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A.M. Best Examines Vermont's Affiliated Reinsurance Company Legislation

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September 06, 2018

A new type of captive insurance company created by Vermont in response to US tax reform provides an onshore reinsurance alternative for companies facing an added tax burden due to the Base Erosion and Anti-Abuse Tax (BEAT) and likely will further enhance Vermont's standing as a captive domicile industry, according to a new A.M. Best briefing.

The Best's Briefing, titled "Vermont Captive Legislation Targeted at Companies Looking To Avoid the BEAT," states that the new captive type, referred to as an affiliated reinsurance company, is being marketed as an alternative for US companies that have been reinsuring to an offshore affiliate, typically Bermuda or the Cayman Islands, to avoid US corporate taxes. Many of these companies now are subject to the BEAT; previously, insurance ceded to third-party reinsurers was not subject to the new tax.

Affiliated reinsurance companies will be subject to many of the laws and regulations under the National Association of Insurance Commissioners but will be licensed and regulated by the Vermont Captive Insurance Division. No affiliated reinsurance companies have been licensed yet; however, a number of companies have expressed interest, as a number of large US insurers already maintain a relationship with Vermont. The legislation appears to give broad discretion to the state's insurance regulator to permit flexibility in capital requirements and investments.  

Other advantages for insurers would include a $200,000 cap on state premium taxes, as well as the ability to avoid the 1 percent excise tax, or in some cases, 4 percent excise tax, imposed on premiums paid to overseas insurers—although foreign insurers making a Section 953(d) election also can avoid the excise tax. Another consideration favoring the new Vermont captive is that any net operating losses from offshore affiliates that make the Section 953(d) election under the US Tax Code are generally unavailable to offset income of other members of the same consolidated group. Presumably, this tax disadvantage would not exist for affiliated reinsurance companies.

A.M. Best would view an affiliated reinsurance company similarly to other affiliated reinsurers. For its analysis of risk-adjusted capitalization, A.M. Best would expect any rated insurers using an affiliated reinsurance company to provide US statutory financials consistent with the reporting requirements of the ceding affiliate.

A complimentary copy of this briefing is available on the A.M. Best website with site login registration.

Copyright © 2018 A.M. Best Company, Inc. and/or its affiliates ALL RIGHTS RESERVED

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