On April 24, 2015, the IRS issued a notice of proposed rule making titled “Exception From Passive Income for Certain Foreign Insurance Companies” (REG-108214-15). The proposal is meant to make sure that hedge fund sponsored offshore reinsurers are not using these vehicles as a way to shelter investment gains from US taxes rather than being true reinsurers.

While the proposed rules are aimed at hedge-fund-sponsored offshore reinsurers, it seems clear that the proposal could have much broader implications. It is essential that the IRS definition of assets needed to back insurance underwriting is dynamic enough to cover the volatility of the risks assumed.

In this era where insurers are under increasing pressure to increase the amount of capital on hand to back risks assumed, we must make sure that the IRS understands the proposed new minimum requirements as set by Fed requirements, US RBC, Solvency II, etc.

There may indeed be situations such as the ones the IRS is attempting to regulate, but let’s make sure that the rules are not so restrictive as to remove legitimate reinsurance capacity from the market.