The US Internal Revenue Service (IRS) stands in the way of one form of expanded business opportunity for Bermuda's captive insurers, according to a captive insurance company manager.

Sedgwick Management Services (Bermuda) Ltd. president, Mr. Robert Hug said bankers and other service professionals are setting their sights on employee benefit plans and life insurance arrangements for employees that could be structured through a captive.

"Over the last two years it has been more widely thought about, but it isn't happening when it comes to US benefits,'' said Mr. Hug. "And there are reasons why it can't. The Internal Revenue Service's position on employee benefit coverages is that they are unrelated risks for the premium deductibility standpoint.

"They take that posture because, in fact, you are insuring the lives of employees, or the welfare of employees, as opposed to the company itself.

"And so there were a lot of people who thought that by running their employee benefit coverages through their captives, they could then get sufficient unrelated business into their captive to be able to take an advanced tax deduction for premiums paid in the property casualty area.

"This has been explored and basically, it is not do-able for any ERISA (Employee Retirement Income Security Act) qualified plan. That basically means that health insurance, life insurance and pension schemes in the US cannot be written through a captive insurance company.'' Mr. Hug said there was a possibility such business could be obtained from non-US jurisdictions.

"That is definitely a possibility and some companies are indeed looking at that. We haven't seen any companies take that step, but there is certainly more discussion of that than there has been in the past,'' he said.

"In my opinion, no-one would set up a captive just to write their group benefits outside of the US. It's conceivable that there could be additional premium to existing companies.

"It's not going to end up creating more companies, it will just mean that the ones that are here could become larger.

"If it were to happen, fees paid to managers would be greater, because services provided would be expanded which means that the captive managers would have to employ more staff, which would have a trickle down effect throughout the entire economy.

"The question is whether it's going to be something that happens substantively or whether it's just going to be something that gets a lot of discussion.'' Mr. Hug said non-US companies received tax deductions on their premiums already, meaning there were no great savings to be made.

"I think that the jury is really out on that, certainly if we look at our client base. About 50 percent of our clients, though, are not US parented, and they get tax deductions for premiums they pay to their captive anyway.

"So the advanced tax deduction theory is nothing that is of particular interest to those clients. It's more for US multi-nationals looking at non-US benefits as a way of getting unrelated business into their captive, so they get an advanced tax deduction for their property casualty premiums.''