The following is Part VI of a six-part series of blog postings regarding whether a captive insurance subsidiary or one owned by the owners or affiliates of a company may represent an effective risk management tool that also provides economic benefits. Although there are various types of captive insurance, this posting will focus primarily on single parent/pure captives and how they might provide economic benefits for you or your food and agribusiness company. Part I, Part II, Part III, Part IV and Part V of the blog series are here.

This posting provides an overview of certain other considerations to forming a single parent or pure captive.    

PART VI – COSTS, EXPENSES AND OTHER CONSIDERATIONS IN FORMING A CAPTIVE

As any experienced business owner, executive or manager understands, risks, costs and expenses are associated with almost every business opportunity. The opportunities and benefits that may be realized through a single parent captive subsidiary are no different; they, too, are subject to costs and expenses.

  • Costs to Organize and Qualify the Single Parent Captive with the Appropriate Jurisdiction

Apart from the time spent in the initial consideration regarding whether organizing, implementing and operating a captive insurance subsidiary makes sense from a business perspective, once the decision is made to move forward, the company will incur costs, expenses and professional fees. These costs and expenses will include but will not be limited to:

  • professional fees for preparing the feasibility study;
  • fees of the actuary to prepare the report required by the feasibility study;
  • preparation of the documents other than the feasibility study that must be submitted as part of the application to the selected jurisdiction’s captive insurance division; and
  • accounting and legal fees.

Thereafter, unless the parent has experienced insurance executives and staff who can operate the captive, it will incur additional costs and expenses as it pays a “captive manager” to operate and manage the captive insurance subsidiary, prepare the financial statements and make the required annual filings and other filings with the applicable jurisdiction’s insurance regulatory authorities. The parent will also need tax professionals, accounting and some legal assistance to handle issues as they arise.
Continue Reading Using Captive Insurance to Create Value for Your Company – Part VI

The following is Part V of a six-part series of blog postings regarding whether a captive insurance subsidiary or one owned by the owners or affiliates of a company may represent an effective risk management tool that also provides economic benefits. Although there are various types of captive insurance, this posting and the one to follow will focus primarily on single parent/pure captives and how they might provide economic benefits for you or your food and agribusiness company. Part I, Part II, Part III and Part IV of the blog series are here.

This posting provides an overview of the benefits to a company and its shareholders or members of forming a single parent or pure captive.    

PART V – CERTAIN BENEFITS OF FORMING A SINGLE PARENT OR PURE CAPTIVE

After identifying the most salient risks facing a company (which should be a part of any company’s risk management function) management considering captive insurance should evaluate the following:

  • whether commercial insurance coverage is available for those risks;
  • whether the available commercial coverage for those risks have such a high deductible and so many exclusions that the company is effectively self-insuring the potential losses from those risks;
  • whether the premiums charged by the commercial providers are not only affordable but also less than the company could provide itself through forming a captive subsidiary for those risks, given the probability of the occurrence of the risk events actually occurring and the magnitude of the loss if the event were to occur; and
  • whether commercial insurance for those risks are likely to remain available at such affordable costs for the foreseeable future.

One of the primary values of the single parent captive is the parent’s ability to customize policies that insure against business and operational risks that are not available from third party insurers or at costs that are unreasonably high given the risk and the potential harm to the company. Captive insurance rarely replaces third party insurance. Rather, it serves as a gap filler to provide coverage that commercial carriers do not provide at a reasonable cost. 
Continue Reading Using Captive Insurance to Create Value for Your Company – Part V

USING CAPTIVE INSURANCE TO CREATE VALUE FOR YOUR COMPANY

The following is Part IV of a six-part series of blog postings regarding whether a captive insurance subsidiary or one owned by the owners or affiliates of a company may represent an effective risk management tool that also provides economic benefits. Although there are various types

The following is Part III of a six-part series of blog postings regarding whether a captive insurance subsidiary or one owned by the owners or affiliates of a company may represent an effective risk management tool that also provides economic benefits. Although there are various types of captive insurance, this posting and the three to follow will focus primarily on single parent/pure captives and how they might provide economic benefits for you or your food and agribusiness company. Part I and Part II of the blog series are here.

This posting turns its attention to two basic elements of insurance – risk transfer and risk distribution.    

PART III: RISK TRANSFER AND RISK DISTRIBUTION

The Supreme Court has identified two criteria for an arrangement to be treated as insurance for federal income tax purposes. Accordingly, these must be present for a company to deduct premiums for insurance and, under Section 831(b) of the Internal Revenue Code for a captive insurance company to exclude up to $1.2 million in premiums received.  These are:

  • risk transfer; and
  • risk distribution.

Risk transfer is the insured’s transfer of its liability risk to another person or entity, and risk distribution is the insurer’s spreading its liability risk among a number of insureds.

Risk transfer is an easy concept. By purchasing liability insurance from a third party, the company is transferring to the third party its risk of liability for an insurable loss it would otherwise have to pay itself.  Risk distribution is a somewhat more complicated concept and the IRS has issued two Revenue Rulings that provide guidance on how the risk distribution requirement may be satisfied.  In short, risk distribution may be satisfied if either:

  • the company that is to be the single member of the captive insurance company also owns 100% of twelve or more subsidiaries (“brother-sister affiliates”) to which the captive insurance company will provide the insurance with no one brother-sister affiliate accounting for less than 5 percent or more than 15% of the risk; or
  • more than 50% of the captive insurance company’s risk exposure is derived from insuring third parties.


Continue Reading Using Captive Insurance to Create Value for Your Company – Part III