A regulation proposed by the IRS last year would end the allowance of deductions for loss reserves by single-parent captive insurance companies that file income tax returns on a consolidated basis with their parent corporation. But, according to the Self-Insurance Institute of America, a national trade association representing companies involved in the self-insurance and alternative risk transfer, this proposal would have a negative impact on tax revenues for the US government, and would simply tempt captive insurance companies to move to established offshore domiciles such as Bermuda and the Cayman Islands.

“Numerous judicial decisions have made it clear that the intent of legislators was to permit captive insurers to deduct losses on an accrual basis, not a cash basis," SIIA President-Elect Dick Goff pointed out in a letter to the IRS last year, following a meeting with US Treasury officials in November.

“The use of administrative procedures for consolidated tax returns to eliminate this ability to deduct losses on an accrual basis circumvents the legislative and judicial intent," Goff's letter added, citing six court rulings in favor of the captive insurance industry on this issue.

The letter also indicated that the proposed regulation would have unintended consequences that would have an adverse affect on US industry:

“In the long run, the Proposed Regulation 1.1502-13(e) will not enhance government revenues. Captive insurance companies will be encouraged to move offshore where they will not be required to pay US income taxes. With this movement offshore, US jobs will be lost to offshore domiciles, and the related payroll taxes, personal income taxes and state premium tax revenues will decline," Goff warned.

SIIA’s recent formal comments, made as part of an IRS consultation which ended on 28th December 2007, are the latest move in an intense lobbying effort by the US captive insurance industry that was initiated on 28th September, the day the proposal was released.

Goff and members of SIIA’s government relations team have presented their case to members of Congress, congressional staff and high level officials from the Department of Treasury and Internal Revenue Service, and the group claims to have had two "very positive" meetings: one with Senator Max Baucus, Chairman of the Senate Finance Committee, which has jurisdiction over this issue, and another with top officials of the IRS and Department of Treasury that included the author of the proposed regulation.

While Bermuda and the Cayman Islands remain the leading captive insurance domiciles, with about 870 and 750 registered companies respectively, the industry has been on the rise in the US; captive insurance holdings have more than doubled over the last 5 years and over half of the Fortune 1,500 companies in the US utilize a captive, according to Active Captive Management (ACM), which specializes in the formation and management of captive insurance companies for small and medium size companies.

However, the industry fears that this trend will be reversed if the IRS succeeds in forcing through its proposed regulation on deductions.