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Are you interested in forming a captive in 2016?
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Reasons to Start

  • You own a successful small business and have been reserving money in case “something unexpected” happens – a unique risk to you or your industry/business.
  • If commercial insurance is available, the premiums are extremely costly, have a high deductible, or have low benefit limits.
  • You would like to move the reserved money out of your savings account into a growing protected asset that you control to provide risk coverage.
  • You may even be asking yourself, “Why can’t I just create my own insurance company to protect myself?”
  • The answer is, “You can, It’s called Captive Insurance.”

Is Captive right for me?

  • Traditionally available to large corporations, the minimum requirements have been lowered, and thousands of small businesses have already formed captives.
  • Even if you can’t support your own captive, you can still participate by grouping with other similar small businesses.
  • You must follow a precise set of requirements to create and run a captive as proper insurance, however, in doing so, your premiums are non-taxable, giving you an instant 45% return.
  • The Safe Harbor Group will give you one-on-one service to guarantee your Captive is set up and operated properly.

Here’s how it works

  • You create a private insurance company (captive) to insure the unique risks of your operating business.
  • You pay pre-tax premiums to your captive insurance company.
  • You control the captive as an independent asset, protected from your operational business. You may invest or borrow from the captive as needed.
  • If the unique risk should occur to your operational business, it is covered as a claim. Unused premium dollars stay in the captive, not lost to a commercial insurance company.
  • Down the road you can liquidate the captive insurance company or pass it to your heirs.
  • The Safe Harbor Group account manager will give you personal attention to every detail for the lifetime of the captive.
How can it help me or my business?

Historically captives were considered to only make sense for those companies with a minimum of $100,000 in traditional insurance premiums and over $10,000,000 in revenue and no less than 50 employees. Due to legal innovations, the decline in capital requirements and operating costs, this is no longer the case. Group and cell captive programs make financial sense for much smaller companies and professional practices. These smaller captives are able to take advantage of US Internal Revenue Code section 831(b) which allows qualified small captive insurance companies to be exempt from federal income tax on operating income.

Why form a captive?
Business Goals of Captive Insurance:

  • Improve cash flow predictability and balances
  • Retain control over risk assets
  • Improve risk coverage and cover uncovered risks
  • Reduce risk financing cost and lower premiums
  • Create new profit center
  • Minimize taxes
  • Increase asset portfolio liquidity
Business objectives of Captive Insurance:

  • Reduce insurance costs
  • Improve Claim Reserve Investment Management
  • Increase tax saving opportunities
  • Protect assets
  • Reduce asset transfer costs
  • Expand wealth accumulation options

 

Who Does a Captive Benefit?
Who is an Ideal Client?

  • Businesses with Substantial Risk
  • Anyone who may be insured or self-insured
Key Industries:

  • Real Estate Developers and Builders
  • Manufacturers
  • Professional Services Firms
  • Franchisees
  • Restaurant and Hotel Chains
  • Physicians and Practices

Who is a Candidate? Good candidates generally meet one or more of the following criteria:

  • $ 20+ million gross revenue
  • Pre-tax profits of $1 million to $50 million
  • Substantial self-insure / uninsured business risk
  • 50+ employees
  • Entities or those that can create multiple operating subsidiaries or affiliates.
  • Businesses interested in personal wealth accumulation and/or family wealth transfer strategies.
  • Businesses looking for asset protection.
Ownership Options

Captive Ownership
Captive ownership is quite flexible. In many cases, the captive has the same or similar ownership as the business. For group captives, some or all of the group members can own the captive.

A captive can be owned by multiple parties, including LLCs, partnerships, corporations, trusts, key employees and individuals.

For business owners focused on estate planning, a captive can provide substantial opportunities to transfer assets efficiently to future generations without gift or estate taxes.

