Many medical practices are fighting an increasingly futile battle against declining reimbursements, increased regulation and concerns about the declining value of a medical practice and exit strategies. As a result, a growing number of doctors are exploring the concept of a privately-owned insurance company, known as a Captive.
What is a captive?
A captive is fully regulated insurance company that is closely held and owned by one or more individuals and which typically insures those individuals and their various personal and professional liabilities.
Owning your own insurance company allows you to source insurance through the captive, keep some of the premiums you’d pay someone else using high deductibles, and create available surplus for a variety of purposes. A captive can be complex, and is fully subject to standard insurance regulations and reporting requirement.
In some cases the captive is used to provide additional coverage on issues already covered by primary lines of insurance, like malpractice. In other cases, captives are used to provide additional supplemental coverage on issues not covered in traditional liability policies.
A typical practice needs five or more basic types of liability insurance for things like malpractice, employee lawsuits, cyber liability, general liability, and even “key-man” coverage. CapAlt offers more than 50 different insurance policies tailored for doctors and captive owners. The list is limited only by the types of risk you can identify and legitimately insure against.
Is it a risky “tax dodge” strategy?
It’s always wise to steer clear of any captive promoter who starts out with the tax deductions pitch. It will only go downhill from there. But if a captive is created and managed correctly, by experienced and specialized professionals, your private insurance company can be constructed like the veritable Swiss Army Knife of business planning – affording Risk Management, Asset Protection, Estate and Tax Planning and Exit strategies.
There are very specific guidelines to making your captive work, have it protect you, be compliant as an insurance company, and get the tax advantages that get doctors and business owners excited.
The captive strategy is employed by almost every major national corporation, all of whom use them effectively and without significant issue. In fact Congress just increased the premium limit for captives to $2.2 million – from a previous maximum of $1.2 million.
What happens to my premium payments?
Your premiums are determined by professional underwriters and an actuarial analysis based on your coverage needs, budget and risk exposure. You pay your premiums to an insurance company, who issues your 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 which can’t compete with the coverage you get when buying insurance.
Can I reinsure as little or as much as I want to?
You can cover a wide variety of legitimate risks. An actuary will develop premiums and apply a very specific actuarial formulas that dictate minimum cash reserves, what the internal costs of reinsurance should be, and what risks you can legitimately insure against. The list is very long and comprehensive. You can also move some of the costs of commercial risk into your captive by taking high deductibles on workers comp, health insurance and medical malpractice.