what you need to know about captive insurance
DESCRIPTION
Are you a business owner interested in forming a captive insurance company? Read this presentation to discover what to do.TRANSCRIPT
INSURANCE CAPTIVES
WHAT YOU NEED TO KNOW WHAT TO DO
AND HOW TO DO IT
Why use a Captive Insurance Co.?
You may be considering setting up a captive insurance company.
And it’s very likely you may be saying to yourself, “why should I be doing this?”
There are lots of good reasons – and you’ve probably heard most of them – but the main reason for setting up a captive is . . .
MakingMoney
Make money?How?
A captive gives you the ability to share in underwriting profit and investment income.
It can result in a lower net cost for insurance.
Tax benefits. Premium ceded to a captive is tax deductible. Underwriting profits and investment income are tax-deferred.
Asset protection. Assets put into a captive are shielded from creditors other than claimants if set up properly.
Estate planning. Assets put into a trust can be excluded from your taxable estate.
Is a captive Right for you?
You need to take a long term view toward risk management.
You strongly believe in loss prevention.
Willingness to share risk.
You need at least $1,000,000 of annual insurance premiums.
You should have $500,000 or more of pre-tax corporate profits.
This is NOTFor you if . . .
You buy insurance to “win” against your insurer.
You aren’t interested in loss control or prevention.
You are risk averse.
Your insurance premiums are not big enough.
Your assets aren’t sufficient to provide the necessary collateral.
How do I Set it up?
Choose your jurisdiction.
Onshore vs. offshore.
Tax election – U.S. taxpayer / 831b captive.
Feasibility study - $5,000 to $10,000
Business plan - $5,000
Actuarial study - $5,000 to $10,000
Application fees - $500 - $2,500
Capital investment - $25,000 to $250,000
Collateral
Captive management - $15,000 to $50,000 per year, plus percentage of premium.
The Rent-a-captiveOption
Provides all of the benefits of an owned captive insurance company, without the upfront costs, capital investment and annual maintenance costs.
You “rent” a protected/segregated cell, working capital, and licenses from an insurance company set up for this purpose.
No pooling of risk between cells – each cell, and its assets, are legally separated from the others.
Typical captiveDiagram
Owner
Policy Issuing Co.Admitted, “A” rated
Claimants
Captive
Loss Payments
Paid Claims
Net Ceded Premium
Premium
Investment IncomeUnderwriting Profit
Collateral
Estate PlanningDiagram
Company Policy Issuing Co.Admitted, “A” rated
Captive
Up to $1.2MPremium / Yr.
Children’s Trust / Family Ltd. Partnership /
LLCShareholders
What is the831(b) election?
IRC 831 – Tax on insurance companies other than life insurance companies.
(b) – Small Insurance Co. ($1,200,000 or less in annual premium income) pays tax only on investment income.
If jurisdiction offshore, you must elect to pay U.S. tax.
Need to do one of these:
• Insurance company insures 51% unrelated risk.
• Insurance company insures 12 or more related companies.
• Insurance company insures 7 or more unrelated companies.
Consult your tax advisor.
What isCollateral?
Collateral is needed if the captive insurance company is used as a reinsurer of an admitted insurance company.
It is needed for the insurance company to take credit for the reinsurance in their financial statements.
Protects the insurance company from any credit risk of the captive’s performance.
Collateral types:
• Letters of Credit.
• Parental guarantee.
• Pledged assets.
• Performance bond.
• Insurance trust.
ExitStrategies
Risk management strategies evolve over time and at some stage, the owners of a captive insurance company may look for an exit strategy.
Commutation. The fronting insurance company agrees to assume all outstanding liabilities of the captive. This may allow the release of collateral.
Novation. A reinsurer agrees to step in the place of the captive and assume the remaining outstanding liabilities of the captive.
Reinsurance. The captive enters into a contract with a new reinsurer to assume the remaining outstanding liabilities of the captive. This option works for insurance that was fronted by an admitted insurer as well as for insurance policies issued directly by the captive.
NextSteps
Call or email for your free captive audit.
Email: [email protected]
Type “Captive Audit” in the Subject line.
Telephone Paul Dzielinski at 845-920-7100