Captive Insurance For the Franchise Industry

Transcription

1 Captive Insurance For the Franchise Industry Jeff Goldman Husch Blackwell LLP 1

2 IRS Required Statement Pursuant to U.S. Treasury Department Regulations, we are required to advise you that, unless otherwise expressly stated, any federal tax advice contained in this communication, including attachments and enclosures, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding taxrelated penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein.

3 CAPTIVE INSURANCE FOR THE FRANCHISE INDUSTRY I. THE BASICS OF CAPTIVE INSURANCE

4 What is a captive insurance company? A captive insurance company is an insurance company that insures risks of parties related to its owner Franchise captives can be owned by the franchisor and cover risks of the franchisees, or by a group of franchisees, and cover their risks

5 What does the captive do? The captive issues policies, collects premiums, and pays claims, like a commercial insurer. However, as Jason will demonstrate, captives are far easier to operate Captives can generally write almost any kind of insurance: Property/casualty, tort liability, worker s compensation. Also hard to cover franchisee risks like cyber and employment practices liability

6 Captives often use a front and reinsurance A front is a licensed commercial insurer that provides the paper it is the name on the policy. The captive reinsures some of the insurance written by the front Certain lines of business workers comp require use of a front. A front is often used where the captive is located offshore Using a front can make it even easier to operate a captive, but at a cost

7 Captives Use Reinsurance to Limit Their Risks In order to avoid large claims, a captive will purchase reinsurance, essentially laying off a part of its coverage, from another company Captives have access to wholesale reinsurance markets, lowering insurance costs

8 Tax Benefits of Captives Insurance Companies are Special Premiums are deductible by insured The captive may deduct tax reserves actuarially determined amounts set aside to pay future claims This defers tax on a portion of premium income, and deferral may be significant for longer tail business

9 An insurance program must meet the IRS definition of insurance The IRS requires that risks be transferred by the insured, and that insured risks be distributed among a significant number of insured parties Franchise captives can meet these requirements easily, especially if owned by the franchisor

10 CAPTIVE INSURANCE FOR THE FRANCHISE INDUSTRY II. CAPTIVE INSURANCE CAN PROVIDE BIG BENEFITS TO FRANCHISES

11 Captive Insurance Can Improve the Bottom Line The Captive sets the rules Done right, the captive can earn significant profits Cover predictable risks, with appropriate deductibles Profits lead to lower premiums, more business, fewer overall losses, and more profits Franchises will want access to the captive insurance

12 Captive Insurance Can Improve the Bottom Line Example: $2 million in premiums, $350,000 in reinsurance costs, $150,000 administrative costs, $500,000 claims = $1 million gross profit $2,000,000 - $1,000,000 = $1,000,000 Key is choosing good, predictable risks to cover with appropriate deductibles, and choosing franchisees with good records and loss prevention practices

13 CAPTIVE INSURANCE FOR THE FRANCHISE INDUSTRY III. GETTING STARTED

14 Captive Insurance Can Enhance the Franchise Brand The Captive sets the rules Cover only franchises with good records Require franchisees to implement best loss control and reporting practices Lead to lower premiums, fewer losses, and enhanced reputation Captive is a marketing tool to attract franchisees one stop

15 Steps in the process Work with counselors to determine whether a captive might make sense and how a captive could best be used Obtain coverage and loss information from franchisees to do actuarial and feasibility studies, create a business plan Choose a form and domicile, develop the insurance policies, determine coverages and premiums Counselors meet with domicile regulators, file an application and do the legal work to organize the company, When approved, you must capitalize the company (a letter of credit can be used), and start operations

16 Operations Internet based interface Steve Ruben and Jason Scott will show how attractive the operation can be for franchisors and franchisees

