Get To Know Everything About Captive Insurance

Various small business owners and accountants are not aware about the easy way for reducing their taxes and expenditures. They can reduce their tax by some percentage by sharing or creating a captive insurance company. It has been observed that approximately 80% of Fortune 500 companies are using this method and hence getting some kind if captive insurance arrangement. When they feel that outside insurance carriers are charging them a lot, or they can’t get the coverage that they want, then they set up their own insurance companies.

The parent insurance company creates a captive option that allows you to have self financing options to buy insurance coverage. When you buy insurance from a company, then you spend cash on buying their service, but that money is gone forever, but when you invest in captive insurance, then you have strong chances of getting back your payment.

It is the responsibility of the organization to pay money from the captive or from the business. Usually, captives are located at the places, such as Bermuda, South Carolina and Vermont where there are less arduous regulations and tax treatment is favorable. Renting or sharing a big captive is the right way in which small businesses and medical practices can take full benefit of captive insurance. You can get tax deductions and lower the insurance costs at the same time with one scheme only- it is really beneficial. It is good to rent a huge captive instead of owning your own captive if you need only tax advantages.

The reason to go for renting a captive is that a single parent captive may be forced to employ less than marginal services or the required standards. It is recommended for small companies to opt for renting since in this case, they do not have to pay for the expenses, like administrative costs licensing requirements etc. What you need is a captive or a captive insurance company for your tax reduction requirements.

So, to set up a captive insurance company, you need to rent or own a company by contacting the provider orgnization. Since it has a number of advantages, there are many small and medium companies and businesses that opt for this method to save money and taxes, and get the insurance of their choice. So you can get insurance and get many advantges from it.

Florida Becomes Latest Home To Captives

Nearly half of the states in the U.S. allow captive insurance entities to operate. Now Florida is joining the list, with Governor Rick Scott recently signing into law a measure allowing the formation of captive insurance companies in the state. The measure, H.B. 1101, allows the formation of single-parent captives, special-purpose captives, industrial insurance captives and captive reinsurance companies. The new law takes effect in July of this year.

Captive reinsurance companies are required to have a minimum of the greater of $300 million or 10% of reserves in capital and surplus. Captives licensed in Florida will be required to hold at least one annual board meeting in the state and appoint a registered resident agent to act on their behalf. Captives and captive reinsurance companies must pay a $1,500 application fee and a $1,000 annual renewal fee.

Captives Formed by Self Insurers to Reduce Taxes

A captive insurance company operates at the behest of and for the benefit of a noninsurance parent-owner company or group. A captive insurance company is self-owned by the very persons or group whose risks it insures. Ownership may be by a single parent or by a group of shareholders. The latter is referred to as a “multiple-owner captive.”

These entities resemble mutual insurance companies, but for a limited number of participants. The formation of a special purpose captive insurance company by an affiliate or controlled company should not be negatively influenced by the jurisdiction of formation; and, while captives provide insurance primarily in the areas of general liability and workers compensation, the structure can be used to address what once were considered more exotic risks (i.e. ransom, kidnapping, terrorism).

A captive insurance company is established for the individual needs of the owners or members, as opposed to third-party insurance. Tax advantages are not the principal reason for forming such an arrangement.

Although each captive is distinct, some common advantages are sought, including reduced cost of coverage, direct access to reinsurers, provision of broader or otherwise unavailable coverage, mitigation of the market swings of commercial insurance, improved cash flow, risk spreading, improved risk retention capability, and integration with an overall risk management plan.

Captive insurance companies represent a significant component of the alternative risk market. Due to their growth, strength, and utility over the past decade, captive insurance companies are no longer considered by many insurance professionals to be a truly “alternative” insurance market. The use of a captive is now seen as an integral part of general business risk management.

Captive Insurance As an Alternative Risk Management Technique

A captive insurance company is one that is owned by its parent and/or other similar parents for the sole purpose of insuring the parent’s exposures to claims of losses. Captives are usually owned by a single organization, although, sometimes it can be owned by an association of similar types of businesses.

The carrier issues policies directly to the business owner and provides the risk transfer mechanism that the insured desires. Since the client owns the captive insurer, the insured will be able to participate in all or some of the profits. On the downside, the business owner will also participate in any and all of the claims and losses. Clearly this arrangement presents the insured extreme control over the underwriting, claims and investments. Captives are usually created in industry sectors that are considered high-risk or have high risk exposures for loss.

Most professional liability industries, such as doctors, attorneys, engineers, and other professional organizations have these types of plans for their member organization. Captives can also be formed to deal with catastrophic events that are reoccurring and somewhat predictable overtime. Usually you see this along the coastal waterways with the high wind exposure to loss on property accounts. As with a self-insured plan, which this highly resembles the company profits and commissions are savings that are passed through to the insured. In high risk industries by the nature of their business or because of high risk exposures of loss, captives can provide some continuity in insurance pricing overtime. High risk industries that have exposures to malpractice claims tend to go in cycles depending on laws and regulations and other in inherent global factors.

Businesses that are exposed to catastrophic damages such as hurricanes, earthquakes, floods and the like have losses that tend to come in climactic cycles over long periods of time. These contracts can help prevent these premium highs and lows by stabilizing the premiums over time. Just like self-insured plans, there usually is a tremendous amount of capital that must be invested to make the program work. Thus entering and exiting this program can be complex and difficult just like a self-insured plan. The Captive has tax advantages by having your own captive insurer but it is highly regulated and normally the captive would need to allow outside businesses to access the plan in order to receive favorable tax deduction of premiums.

Within this category of captive insurers there are legislative laws in place allowing risk retention groups to be formed. These groups operate as a sharing of mutual risk financing by insuring all of its owners. Risk retention groups can form quite easily with very little capital as long as the group is a homogeneous group of business owners.

  • Usually depending upon the tax ramifications captive insurers can either be domiciled in the state where the insured is domiciled and thus this is called a domestic insurer.
  • The captive insurer could be based in another state other than the insured State and this would designate the captive insurer as a foreign insurer.
  • Finally, it might make sense to base the captive insurer in another country and that would give it the designation of an alien insurer.

Captive Insurance Company’s fill a certain niche and usually works well within the niche and not so well outside their niche.