Where to Set up Your Captive
“Where do I form a Captive Insurance Policy” is one of the more popular questions we are asked. Timing is everything and where you set up your captive and when could be the most important. Once you have taken care of issues like capitalization, structuring, and tax issues then issues of domicile may be considered.
Domicile is where the captive is formed and licensed as an insurance company. Once your captive is formed and licensed, it may then become an admitted carrier in any other jurisdiction where it applies for an insurance license. Unfortunately, many people desiring to form a captive insurance company start thinking of domicile first. You don’t want to do that. You need to get all your ducks in a row first.
The truth is that most domiciles are about the same on paper. Each one usually just copies the next to try and stay up to date and to try and keep in competition with their neighboring domiciles. Because they all are so similar decisions on where to set up your captive need to be looked at closely by someone who is familiar with the different policies of all the neighboring domiciles. Have your financial advisor look at all the domiciles in your area to see which one best fits the need for your captive insurance company.
Types of Liabilities
There are many different types of Business Liabilities for which a policy may be issued that you need to consider when setting up a captive.
Advertising Liability – included in this is false advertising.
Antitrust & Unfair Competition. If you are over competitive or have un-fair practices this can result in a liability.
Commercial Vehicle Insurance – This is most common and stems from employees using company vehicles. The claims can be filed from both the employee who would be driving said vehicle or the 3rd party who was injured by the employee,
Construction and Design Problems – A company can be help liable years after completing a job for construction defects.
Structural Defects – Everyone involved in the construction of a house/ project will be help liable if a claim is files. Architects, engineers, builders, contractors and even supplies that provided the materials for the project can be names in a suit.
Title Insurance – paperwork can be wrong therefore resulting in a claim when there is an issue with the title.
There is no need to worry about your business if you have a captive set up properly by a knowledgeable captive insurance pro like Steele Larson Advisors. They can help you and answer any questions you may have.
Business Liability Information
Captives are known for saving companies money when buying insurance . Every company is exposed to various types for liabilities. Unfortunately some companies more than others depending on the type and size of the company. Most companies have coverage for the “normal” risks for that type of business but lack coverage on other risks that we don’t normally think of. There is a way to draft several different policies to help cover these risks. Here are a few options:
Litigation Expense Policies. This is in the event you are ever subjected t litigation you will have coverage which would pay for your legal fees and expenses only. The litigation expense policy (LEP) is usually used with captives so that no large asset becomes available to creditors.
Direct Policies. This would directly pay claimants and pay your legal defense fees and expenses. This type of policy are not preferred for captives since they potentially create an asset for plaintiffs to chase.
Policies of Indemnification. This would indemnify you for claims only (if you decide to make a claim) and pay your legal defense fees and expenses.
Sadly, many insurance managers simply copy their policies from a form or book or copy commercial policies without giving any thought to the peculiar needs of that particular captive to cover. Make sure you are working with a Captive Insurance Company that has experience and can sit down and talk you though all the different options.
Captive Policies
Reiss conceptualized the captive to provide his clients with coverage’s they needed but could not obtain through the traditional insurance market, thereby reducing the high cost of insurance to large corporations. Almost simultaneously he recognized the tax advantages under the concept under the US Tax Reform Act 1962. The tax advantages often attracted corporations to form captives solely for tax-reduction, but, over the years the business purposes for establishing a captive remained long after the tax loopholes were gone. Companies have turned to captives to reduce costs, enhance risk management, gain greater control over their insurance and directly access the reinsurance market. Today, captives are established to insure a wide variety of risks. Virtually every risk underwritten by a commercial insurer is provided for in a subset of captive insurers. Examples include: property, workers’ compensation, casualty (general and auto liability, product liability), and employee benefits such as long-term care and supplemental life insurance plans.
The most common use of captive insurance is to provide liability coverage’s for those lines of business, such as workers’ compensation, that have regular and predictable loss payments and for working layer professional liability coverage in order to access the reinsurance market, including Lloyd’s syndicates, for excess protection that may be unavailable or cost-prohibitive at the primary level such as products liability, general and professional liability and directors and officers liability. Vehicle insurance, both property damage and third party liability of corporate fleets and vehicles is also quite common.
Definition from Wikipedia
Call us – your Captive insurance Pro’s today and we can get you up and running.
Application
When you have all your paperwork filled out you submit your application to the Insurance Commissioner where the captive is formed. The Captive application will need the following items:
1. Personal information about each of the company’s shareholders, officers and directors. This if for the board to review whether or not you are going to be reputable or not.
2. Information about your new Captive Insurance Company. They will need to have information on the number and class of shares you want to be authorized and issued and how much capitol will be in the Captive.
3. Business Plan. This is the most difficult part of the insurance application. The commissioner wants to know how the company will be conducting the insurance business.
You will also need the following information regardless on where you live in your business plan:
1. Who will be the manager of the Captive on a day-to-day basis.
2. Structure of Governance – who, what and where the board of directors will function.
3. A list of Service Providers who will act as the insurance manager and auditor both of which ned to be approved and licensed.