17 Hays Specialty Programs Franchise Systems January 28, Hays Companies. All rights reserved.

18 ABOUT HAYS COMPANIES Hays Companies was founded in 1994 and is a privately held organization, owned by its leaders and managers. Number of employees: 700+ Firm revenues 2012: $141,000,000 Se attl e Portland San Francisco Salt Lake Cit y Denver Minnea pol is Mil wau kee Siou x Falls Des Moine s K ans as Cit y Ch icago area (3) St. Lou is Clevela nd Indianapolis D.C. Nashua Bos to n New York Morris town Phila delp hia Baltimore W ichita Cha rl ot te L os A n gel es area (4) Atlan ta Phoenix Dal la s Destin Houst on Ft. Laude rdale 18

19 FRANCHISOR GOALS Profit opportunity that can increase value of franchisor. High franchisee participation to create volume discount. Low touch for franchisor staff. Allow franchisees to focus on building business. Protection of assets, including brand. Uniform coverage. Loss control and safety specialists. 19

20 FRANCHISEE GOALS Easy to manage program. Allow franchisees to focus on higher impact activities. Uniform, franchisor-approved coverage. Competitively priced. Easy claim reporting process. Easy to generate certificates of insurance. 20

21 HAYS COMPANIES & PROGRAM CAPABILITIES HAYS PROCESS Information gathering Development of Proprietary Web Based Communication Platforms Development of Insurance Coverage and Rating Parameters Apply Best Practices for insurance coverage for franchises Captive feasibility study Customized Billing Claims and Q&A Support 21

22 HAYS COMPANIES & PROGRAM CAPABILITIES DISTINGUISHING FEATURES Experienced franchise customer service and support from an organization with extensive program expertise. Marketing expertise and data-mining capabilities to effectively target markets and meet customer needs. Products that provide high value because they are competitively priced. Sophisticated technology and automation, to support the ease of sale. Loss Control Services available to provide information and hands on instruction to improve safety. Claim Advocates to make sure clients are treated fairly. Currently administering over forty specialty programs. 22

23 INSURANCE PROGRAM GOALS PROTECT BRAND Franchisees have adequate coverage to insulate Franchisor against a loss. Require coverages to cover liability for specific, hard to place exposures of a group. Cyber, employment practices, excess limits Use insurance program as a selling point to potential franchisees. Make sure you are an additional insured on members policies. 23

24 INSURANCE PROGRAM GOALS IMPORTANT FOR MEMBERS TO HAVE ADEQUATE COVERAGE Franchisees should have a minimum amount of coverage that is adequate to protect against exposures. Collect certificates from those that are not in sponsored program. Leverage buying power with a large group to reduce cost of insurance. Add insurance requirements into franchise documents. o Can make sure Franchisees are adequately covered o Drive members into program 24

25 INSURANCE PROGRAM GOALS OPTIONS Coverages for group below market. Master policy with common renewal date. Consolidate loss and premium information. Add enhancements to program easily. Drive traffic to your franchise portal. Build business plan for a captive. Coverage options included in captive: o Property, Crime, General Liability, Professional usually included; and o May included Workers Compensation, Excess Liability, Cyber Liability Looking for predictability of losses, ability to control losses and how much potential exposure is in captive. 25

26 HAYS COMPANIES TECHNOLOGY ENROLLMENT FORM 26

27 HAYS COMPANIES TECHNOLOGY LANDING PAGE 27

28 HAYS COMPANIES TECHNOLOGY FREQUENTLY ASKED QUESTIONS 28

29 HAYS COMPANIES TECHNOLOGY CLAIMS 29

30 HAYS COMPANIES TECHNOLOGY CLAIMS 30

31 HAYS COMPANIES TECHNOLOGY 31

32 HAYS COMPANIES TECHNOLOGY. 32

33 HAYS COMPANIES TECHNOLOGY. 33

34 HAYS COMPANIES TECHNOLOGY UPDATE MY INFORMATION 34

35 HAYS COMPANIES TECHNOLOGY REPORTS 35

36 Questions

37 Contact John Moore Kansas City, MO Jeffrey Goldman Kansas City, MO Steve Ruben Hays Companies Jason Scott Hays Companies