captive considerations

Captive Considerations

What to know, What to avoid

#[insert hashtag here]


R. Wesley Sierk, III ARM, ACI, ChFC

Author, Taken Captive

110 Pine Avenue, Suite #310Long Beach, Ca 90802 P: 562.472.2846 x210F:562.435.7886M:[email protected]

#[insert hashtag here]

mailto:[email protected]


• Michael R. Mead, CPCU• 2011 CICA Distinguished Service Award Winner• Captive consultant, manager, broker• President, Missouri Captive Insurance Association, www.mocia.org• Vice President, Director, International Center for Captive Insurance

Education, www.iccie.org• Director, Captive Insurance Council of the District of Columbia,

www.cic-dc.org• Past Chair, Captive Insurance Companies Association,

www.cicaworld.com• Past President, Director, Arizona Captive Insurance Association• Expert Commentator,Captives irmi.com• www.mrmeadandco.com• [email protected]• 312-316-5084

http://www.iccie.org/

http://www.cic-dc.org/

http://www.cicaworld.com/

http://www.mrmeadandco.com/

mailto:[email protected]


• Agenda– Basics– Uses– Challenges

• Ask questions at any time• Presentation will be available on the WRCIC

website, or AZ, MO, UT sites.


• What is a Captive? Insurance company wholly owned and

controlled by its insureds Insurance company that insures the risk of the

parent company


• Who has a captive?• Over 50% of the commercial

property/casualty market• Virtually all of the Fortune 500• All energy companies, utilities and most

hospitals• Over 5000 globally

Captive Consideration s

• Why a Captive?Get control of the cost of insurance Improve claims handling Improve cash flow Design coverage that will benefit their own

business Obtain income tax deductions Potentially provide gift and estate tax free

transfers


• Uses• Workers compensation• Pollution• Terrorism• Medical malpractice• Directors and Officers/Fidelity• General Liability


• What Problems Can a Captive Address Unavailability of insurance Insurance that is too expensive Premiums that don’t match the company’s

losses Inflexible language Inflexible terms No tax benefit to retain the risk


• Types of Captives:Rent-A-Captive

Protected Cell CaptiveSingle Parent CaptiveIndustry CaptivesAssociation CaptivesRisk Retention Group CaptivesAgency CaptivesSpecial Purpose


• What are the steps to form a Captive?• Prepare Feasibility Study• Actuarial Analysis• Choose a domicile• Choose a Captive Manager• Determine structure• Create the Business Plan• Prepare Incorporation Documents• Biographical Affidavits• Complete the Application• Submit to Commissioner • Receive Certificate of Authority.


• Tax Issues• Do you want a deduction?• State versus Federal• Risk Shifting• Risk Distribution• Facts and Circumstances


• IRS red flags• FAS 113• Not finite risk• Actuarial Study• Surplus to premium ratio• Paying claims• Unusual coverage• Purpose


• Feasibility Study• Is a feasibility study the same as an actuarial report?• What are the main purposes of a feasibility study?• Who conducts the feasibility study?• What does a feasibility study cost?• Is a feasibility study required for getting licensed as an

insurance company? • How long does it take to complete a feasibility study?• Should I be concerned about confidentiality?


• Elements of the Feasibility Study1. Clarifying the objectives2. Defining the risk 3. Measuring the risk

• Retained risk and loss projections • Expense budget for the captive• Tax impact

• U.S. (or other country) income tax• Excise taxes• Excess and surplus lines taxes• Domicile premiums taxes• Local premium taxes• Other taxes/assessments

• Premium strategy


• More elements3. Measuring the risk- Continued

• Premium strategy• Capitalization • Pro forma financial statements-These financials

should include:1. Income statements and balance sheets2. Five-year pro forma results3. Presentation of tax consequences4. Financial assumptions (interest rates, growth rates, cost

of capital, etc.)


4. Structuring strategy 5. Domicile choice6. Operating the captive


• Key components of captive management– Underwriting– Claim management– Financial management– Compliance/reporting

Captive Consideration

• Reviewing and evaluating risk• Setting premium rates• Reviewing coverage applications• Writing policies• Create the underwriting policy

– established guidelines that the underwriter should follow– Coverage review and require financial strength of the

insured– Should cover how policy terminations or loss of coverage is

handled.– It should also cover any target market or geographic

restrictions.


• Claims Management• Decide WHAT risk you will cover• Then decide HOW to handle the claims that arise• Claims Management Policy

– Claims Team – Internal vs. External to the captive– Internal team to the parent organization?– Investigations– Settlement Authority– Other policy matters to consider:

• defining roles, responsibilities and authority levels for all those involved in the process;

• establishing case-reserve protocol; • identifying and retaining the law firm that will handle litigation or

other negotiations requiring legal expertise.


• Financial Management• Understand the Purpose of the captive

– Improve Risk management– Build and increase wealth

• Create board policies to address – signature/wire transfer authority, – cash management and other accounting policies, – risk limitation and operating ratios, – investment policy, – internal and external compliance communications, – contract signature authority


• Compliance Reporting• Domicile and Type of captive specific• Starts with the annual audit:

– Opinion of Independent Certified Public Accountant – Report of Evaluation of Internal Controls – Accountant's Letter – Financial Statements– Certification of Loss Reserves and Loss Expense Reserves

• Organizational / Jurisdiction Review• Risk Pool Certification / Compliance


• Advanced Issues• Captives can be used for

– Estate / Gift Tax Planning– Asset Protection

• Ownership succession• Specific subsidiary issues


• Asset Protection

Limited Partnership

Captive Insurance Company

Business Owner/Corporation

Foreign Trustee

Business Owner

100% Owner

1% General Partner

99% Limited Partner

ForeignAsset Protection

Trust


Limited Partnership

Captive Insurance Company

Business Owner/Corporation Irrevocable Trust

Business

100% Owner

2% General Partner 98% Limited Partner

Policies Issued

Premiums Paid

Captive Ca