H.C.R. NO.














Opposing the Proposed Amendment to Internal Revenue Service Regulations Eliminating the Deductibility of Captive Insurance Company Reserves.




     WHEREAS, the cost of insurance is one of the largest single business expenses, prompting an increasing number of corporations to establish insurance subsidiaries within their corporate framework, known as captive insurance companies; and


     WHEREAS, many captive insurance companies were established offshore to maximize their operational flexibility and the use of financial incentives; and


     WHEREAS, the corporate parents soon recognized that managing insurance subsidiaries with ineffective, minimal, or no regulatory oversight could lead to damaging financial consequences; and


     WHEREAS, individual states have realized that the captive insurance industry, if offered a comprehensive, cooperative, and reasonable regulatory environment, can be persuaded to base its companies in their respective states along with the employees required to manage its operations; and


     WHEREAS, beginning in the early 1980s, individual states have adopted laws and administrative rules that establish a secure and helpful regulatory environment for the captive insurance industry; and


     WHEREAS, the captive insurance industry has brought many jobs to the states that have extended an invitation of welcome; and


     WHEREAS, an additional incentive for captive insurance companies to be organized in the United States has been their ability, in accordance with Internal Revenue Service regulatory section 1.502, to deduct the interest accrued from deposited cash reserves from their annual corporate income tax payments; and


     WHEREAS, these reserves represent the funds that captive insurance companies maintain on deposit to pay claims that may arise; and


     WHEREAS, on September 28, 2007, the Internal Revenue Service published proposed amendments to section 1.502 of its regulations that would eliminate the deductibility of cash reserves that belong to captive insurance companies; and


     WHEREAS, under the proposed rule amendment, captive insurance companies will be defined as insurance companies in which more than five per cent of the insured companies are groups under a common corporate umbrella and all captive insurance companies legally domiciled in the United States will be subject to the amended federal tax rule; and


     WHEREAS, the termination of the federal income tax deduction will drive the captive insurance companies from the United States and back to offshore locations, including Bermuda and the Cayman Islands; and


     WHEREAS, this proposed change in federal tax regulations will have a significant impact on the insurance industry and will push the captive insurers into less hospitable and reliable regulatory environments; now, therefore,


     BE IT RESOLVED by the House of Representatives of the Twenty-fourth Legislature of the State of Hawaii, Regular Session of 2008, the Senate concurring, that the Legislature urges the Internal Revenue Service not to adopt the proposed amendments to section 1.502 of the federal tax regulations; and


     BE IT FURTHER RESOLVED that certified copies of this Concurrent Resolution be transmitted to the members of Hawaii's

congressional delegation, the Acting Commissioner of the Internal Revenue Service, and the state Insurance Commissioner.









Report Title: 

Captive Insurance; Internal Revenue Service