75% if the S&P 500 Utilize Captive Insurance
Pure captive: Closely held insurance company

Insure Hidden Risk

Most businesses unknowingly self-insure a large amount of risk. Many of these are hidden or “below the surface” risks inherent in the day-to-day operations of business.With a captive, self-insured risks can be converted into tax-deductible premiums that are paid to a captive. Any materialized risks can now be paid with pre-tax assets.If insurance claims are as projected, the captive will retain substantial profits that can be distributed to its owners.

 

Insured Risk

  • Auto
  • General Liability
  • Medical Malpractice
  • Property
  • Worker’s Compensation
Self-Insured Risk

  • A/R Concentration
  • Business Interruption
  • Construction Defect
  • Cyber Risk
  • D&O/ E&O
  • Disability
  • Earthquake/Hurricane
  • Employment Practices
  • Intellectual Property Risks
  • IT and Information Security Risks
  • Litigation Defense
  • Mold and Pollution
  • Natural Disasters
  • Product Warranty

 

Risk Shifting

Often used in tax deductibility discussions, the term connotes the transfer of risk to a separate party. In tax disputes, the Internal Revenue Service (IRS) and numerous courts have required the presence of both risk shifting and risk distribution to find a financial arrangement to be "insurance."

Risk Management

The practice of identifying and analyzing loss exposures and taking steps to minimize the financial impact of the risks they impose. Traditional risk management, sometimes called "insurance risk management," has focused on "pure risks" (i.e., possible loss by fortuitous or accidental means) but not business risks (i.e., those that may present the possibility of loss or gain). Financial institutions also employ a different type of risk management, which focuses on the effects of financial risks on the organization. For example, interest rate risk is a bank's greatest financial risk, and various hedging tools and techniques such as derivatives are used to manage banks' exposure to interest rate volatility.

Tax Law and Captive Insurance

 

What constitutes Insurance?

  1. Insurance Risk
  2. Risk shifting and risk distribution
  3. Commonly accepted notions of insurance
3 Safe Harbor Rulings

  • Rev. Rul. 2002-89
  • Rev. Rul. 2002-90
  • Rev. Rul. 2002-91

 

Captive by Industry

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. This allows you to keep premiums you’d pay someone else in some cases, takes those premiums, gets claims and pays them. It is completely subject to all insurance regulations and reporting requirements in the jurisdiction in which it is founded and must be run with a high degree of compliance and disclosure to be effective for any purpose.

The captive may be used to provide added coverage on matters already included 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 standard practice needs several basic types of liability insurance for things like malpractice, employee lawsuits, data breach, general liability coverage.

For example, Physicians have a higher need to protect their assets and should take advantage of all lawful asset protection measures. Doctors and Surgeons are viewed as “deep pocket” defendants and are more likely to be sued than any other profession.

The captive provides an affordable way to hedge a variety of risks, including:

 

  • Directors and officers liability
  • Insurance carriers can deny claims
  • Deductibles on other policies
  • Exclusions from other policies
  • Credit line default
  • Patient Utilization
  • 25% of all pain and suffering lawsuits are frivolous
  • Surgeons are 4 times more likely to be sued than other doctors
  • Shrinking Affordable Care Act (ACA) reimbursement
What Happens to my Premiums?

You pay your captive insurance company premiums, and it reserves and re-invests as much of that premium as possible in a tax-advantaged way for the profit of the insurance company, which you own. It also takes a portion of those premiums and re-insures itself against the risks it covers to the greatest extent permissible. By reinsuring, it protects itself against large claims that could wipe out the captive and your “savings” that it accumulates as profit and reserves. 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. The premiums may also be used as a deductible 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 Insure as Little or as Much as I Want to?

You can choose from a broad variety of legitimate risks that you can cover. There are 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.  Benefits to the captive’s owner include the basics like life insurance, disability and long-term care and health care.

Cell Captives

The formation of a cell facility has a core where the owner of the facility holds the regulatory capital and the insurance license and runs the day to day operations of the company. Each cell is segregated from the others so that insurance risk, liabilities, assets and other relevant information is not shared. Capital or collateral funding levels may vary depending on the facility or domicile requirements.

