THE INTEGRATED CAPTIVE SOLUTION TM

Transcription

1 THE INTEGRATED CAPTIVE SOLUTION TM corprotect.com copyright 2012 Corprotect LLC.

2 WHAT IS A CAPTIVE INSURANCE COMPANY? A captive is an insurance company established to insure the specialized risks of a business. It issues policies, collects premiums and pays claims. A captive can be owned by one or more business owners, and can be a very effective tool for managing risk in a tax-efficient way. Businesses typically have a number of risks that fall outside of the underwriting guidelines of traditional insurance, and these specialized risks may be insured through utilizing a captive structure to finance potential losses in a formal structure. Domicile selection is an important consideration in the formation of a captive. International and domestic domiciles tend to have different capitalization requirements, investment limitations, regulatory restrictions, fees and taxes. Currently, more than 30 states have captive legislation in place. Through a feasibility study, it is easy to establish which domicile is most appropriate. A captive must be formed as a C-Corp and can be domiciled in the U.S. or offshore. There are several ways to form a captive insurance company, including, but not limited to: single parent captives, group captives, risk-retention groups and reinsurance captives. LEGISLATIVE SUPPORT My administration continues to recognize how critical the captive insurance industry is to Vermont and the need to continue investing in our infrastructure and innovating in our regulation, The captive insurance industry creates valuable jobs and revenues to our state, and provides more than 1,400 full- and part-time jobs for Vermonters. -Jim Douglas, Governor of Vermont* The captive division continues to enjoy unparalleled support from the governor s office, the legislature, and an experienced and engaged insurance commissioner. As the number of captives licensed in Utah has grown, professional staff have been added to meet the regulatory needs. -Ross Elliot, Utah Captive Insurance Director**

3 WHY FORM A CAPTIVE? Businesses typically purchase traditional insurance through third-party carriers to cover their core risks. These risks are covered through general liability, property and auto policies, etc. At Corprotect, we view these risks as the above-water risks. These same businesses are also exposed to a number of risks that fall outside of the scope of traditional insurance. Failure to address these risks can lead to catastrophic outcomes. At Corprotect, we view these as the below-water risks. Each business has their own unique below-water risks. Some examples of these risks may include deductibles, limitations of existing insurance policies, credit default, litigation defense, construction defects, disability, loss of key customers and suppliers, and so forth. The purpose of a captive insurance company is to create policies to insure against these below-water risks. It is critical to effectively manage both the above-water and below-water risks of a business in today s ever-changing world. A captive allows a business owner to have greater control in managing risk, controlling premiums and paying claims. Premiums are not taxed when received by a captive, since the money is reserved to cover potential future claims. But until claims become payable, the captive gets the benefit of any investment income earned on the premium. If captive risks do not materialize, the owners of the captive retain any profits within the group, rather than lose them to an outside party.

4 THE MIDDLE MARKET SOLUTION = 831(b) The captive insurance industry has emerged to address deficiencies and inefficiencies for midmarket U.S.-based companies. Per 28 U.S.C. section 831(b) an insurance company is taxed only on investment income, so long as the insurance company receives less than $1.2 million in premium each year. Through the 831(b) election a small insurance company can receive $1.2 million in premium a year without paying any income taxes on those premiums. However, the election does not affect the deductibility of the premiums paid by the operating business. This has the effect of creating up to a $1.2 million deduction in the operating business, and the premium is transferred to the captive tax free. The 831(b) election provided by Congress encourages growth in the insurance space and has provided a tax-efficient solution for middle-market US companies. What are the key industries for captives? Some of the key industries are: Real estate developers/builders Manufacturers Professional services firms Franchises Restaurant/hotel chains Physicians/groups Who is a candidate for a captive? Good candidates for an 831(b) captive generally meet one or more of the following criteria: $10M+ gross revenue Pre-tax profits of at least $1M 20+ employees Substantial self-insured/uninsured business risk

5 WHAT IS AN INTEGRATED CAPTIVE SOLUTION? The Integrated Captive Solution, offered only through Corprotect, provides a business owner with direction on, not only how to set up a captive insurance company, but also how to integrate the captive into their business and personal planning. When structured correctly, a captive can help supplement a client s planning, including, but not limited to: Insurance planning Estate planning Buyout partners Retirement income Wealth accumulation Asset protection Estate preservation Charitable giving Premiums tax deductible Lower income tax Lower estate tax Tax arbitrage upon distribution Clarity to plan Expert design team Proven investment strategies Choice and control Retain capital Flexible premiums Reduce insurance costs Underwrite self-insured risk

6 WHAT ARE SOME ADDITIONAL BENEFITS OF FORMING A CAPTIVE? Below is a summary of some of the economic motivations to form a captive. Unavailable Coverage: In the commercial insurance market there are a number of risks where coverage is simply not available. A captive can provide a way to insure against specialized risks where commercial coverage is unavailable. Lower Insurance Costs: Commercial insurance premiums must be adequate to pay the cost of claims. It is no secret that insurance companies are in the businesses to make a profit and therefore they include in premiums their acquisition costs, overhead and profit. This portion of the premium can represent as much as 35% to 45% of the total premium. A captive does not have many of the expenses associated with a commercial carrier and therefore can charge less premium to cover an insurable risk. Risk Retention: The desire for a business to retain more risk through increasing deductible levels may be hindered by the inadequate discount offered by a commercial carrier. This can make it difficult for the business to establish appropriate reserves to pay future claims. A captive allows a company to retain additional risk in an efficient manner and provides the business a way to efficiently build appropriate reserves. Risk Management: Effectively managing business risk is critical in today s everchanging world. A captive can provide the structure for a company to better understand their current risks so they can plan and manage the risk financing activities of the business more effectively. Captive Profits: Effectively managing risk can result in significant profits to the captive insurance company. Thus, risk management at the business level can be viewed by the captive owner as an additional profit center. By establishing a captive, the business and its owners retain any profit within the group rather than see it go to an outside party. Cash Flow: Premiums on an insurance contract are typically received in advance of any claims being paid. Until claims become payable, the insurance company gets the benefit of any investment income earned on the premium. Also, a captive may offer the parent business more flexibility on how and when premiums are paid, thus offering a direct cash flow advantage to the insured business entity. Access to the Reinsurance Market: Access the reinsurance market allows a business owner to get wholesale insurance pricing on a variety of coverage lines, which can be much less costly than going through direct insurers. Using a captive, a business owner can better manage retention levels and structure an insurance program that meets the needs of the business in a cost effective manner. Tax Advantages: Although a captive should not be formed specifically for tax purposes it can provide substantial tax benefits to a business and its owners. The tax considerations in forming a captive will depend on the domicile of the parent and the captive. Contact Corprotect today for a no-obligation consultation: info@corprotect.com * May 27, ** Mar 2012 CICA 40th Anniversary issue published by Newton Media Utah: A Western Champion

7 copyright 2012 Corprotect LLC.