Estate planning has long been a potential ancillary benefit of establishing a captive insurance company in situations where the insured company is owned by a family or a small group. Nonetheless, the primary rationale for establishing the captive in the first place must be sound, namely the insurance benefit and/or cost savings to be gained by the insured. Put another way, if the captive is established with the primary intent of serving as a tax shelter, it runs the risk of attracting the unwanted scrutiny of regulators at the state and federal level. The reader should bear that in mind when reading this article on using captives as part of tax planning for hedge fund managers, which contains advice that ordinarily is best given orally and in the context described above!
Here’s a new article in the Wall Street Journal concerning inconsistent standards in reporting capital reserves among European insurers. As always, caveat emptor!
Here’s a short piece from today’s Crain’s New York Business explaining why Hurricane Irene will only be a speed bump on the way to higher profits for insurance companies. In short: losses paid out today mean higher premiums tomorrow.
There’s an interesting discussion taking place on LinkedIn on whether IRC 831(b)’s $1.2 million tax deduction for small insurance companies should be indexed for inflation. Enjoy.
OK, gang, this doesn’t fall into any of my practice areas, but sometimes you have to point out abuses when you see them. The good folks at the New York Stock Exchange are trying to quash the use of stock photos of their trading floor in news stories on financial matters by the popular political blog Talking Points Memo, claiming that the depiction of the trading floor violates their trademark. This is an argument best left to the environs of the ivory tower; in the real world, it’s transparent nonsense. What’s next? No photos of Yankee Stadium in an article about baseball?
The life settlement industry scored a major victory in California this week in the case of Lincoln Life and Annuity Co. of NY v. Berck, as Trustee of the Jack Teren Insurance Trust, when the California Court of Appeals, in a 2-1 ruling, reversed a lower court’s ruling and held that the sale of a beneficial interest in an irrevocable life insurance trust to an investor shortly after the issuance of a policy was not a violation of California’s insurable interest statute even though the sale may have been contemplated at the time the policy was applied for. The California law has since been changed. I tip my hat to my wonderful litigation counsel, Steve Sklaver, Ryan Kirkpatrick and Matt Berry of Susman Godfrey LLP.
This echoes the decision of the New York Court of Appeals in its decision in the Kramer litigation this past November, and continues the recent streak of victories the life settlement industries has had in recent months.
A new decision in the Southern District of New York discusses the permissibility of the award of legal fees by an arbitrator where the arbitration clause is silent on the subject. You’ll find a nice blurb at the website of fellow lawyer Marc J. Goldstein, linked to above. Thanks Marc!
The New Jersey Captive Insurance Association has penned a response to the recent New York Times article that described a potential abuse in the use of captive insurance companies. The NJCIA’s article describes the efforts of the recent financial reform bills, notably the Dodd-Frank Act, to bring back to the United States the booming off-shore captive insurance industry, so that U.S. tax coffers and employers could have the benefit of the dollars that would otherwise flow to foreign countries. While bolstering the case for the growth for the U.S. captive industry, it leaves open the question of whether the particular practice described in the New York Times article — insurance companies establishing their own captive insurance companies — amounts to an abuse. That, I think, is a legitimate question, but far removed from the core purpose and benefit of captives in general.
From the front page of today’s New York Times: an article about how some insurance companies are themselves using captives as reinsurance vehicles. Of course, this is far from the core use of captives which, generally speaking, are used as genuine insurance affiliates set up to provide insurance coverage on the basis of premiums that are calculated according to arm’s-length actuarial principles and reserves that are set by regulators in accordance with generally applicable insurance principles. Whether the use of captives by insurance companies represents an abuse is a legitimate question — although far removed from what my colleagues and I do! I hope, though, that the debate and its upshot does not serve as a drag on the clearly proper use of captives as a regulated self-insurance mechanism.
Here’s a pretty little IRS revenue ruling issued recently that reaffirmed the deductibility of medical malpractice premiums paid to a captive. The beauty of this ruling is not that it carves out new law — it really doesn’t — but that it nicely describes the mechanics of how captives work generally and how all the pieces come together. (It does not address, however, the deductibility of premiums received by a captive under IRC §831(b).)
