies to payments to foreign affiliates. It could have the impact of increasing the demand for unaffiliated reinsurance, but if the entity enjoyed having control of the underwriting, they understand the business and if they wanted to utilize an affiliated reinsurance arrangement, they can certainly do that because it affords a certain level of operational control, consistency, effective capital management and obviously continuity of the availability of reinsurance if they have their own affiliate.”

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