The Protected Captive™ from Captive Alternatives
Setting up a captive insurance company can involve layers of complexity and the learning curve is often steep. You likely have questions about how Captive Alternatives’ Protected Captives work and what’s entailed in owning one. This list of Frequently Asked Questions covers the basics, and Captive Alternatives welcomes the opportunity to work with you to determine your next best step.
> What is a Captive?
> How does a Protected Captive work?
> What are Safe Harbor rules/ Is my Protected Captive compliant?
> How are Claims handled?
> Can I take money out of my Captive?
> How long does it take to create a captive?
> Does CapAlt give Tax, Legal or Financial Investment advice?
> Who needs a Captive?
> What are the costs of a Captive?
> How do I create and run a Protected Captive™?
> Is my money safe?
What is a Captive?
A captive insurance company is a privately held small insurance company that insures the risks of its owners other business enterprises. Congress enabled “831 (b)” small captives in the 1986 Tax Reform act, believing that it would foster the growth of insurance capacity and help provide greater stability for closely held small companies. The captive acts like a conventional insurance company: issuing policies, accepting reinsurance, determining risk and paying claims.
What is a Protected Captive?
A Protected Captive™ is a corporate structure with a hub design, in that it has a central core organization – called Madison Re, I.I. or MadRE – linked to separate Protected Captives that have their own assets and liabilities. A Protected Captive™ shares all of the administrative and regulatory traits of a traditional insurance company; however, unlike a more traditional insurance company, the structure of the Protected Captive™ vastly increases administrative efficiencies, while maintaining statutorily protected assets within each individually owned cell.
How does a Protected Captive work?
A Protected Captive™ works as a participant in the sharing of risk which is at the heart of an effective risk management program.
One point of difference between a Protected Captive™ and a traditional captive is that the Protected Captive™ does not issue direct insurance coverage to the parent. The parent obtains their selected risk coverages from an independent insurance carrier, often called a fronting carrier or front. The Protected Captive™ participates in the parent’s selected risk coverages with the issuing carrier, by providing reinsurance to the fronting carrier.
What are Safe Harbor rules/ Is my Protected Captive compliant?
It is very important that captive owners implicitly understand that they are the owner of a private insurance company. Safe Harbor rules help determine whether a captive is operating properly and compliantly as an insurance company. Two key considerations are Risk Transfer and Risk Distribution.
Risk Transfer is the action of obtaining insurance coverages from an independent issuing insurance carrier, thus shifting the risk from a self-insured risk retained by your company to a risk insured by another. Risk Distribution is accomplished in the Protected Captive™ model via the sharing of risk with multiple unrelated insureds via the issuing carrier. Both features are essential to the valid and effective Protected Captive™ model.
In the CapAlt Protected Captive™ model, the Captive shares 50% of the business’ related risk and the insurer carries the other 50%. This is a “safe harbor” amount that is far from any arguable minimums.
How are Claims handled?
The fronting insurer provides “claims made” policies that last for a one year period of time, plus a sixty day notice period at the end of that year. Therefore, the length of time for Captive reinsurance risk is a fourteen month period. The insurance pays the claim in full and obtains 50% reinsurance participation from the Protected Captive which reinsures these coverages.
Insurance premiums that were not spent on expenses or claims are returned to the Captive, where they are typically held as surplus reserves, and used to cover subsequent Captive reinsurance operations.
Can I take money out of my Captive?
When Captive surplus reserves are no longer needed to support reinsurance functions, they can be distributed either as dividends or long term capital gains distributions. If there are sufficient liquid investments to cover the Captive’s solvency requirements, then surplus funds can be loaned out on commercially reasonable repayment terms. In this manner, business projects can be funded from successful Captive operations.
How long does it take to create a captive?
Depending upon the jurisdiction selected by you, it can take from as short as two weeks to as long as four months to obtain your Captive’s certificate of insurance authority. All of CapAlt’s Protected Captives are now formed in Puerto Rico. This gives us unprecedented flexibility to offer customization, efficiency and speed in creating your captive.
Since the late 1990’s, CapAlt has set up more than 200 successful Captive Insurance Companies. CapAlt presently manages Captive Insurance Companies across many varying business and medical sectors, and we continue to grow every day. Our Puerto Rico International Insurer structure is the wave of the future, and unique in the small captive industry. It is based on years of research and detailed analysis of the laws of the top jurisdictions.
Our partners and suppliers include Morgan Stanley, B2B CFO, Microsoft Great Plains and we are endorsed by the California Medical Association as their preferred captive vendor.
Does CapAlt give Tax, Legal or Financial Investment advice?
No. CapAlt does not give tax, or legal advice in general or about Captives in particular. We can certainly alert you to questions you might ask your trusted advisor, and CapAlt will work with your advisors to help them respond.
The CapAlt model includes the aggregation of financial assets which can be invested in compliance with insurance related investment principles. CapAlt does not give financial investment advice. The Protected Captive™ owners can select their own investment advisors or select from several investment advisors recommended by CapAlt.
Who needs a Captive?
Captive Insurance Companies are an essential risk management tool, and should be considered for any successful companies with a substantial cash flow. Captives can provide a structure for your company’s long term insurance and financial stability. They can be considered as additional profit centers for your business, and provide investment funds from excess surplus. Captives can accomplish a multitude of long term goals for your business and its owners.
The ideal target business for a Protected Captive™ is a privately owned for profit business with a gross annual income in excess of $1 million, and the economic benefits of Captive’s can begin with a risk budget as low as $150,000. CapAlt works with private companies of all sizes in all major business sectors, as well as many medical practitioners and medical companies.
What are the costs of a Captive?
Reasonable fees – on a sliding scale – are charged for the creation and ongoing management of the fronting program and the captive operations.
Capitalization of a Protected Captive™ is one third of the premium paid by the parent company for its risk coverages. This amount of capital is set by the Puerto Rico authorities to ensure that your company is an insurance company that has the financial capability to withstand losses, especially in the early years. Over time, the capital assets of the Captive grow from the retention of surplus funds generated annually under the Protected Captive™ model. The Captive gets financially stronger, and is able to expand its reinsurance functions for its parent business. While you may find domiciles and managers that set lower capital requirements, we always re-iterate that a Protected Captive must operate as a fully compliant small insurance company, and that includes having industry standard capitalization levels.
How do I create and run a Protected Captive™?
There are three simple steps involved in determining whether your business is a fit with the Protected Captive™ model.
First, we will have a conversation with you about your business, your present goals, and your company’s internal risks and current risk management programs. Those are the focal points of the “Risk Management” page of this website.
Second, CapAlt will provide you with a detailed feasibility and actuarial analysis report that shows your business several options of participation in the Protected Captive™ model, along with the associated costs and timelines of each option.
Third, you and your business advisors will select the program or programs that make the best sense to you, and you will select the timelines for implementation.
Once your business’ Protected Captive™ is set up and running, the risk review and renewal decisions are performed on an annual basis. You will decide how long the program is in effect for your company, and you will decide if and when to end the program and wind down your Captive.
Is my money safe?
While there have been horror stories of mis-managed funds, CapAlt goes to significant lengths to protect your captive funds. All new Protected Captives receive a Morgan Stanley operating account, and we follow a rigorous internal control process that require multiple signatures for funds transfer. CapAlt has viewing only rights into these accounts to help prepare financial statements, but you are always in full control of your captive funds. Distributions or loans from the captive are subject to minimum surplus rules and formal loan documentation.