Marsh's annual captive benchmarking report has found that only one-third of US captive owners treat their captives as insurance companies for US federal income tax purposes.
The finding suggests that captives are being used more as a tool to generate operational and risk management value rather than for their tax efficiencies.
The report, The Evolution of Captives: 50 Years Later, is based on the activities of 1148 captives under Marsh's management, including a vast array of all types of captives, risk retention groups (RRGs), non-traditional captives and life insurance company captives.
It found that of the 664 captives benchmarked with a US parent, only 37 percent are deducting captive premiums on US federal income taxes.
Among the captives that are being treated as insurance companies for tax purposes, the number of new small captives, or so-called 831(b) captives, is trending upwards.
These captives, typically created by mid-sized companies writing less than $1.2 million in premiums, represent the most common new captive formations in the US over the past five years and have led to the significant growth of domiciles such as Utah, Kentucky, Montana, and Delaware.
According to the report, a majority of small captives, 68 percent, are opting for the brother/sister approach—where a captive owner is a holding company with several subsidiaries in order to qualify as insurance companies for tax purposes.
Twenty-two percent are taking a hybrid approach (brother/sister and third party writings), and only 10 percent are achieving it with a third party risk approach, according to the report.
With the growing popularity of smaller pooling facilities, which is an approach to securing third-party risk, Marsh stated that it expects the pooling approach to grow significantly in the future.
Julie Boucher, Marsh's Americas captive leader, said: "Marsh has always advocated that captives be viewed as a tool to help companies better deal with fluctuating market conditions, unstable regulatory environments, and global economic shifts, rather than just view them as a tax benefit"
"We counsel our clients to explore innovative ways of using captives to manage risk."
For example, more real estate investment trusts (REITs) are forming captives today to access funding from the Federal Home Loan Bank (FHLB) system at favourable rates.
Captive membership in the FHLB is a significant new opportunity for REITs and other types of real estate finance clients, and has been growing at a rapid rate since the summer of 2013, noted the report.
