making your large deductible workers’ compensation program
DESCRIPTION
Making your large deductible workers’ compensation program. significantly better. $ 1,000,000. Excess Insurance. $999,999. Statutory Workers’ Comp. $250,001 . $250,000. Business. High Deductible Retained Layer. $0. 3 Disadvantages. No tax deduction for retained risk - PowerPoint PPT PresentationTRANSCRIPT
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Making your large deductible workers’
compensation programsignificantly better
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High Deductible Retained Layer
StatutoryWorkers’ Comp
Business
ExcessInsurance
$250,001 $250,000
$0
$1,000,000$999,999
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3 Disadvantages
1. No tax deduction for retained risk
2. LoC with after-tax dollars
3. Volatility
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Risk Management
Tax Savings
Cash Flow
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93%
91%
93%
83%
92%
$3M - $7MOver 10 years
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AEX
Captive
Unrelated Risk
Direct Premiums
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Captive
Operating Company AEXCaptive
Invest Assets
Captive Owner
DividendsLiquidation
RiskPay losses
Stocks Bonds Other
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A valid captive requires
“Risk Distribution”
Risk distribution is a spreading of risk that allows the insurer to reduce the possibility that a single costly claim will exceed the amount available to the insurer for the payment of such a claim.
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Multiple Subsidiaries Unrelated Risk
Sub
Sub
Sub Sub
Sub
Sub
Sub
Sub
Sub
Sub Sub Sub
Business
CaptiveUnrelated risk
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High DeductibleRetained Layer
Business
ExcessInsurance
$250,001 $250,000
$0
$1,000,000$999,999
AEX Pooling
$100,001 $100,000
StatutoryWorkers’ Comp
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AEX
(Trust Account)
Total Premium =
$18
$9
$6
Premium
$3 x $18 = $18
$6 x $18 = $18
$9 x $18 = $18
QuotaShare %X Premium
Quota Shared Premium
Unrelated Premium
$1.00
$1.50
$1.00
$2.00
$3.00
$1.50
$3.00
$4.50
$9
$6
$3$3
$0.50
Captive
Captive
Captive
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Captive
Captive
Captive
AEX
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AEX
Captive
Captive
Captive
Captive
Captive
Captive
Virtual Pool
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Criteria
1. Minimum $400,000 Loss Pick
2. Cash Flow
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Frequency layer = predictable
125% cap
Retrospective adjustment
Protections
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Expected Bad Year Good Year0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
Expected: $1m Losses in Pool AEX
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2012
2013
2014
2015
2016
Settlement
Policy year
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Claims
Administrator
AEX Captive
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Solutions
1. Tax deduction for retained risk
2. LoC with pre-tax dollars
3. Reduced Volatility
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Expected Bad Year Good Year0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
Expected: $1m Losses in Pool AEX
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Captive
LOC Collateral LOC Collateral
Funded with after tax dollars
Funded with pre-tax dollars
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AEX
Captive
Unrelated Risk
Direct Premiums
• Prior year’s retained risk (any line)
• Load charge for captive
• Other types of insurance (GL, auto, E&S)
• Excess work comp layer (e.g., 150 x/s 100)
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Safe Harbor Industry
AEX
50%Direct50%(Unrelated)
Di-rect 70%
AEX
30%(Unrelated)
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• Already take tax deduction • Need a captive
• Don’t disrupt existing high deductible program
• AEX is an “overlay”
• Share risks with others? • Sharing is in frequency layer
• Black Swan event? • Excludes risks >125% expected loss pick
• IRS approval? • IRS has approved similar arrangements
Objections? Answers
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Cost
• AEX Service Cost• 0 -$2M: 6% of AEX premiums
• $2M-$4M: 3%
• Above $4M: 1%
• Minimum annual service fee of $30,000
• Captive Management
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Participation Criteria
Large Deductible or SIR Program
Minimum $400,000 Loss Pick in AEX Layer
Cash Flow
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Submission Criteria
5 Years Loss/Exposure Data
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Section 831(b) Captive Solution
$1.2M annual premium
Taxed only on investment income (C corp rates)
Shareholders
CaptiveBusiness
Basic Captive Diagram
Insurance Premiums
Insurance Coverage
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Insured Risk Workers Comp ● Property ● Auto ● General Liability
Uninsured Risk
Deductibles
Exclusions
Operating Risks
A/R Concentration
Construction Defect
Credit Default
Disability
Administrative Actions
D & O / E & O
Legal Defense Reimburse
Mold and Pollution
Product Warranty
Hidden Risks
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1. Insurance Risk
2. Operate as an insurance company
3. Risk shifting and risk distribution
Tax Law and Captives
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Ownership Options
Captive
Shareholders FamilyKey Employees
Estate Plan Trust
ParentCompany
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