BARKING UP THE WRONG TREEPosted On: Feb. 16, 1997 12:00 AM CST
ONCE AGAIN, some budget crunchers in the Clinton administration have decided to go after captive insurance premiums as a source of tax revenue.
These efforts-last seen in a 1996 budget proposal-are fueled by the misperception that captives are nothing more than sophisticated tax dodges, rather than a vital risk-financing tool.
We think the captive industry, as well as the business and insurance community, should marshal their resources to eradicate this prejudice once and for all-or else risk battling this recurring proposal in perpetuity or, much worse, seeing it enacted into law.
We're dismayed that such a view persists, as captives today are really a mainstream risk-financing tool and account for a significant amount of the premiums that corporate America pays to cover its risks.
Not only do captives provide billions of dollars of insurance protection, they also serve as an important buffer to the wild swings in pricing that were once common in the commercial insurance industry. Without those cyclical swings in pricing, traditional coverage has been much more available and affordable for everyone.
The Clinton administration's new proposals, contained in its budget proposal, would bar many captive owners and shareholders from deducting premiums paid to the captive unless the captive writes a significant amount of unrelated business.
That policy could prove ruinous to captive insurers.
Captive experts warn that the proposal would cause many captives' taxable income to increase, thereby leaving less money to put into reserves for future losses. That, in turn, could weaken the solvency of some captives.
The alternative-writing more third-party business-would be imprudent at best and disastrous at worst.
Writing unrelated third-party business produced massive losses and led to the insolvency of many captive insurers in the late 1970s and early 1980s.
A number of those captives-including Gulf Oil Corp.'s Insco Ltd., Exxon Corp.'s Ancon Insurance Co. SpA, and Ocean Drilling & Exploration Co.'s Mentor Insurance Co. Ltd., to name a few-found that taking on third-party business was more than they could handle. And one insurer, Ideal Mutual Insurance Co., collapsed under the weight of losses on unrelated business that it fronted for captives.
The captive insurance industry is gearing up to fight the Clinton budget proposal. It should not stand alone.
Others that have a vested interest in this battle include: Businesses that want to preserve captive insurance as an option; state insurance regulators and lawmakers in captive domiciles; service providers, such as brokers and third-party administrators; and even insurers and reinsurers that have found the captive market a fertile ground for their services.
As Jon Harkavy, president of the Coalition of Alternative Risk Funding Mechanisms, said: "Companies with captives have not always been particularly effective in protecting their turf."
We hope that won't be the case this time.