Introduction to Private Insurance Companies

Transcription

1 Introduction to Private Insurance Companies 1

2 Captive Growth A Captive Insurance Company provides insurance for its owner. With the continued awareness and recognition of opportunity, the captive insurance company concept is now entering the middle market through the use of Private Insurance Companies. Continued Growth of Captives 2

3 Private Insurance Company Benefits Protects Assets Investment Income Reduces Insurance Costs Business Expense Underwriting Profit Risk Financing Owner Involvement Custom Coverage Dynamic Program 3

4 Who Should Consider a PIC? Businesses with significant uninsured risk Businesses in an insurance inadequate field Privately owned business (all business types) Businesses that are consistently profitable Businesses with gross revenues greater than $5,000,000 per year Entrepreneurs 4

5 What Type of Business Can Have a PIC? Manufacturing Construction Finance Energy Healthcare Retail Transportation General Contracting Professional Athletes And many more... 5

6 Example Coverage Descriptions Governmental Actions Protection Reimbursement for costs/expenses paid by the Insured resulting from a Governmental Action, which includes hearings, review boards, or appeals resulting in assessments, penalties, fines, sanctions or any costs to ensure compliance with the rules, regulations and standards of any local, county, state or federal government agency. In addition, reimbursement for costs/expenses paid by the Insured for professional licenses mandated by any local, state or federal government as well as local, state or Federal Department of Health or Health Care Finance Administration and Medicare are covered. Products & Services Reimbursement Reimbursement for covered costs and expenses the Insured has paid resulting from loss of use, withdrawal, recall, inspection, repair, replacement, adjustment, removal or disposal due to the Insured s product or the Insured s work. Supply Chain Interruption Reimbursement for covered costs and expenses the Insured has paid and / or loss of business income resulting from the loss the Insured sustained due to the loss of a Critical Customer, Critical Employee, Critical Contract and/or Critical Supplier. The Insured will have the option under Supply Chain Interruption to take any or all of the Critical Coverages. Health Care Employers Deductible Reimbursement Reimbursement to the Insured for the employer health care retention or deductible of the medical costs associated with work related employer sponsored health care plans. 6

7 Oil and Gas Case Study Client Concern/Issue: A U.S. manufacturer builds trucks specially fitted with oil rigs that are sold to oil and gas companies to drill for oil. Not only does the insured enter into a number of contracts with international customers, their business is subject to the oil and gas cyclical economy. The loss of one or more of their international contracts would be detrimental to the financial strength of the manufacturer. ERS Solution: ERS worked with the manufacturer to create a captive to insure their Contractual exposure, Loss of a Key Customer, Mechanical Breakdown and Governmental Action coverage. Given the manufacturer s focus on minimizing expenses and capital, the customer utilizes ERS Utah cell facility instead of forming a pure captive. This solution provides the same risk financing benefits but at a lower cost to the owners. Results/Benefits: The manufacturer has financed risk successfully each year for four years and has generated an underwriting profit. In the current year the insured is anticipating a significant decrease in operating income due to the downturn in the oil and gas market. The risk associated with their manufacturing operation has decreased along with the decrease in production. Consequently the insured has decided not to buy coverages through their captive and has placed the captive in dormancy. This is an effective strategy to keep the captive operating and available for use in the future without dissolving the captive. 7

8 PIC Basic Concept Business Premiums may be a business expense ERS Insurance PIC Premiums may not be taxable income for the PIC PIC Owner 1. Surplus may build on tax deferred basis 2. Liquidation at long-term capital gains rate 8

9 Who Can Own the PIC? Individuals Trusts / FLPs LLCs Partnerships Corporations 9

10 10

11 Tax Code Section 831(b) $2.2 million premium limit for the 831(b) election, indexed for inflation Diversification requirement Possible new reporting rules Effective date of December 31,

12 To Qualify as an Insurance Contract Business Purpose (resemble insurance in its commonly accepted form) Insurance risk (fortuitous, not investment risk) Risk Transfer Risk Distribution On December 30, 2002 the IRS issued three revenue rulings regarding the deductibility of insurance premiums. The IRS provides safe harbor if a PIC s operations fall under one of the following three revenue rulings: IRS Safe Harbors for Private Insurance Companies Pool ( ) Multiple Subsidiaries ( ) Group Captive ( ) 12

13 Basic Structure of PIC 13

14 Basic Risk Structure (PIC Reinsures ERSI) Example of $1M claim Risk Pool: $250K - $1M Risk pool distributes remaining $750K per quota-share: $750K x 3% = $22,500 per participating PIC Retention: $0 - $250K Related company s PIC responsible for first $250K 1. Facultative certificate = reinsure first $250K layer of direct business risk 2. Quota-share certificate = 3% of each excess layer above $250K 14

15 Disclaimer IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the U.S. Internal Revenue Service, we inform you that any U.S. federal tax advice contained in this PowerPoint is not intended or written to be used, and cannot be used, for the purpose of (a) avoiding penalties under the U.S. Internal Revenue Code or (b) promoting, marketing or recommending to another party any transaction or matter addressed herein. The views and statements expressed in this presentation are for general information only. ERS, LLC is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation provides general information about certain legal and accounting issues and should not be regarded as rendering legal or accounting advice to any person or entity. As such, the information is not privileged and does not create a client relationship with the companies, or any of its employees. This presentation does not constitute an offer to represent you, and you should not act, or refrain from acting, based upon any information so provided. In addition, the information contained in this presentation is not specific to any particular case or situation and may not reflect the most current developments. 15

16 Contact Us Bruce Slapper, Executive Vice President t: e: Luis Filipe, VP, Director of Captives t: e: 16