Small Business Captive Insurance Companies

May 26, 2010

Captive insurance companies were initially established by Fortune 500 companies to manage self -insured risk, for tax minimization and to build investment funds for corporate purposes. New companies emerged to fill gaps in coverage - such as the {now} giant reinsurers established in Bermuda in the early 80s, by groups of large manufacturers, to provide product liability insurance when the conventional market was not. Physician groups established captives in the 90s - usually in the Cayman Islands where the sailing is even more sensational - to provide medical mal-practice liability coverage when that market tanked.

Over the years the IRS has waged war against an army of attorneys and tax accountants over captives and the tax deductibility of premiums, and a steady truce seems to have formed over what conditions a captive must meet. Over the years other uses for captives such as employee benefits self-insurance have continued to drive demand and there is a thriving infrastructure of professional advisors both off-shore in Bermuda, the Caymans and Bahamas as well as on shore in Vermont, Colorado and South Carolina.

Recently I was intrigued to hear that small companies are now considering captives to accomplish some of those Fortune 500 goals, namely: to manage risks through self-insurance, to minimize federal and state income taxes, and to diversify and increase portfolios. The captive has to meet the criteria laid down by the IRS: be adequately capitalized, have a license and competent professional advisors, underwrite genuine insurance risks and have a third party risk component. A captive would thus allow a business owner to fund up to $1.2 million a year in captive premiums, which can then achieve a number of objectives.

  • Insurance Business - An insurance company will generate revenues from underwriting risks, including risks which are now self-insured, as well as certain third-party risks.
  • Asset Protection - An insurance company can provide additional asset protection benefits.
  • Control - The insurance company owners and participants retain substantial control over investments, and flexibility in how those investments are managed. An advantage of an insurance company over other accumulation vehicles, such as trusts, is that it is proper for the owner to control and manage the insurance company's assets. This can even be used for Estate Planning purposes.
  • Reinsurance Market Access - An insurance company can negotiate with reinsurers for coverage of excess risk. In general, reinsurance rates decline when small captives combine to form a risk retention group (e.g., for medical malpractice insurance).
  • Independent Investment - An insurance company has the potential to become a business of great value.

One more Fortune 500 solution that is now available for the smaller business owner.

For a discussion on how to improve business profitability and value, while retaining as much cash as possible, Contact David Kirkup, B2B CFO®, on 770 845 6897.


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