Captive for CFO’s & CEO's

Originally, a captive insurance company is established with the objective of insuring risks emanating from their parent group or groups. Ultimately, a captive is a sophisticated way to reduce the amount of insurance paid to somebody else, control costs and losses and build a fund to manage imminent risk properly.

Captives accept the premiums that the company would have paid to a regular insurer and then cover any claims against the parent company. If the claims are less than the premium, the captive has made a profit in the same way a regular insurance company would. The difference is that the company that set it up benefits rather than the insurer.

For example, if a business paid a premium of $1 million to a regular insurer and had only $600,000 in claims, it would lose $400,000. However, if the company put the same amount of money into a captive, the business would retain the extra $400,000 in the captive less any costs of operation.


Insure Hidden Risk
Captive PresentationMost businesses unknowingly self-insure a significant amount of risk. Many of these are hidden or “below the surface” risks inherent in the operation of a business. With a captive, self-insured risks can be converted into tax-deductible premiums that are paid to a captive. Any materialized risks can now be paid with pre-tax assets. If insurance claims are as projected, the captive will retain substantial profits that can be distributed to its owners.

 

Insured Risk

  • Auto
  • General Liability
  • Medical Malpractice
  • Property
  • Worker’s Compensation
Self-Insured Risk

  • A/R Concentration
  • Business Interruption
  • Construction Defect
  • Cyber Risk
  • D&O/ E&O
  • Disability
  • Earthquake/Hurricane
  • Employment Practices
  • Intellectual Property Risks
  • IT and Information Security Risks
  • Litigation Defense
  • Mold and Pollution
  • Natural Disasters
  • Product Warranty

 

Benefits for Smaller Businesses
  • Asset protection from claims of business and personal creditors
  • Access to the lower-cost reinsurance market
  • The insurance of risk would otherwise be uninsurable
  • A tax deduction for the parent company for the insurance premium paid to the captive
  • Gift and estate tax savings for the shareholders and income tax savings for both the captive and the parent

The use of a captive is considered profitable by entities exploring heightened loss control and risk management. It is also an excellent opportunity for businesses with multiple entities or those that can create multiple operating subsidiaries or affiliates, businesses with $500,000 or more in sustainable operating profits and businesses with requisite risk currently uninsured or underinsured. Business owners interested in personal wealth accumulation and family wealth transfer strategies should also consider captives, as should businesses where owners and or CEO’s are looking for asset protection.

Personal Wealth Management

Captives are licensed, regulated legal entities, which stand apart legally from any other entity. This distinction can be applied, where appropriate, to form captives to assist in executing a long-term estate plan or to protect specific assets.

Typically, tax and estate planners use these wealth management captives for individuals and families of considerable means, known as high-net-worth individuals and ultra-high-net-worth individuals.

Compliant Captive Management

The Safe Harbor Group provide high quality and responsive turn-key captive management services:

 

  • The Safe Harbor Group Account Manager assigned as contact point for all issues
  • Annually underwrite and draft insurance policies
  • Prepare regulatory filings for your review and approval
  • Ongoing work with domicile’s Supervisor of Insurance, the IRS, and other regulatory authorities
  • Accounting: Prepare quarterly financial statements, bank reconciliation, document and monitor account activity
  • Solvency margin analysis and loss reserve analysis
  • Prepare tax return for captive
  • Arrange for unrelated insurance
  • Arrange reinsurance as necessary
  • Monitor ongoing regulatory changes
  • Consult with captive owners regarding proper investment structuring
  • Maintenance of corporate records
  • Arrange and coordinate an independent audit if required by domicile
  • Pay all regulatory and audit fees
  • Loss handling/claims processing
  • Captive liquidation and winding up activities
Why Use a Boutique Firm? More Money

 

Benefits of Working With The Safe Harbor Group:

  1. One on one experience
  2. Personal attention
  3. Availability
  4. Don’t pay big firm prices for big firm service
  5. Huge savings on management and set-up fees
  6. His experience
  7. Personal touch

“The Safe Harbor Group bring a big firm background and experience at a small firm price”