In today’s “get it now” economy, business owners’ biggest challenges hinge on finding new and innovative ways to grow revenues and build profit, so says Inc. Magazine (Johansson, 2016). The revenue/profit nut is a tough one to crack when you consider the impact of an increasingly stringent regulatory environment and the upward cost trajectory of employees’ healthcare insurance. Simply put, business owners in America are looking for new ways to do business. For many, their quest for innovation has led them to consider the concept of a privately-owned insurance company known as a Captive.
What is a captive?
A fully regulated insurance company, a captive is closely held and owned by one or more individuals. A captive typically insures its owners for their various personal and professional liabilities.
Owning your own insurance company allows you to secure insurance through the captive, elect to use high deductibles to keep some of the premiums you’d pay someone else, and create surplus funds that are available to fund the business going forward. Because captives are fully subject to standard insurance regulations and reporting requirements, they can be complex entities to create and manage.
Sometimes, the captive provides additional coverage on issues already covered by primary lines of insurance, such as key man, fleet liability or D&O (directors and officers). In other cases, captives offer additional supplemental protection for issues not covered by traditional liability policies, such as loss of a key customer or cybercrime.
Captive Alternatives offers more than 50 different insurance policies tailored to meet the specialized needs of business owners. That list is limited only by the types of risk that can be identified and insured.
Are captives a risky strategy?
It’s always wise to steer clear of any captive promoter who starts out with a pitch promoting tax deductions. For conservative business owners, that kind of arrangement deserves skepticism. However, if a captive is created and managed properly by experienced and specialized professionals, a private insurance company can deliver affordable Risk Management and Asset Protection, along with Estate and Tax Planning benefits, and efficient Exit strategies.
There are very specific guidelines to making your captive work, have it protect you, be compliant as an insurance company, and obtain tax advantages that interest business owners.
Almost every major national corporation operating in the United States uses captives. In fact, Congress just increased the premium limit for captives to $2.2 million – from a previous maximum of $1.2 million. That legislative vote of confidence warrants notice from business owners.
What happens to my premium payments?
Professional underwriters and an actuarial analysis based on your coverage needs, budget and risk exposure determine your premiums. Then, you pay your premiums to an insurance company that issues your coverages and policies. In turn, the insurance company reinsures the premium to your captive – less fees and claim reserves. Your captive insurance company can then invest net premiums for the profit of the insurance company, which you own.
Assuming all goes well, at some point in the future you will realize those profits as distributions from the captive you own at a tax-advantaged rate, (i.e., capital gains). Premiums may be deductible as an expense to your business, as opposed to “self-insuring,” which is usually not tax deductible and can’t compete with the coverage you get when buying insurance on the traditional, open market.
Can I reinsure as little or as much as I want to?
Captives can offer a wide variety of coverage for legitimate risks. An actuary will develop premiums and specific actuarial formulas to set minimum cash reserves, determine the internal cost of reinsurance, and list which specific risks you can legitimately insure against. The list is long, comprehensive and laden with options that can be tailored to meet the specific needs of your business. You can also move some of the costs of commercial risk into your captive by taking high deductibles on workers comp and health care insurance.