US tax plan could drive captive insurers offshore

By Shurna Robbins

GEORGE TOWN, Cayman Islands, Jan 29 (Reuters) - A proposed tax change by the U.S. Internal Revenue Service could drive more captive insurers offshore, benefiting the Cayman Islands and Bermuda and hurting Vermont and other U.S. states that have sought to snare a piece of the action, industry officials say.

If approved, the proposal would eliminate the ability of U.S. based captive insurers -- firms that insure their parent companies -- to claim tax deductions for money set aside in reserves to pay for future claims and losses.

Instead, these deductions would only be allowed at the time the actual claims are paid out, potentially leading to millions of dollars in taxes being collected up front.

"Companies wanting to set up captives are holding off to see what happens," said Dan MacLean, president of the Insurance Managers Association of Cayman (IMAC) and managing director of Aon Insurance Managers (Cayman), part of Aon Corp (AOC.N: Quote, Profile, Research, Stock Buzz).

"Right now, Cayman and Bermuda are watching from the sidelines."

Other emerging captives markets, such as Ireland, Switzerland and Luxembourg, could also benefit if the IRS proposals took effect, industry experts believe.

Captives, which insure part or all of their parents, were once considered a fringe product to traditional insurance.

But companies, especially in the United States, have found they can make significant savings on premiums by forming captives rather than through buying traditional insurance. There are now more than 4,000 captives worldwide, writing more than $20 billion in premiums, according to the captive information Web site captive.com.