What Everyone Should Know About Insurance Captives.
What is Insurance Captive
When a captive is established, most CFOS are interested in any potential tax consequences. Payment of premiums to a captive for insurance coverage may well be deductible as an ordinary business expense. But they may not be so deductible. If the tax consequences are important, then a great deal of care must be taken along with engaging trusted, qualified advisers. Elsewhere the reader can find qualified and expert tax advice. My mission is to demostrate a some other points of consideration to support the opinions of the tax experts.
Risk Distribution
As to risk distribution, there are many more puzzling arguments. Some rulings have suggested that writing only one line of coverage in the insurer does not equate to risk distribution. This argument would seem to harm many traditional insurers who write only workers compensation or disability or boiler and machinery. This is an area for further refinement, i.e., more legal fees.
There have been some vague safe harbors, such as insuring more than 13 but less than 50 insureds. This has also been successfully overcome with skilled arguments and specific circumstances.
An approach that has had success is to have an outside insurance party conduct a review of the captive owner's exposures and current coverage to determine if there are exposures peculiar to that business which are not addressed by the traditional market. This approach can be viewed as reasonable for businesses whose line of work isn't well defined by the traditional insurers, such as some construction exposures and supply line issues.
In most cases, success has been gained by reinsuring out of the captive more than 50 percent of the risk as measured by premiums. The choice of the reinsurer becomes critical as that can be viewed as not constituting "real" insurance.
When a captive is established, most CFOS are interested in any potential tax consequences. Payment of premiums to a captive for insurance coverage may well be deductible as an ordinary business expense. But they may not be so deductible. If the tax consequences are important, then a great deal of care must be taken along with engaging trusted, qualified advisers. Elsewhere the reader can find qualified and expert tax advice. My mission is to demostrate a some other points of consideration to support the opinions of the tax experts.
Risk Distribution
As to risk distribution, there are many more puzzling arguments. Some rulings have suggested that writing only one line of coverage in the insurer does not equate to risk distribution. This argument would seem to harm many traditional insurers who write only workers compensation or disability or boiler and machinery. This is an area for further refinement, i.e., more legal fees.
There have been some vague safe harbors, such as insuring more than 13 but less than 50 insureds. This has also been successfully overcome with skilled arguments and specific circumstances.
An approach that has had success is to have an outside insurance party conduct a review of the captive owner's exposures and current coverage to determine if there are exposures peculiar to that business which are not addressed by the traditional market. This approach can be viewed as reasonable for businesses whose line of work isn't well defined by the traditional insurers, such as some construction exposures and supply line issues.
In most cases, success has been gained by reinsuring out of the captive more than 50 percent of the risk as measured by premiums. The choice of the reinsurer becomes critical as that can be viewed as not constituting "real" insurance.
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