4. A list of how and where the reserves and surplus of the Captive are to be held and invested.
5. Capitol Requirements – who much will be contributed to th captive and the type of assets to be contributed.
6. Spreadsheets of all financial statements for at least a five year estimate of cash flow.
7. An overview of the type of insurance business the the Captive intends to conduct should be given.
8. The type of coverage, deductibles and coverage to be extended and any coverage limits should be described.
9. A list of who will be insured by the Captive.
10. A list of situations where the captive may need the services of a front company.
11. Economic impact statement.
12. Lastly – fees. A check for the aplication fee, and review fees or other expensis. The fees typically range form $300 – $ 12,000.
Don’t worry about doing this alone. A good Captive Insurance Pro at Steele Larson Advsors will be able to assist you in filling out all the documents correctly, taking it to the Commissioner and even telling the commissioner any special issues which will speed up the process and get you on your way to your very own Captive Insurance Company and saving you money!
Year End Planning
Captive Insurance Companies (CIC) are excellent tools to manage risk AND reduce taxes. It is important to do year-end tax planning prior to December 31st. Here are the steps:
1. Analyze your projected taxable income by evaluating net income from your Profit & Loss statement
2. Identify transactions that can lower your taxable income prior to the end of the year (Including Captive Insurance Company Premium Payments). If you don’t know how to do this… (See Step #3).
3. Contact us to schedule a no-cost initial consultation to see how you could save thousands off your tax bill. Steele Larson Advisors 480-699-5721.
Types….continued
There are many different types of captive insurance companies. We went over a few in the last post and have six more to go over today.
1. Group Captive- This type of captive is used to help a large number of people or businesses that are members of a large group with similar interests. Example – a group of six Doctors starts a captive and puts each of their practices under that one Group Captive. It gives them the ability to self insure in the event something happens. They can then pull the money out to help cover costs. This is one way to insurance your high risk business when you aren’t able to get coverage elsewhere while saving on taxes at the same time. Beware though….because group captives sell insurance to so many people or businesses they are tightly regulated more so than single parent captives.
2. Agency Captives - This is a way for insurance brokers to be able to provide insurance to their clients. This helps the insurance company cash in on underwriting profits that would normally go to the commercial insurer.
3. Branch Captives – if you have a foreign captive it’s very hard to insure risks domestically. The solution is to create an offshore captive that owns a domestic captive. I know….very confusing. Feel free to ask any questions and we here at Steele Larson Advisors will be happy to clear up any questions.
4. Risk Retention Group (RRG) – This is very similar to a group captive but a RRG is licensed in at least one U.S. state and meets the requirements under the LRRA ( federal liability risk retention act). The biggest benefit is that once it has been licensed in a state and qualifies under LRRA, it can operate in any other state without additional licensing.
Hopefully this has given you something to think about. There are many different variables when it comes to Captive Insurance so make sure you have the correct information before you get started.
The Different Types of Captives
There are many different types of Captives. Unfortunately most people are unaware of the options because they have been created by those in the property-casualty insurance business such as insurance agents and risk managers who are not aware of the every changing updates and advanced estate planning concepts.
Lets go over the different types so you will be better informed when and if you want to start a Captive Insurance Company.
1. Pure Captive / or / Single Parent Captive
This is the simplest type of CIC which mainly insures only the risks of other businesses owned by its owner. Most captives would be considered pure captives because they only have one owner or owned by a close group of people.
2. Corporate Captive
This is the more traditional route people take when starting a CIC because it is largly owned by huge corporations or other publicly traded companies. Most of the worlds largest corporations have at least one captive insurance company. This gets more complex the larger the corporation due to auditors, shareholders and insiders who can all benefit from a CIC.
3. MicroCaptives, MiniCaptives, and CHICs
The micro-captive ( 501(c)(15) started in the late 1990′s for privately wealthy individuals and privately-held businesses. This type of captive is designed to take in less than $350,000.00 per year in total premiums.
The mini-captive (831)(b) is similar but slightly larger in that it takes in less than $1.2 million in premiums each year. There is a section of the code which allows the company to receive the premiums without taxes as long as an election is made.
CHICs = closely-held insurance company (or pronounced as “chick”) This is a variation of a pure captive where the captive is owned by the business owner’s children and/or grandchildren but is still used to underwrite business risks.
There is one other type of captive called a group captive but that needs to be it’s own post.
Let me know if you have any questions on this and I’ll be happy to get back to you with some answers.
About Captives
Captives are insurance companies created by their owners to insure their own risks and exposures, rather than insuring them with traditional insurance companies that market to the general public. With many industries experiencing inconsistent pricing or limited availability from traditional commercial insurance companies, captives are becoming more commonplace in the US and around the world. Physicians, nursing homes, hospitals, home construction and trucking are most notable among the many industries forming captive insurance companies. For more information, contact your personal Captive Insurance Pros at www.steelelarson.com
How Can I Run a Captive Insurance Company?
How Can I Run a Captive Insurance Company?
It’s easy with the help of a professional captive manager.
Steele Larson Advisors, LLC provides a comprehensive solution to your captive management needs. They design, establish and manage your complete captive insurance solution. SLA Insurance offers a turn-key management service which allows you to focus on running your operating company while we manage your Captive Insurance Company needs. You remain in control of claims and investment decisions while they automate the tax, accounting and regulatory issues.
Please visit them HERE at www.steelelarson.com for more information on how they can help you get your CIC up and running.