Captive Providers, LLC
Providing a Cost Effective Turn Key Captive for Successful Business Owners
From Feasibility, Design & Implementation to On-going Compliance & Maintenance
This Section contains... Background
Section 831(b) of the IRC allows a U.S. corporation, Limited Liability Company, Partnership or Sole Proprietor to pay $1,200,000 annually to their own “properly structured” Captive. This premium is deductible under IRC Section 162 as an ordinary and necessary business expense. Additional Captive premiums may be paid to other Captives. A Captive must be qualified by regulatory authority to operate as a licensed insuracne company for specific and limited purposes.
In the simplest form, a Captive is an organized plan of self-insurance that calculates risk, issues policies, collects premiums, pays expenses and establishes reserves to pay future claims. Captive owners control their company, how claims are handled and how reserves or underwriting profits are invested. Over a period of time, these reserves can become a sizeable asset. These reserves and the income from this asset directly benefit the Captive owners or their estate depending upon how the structure is established. If the business owner has a good claims history, the premiums that have been successfully deducted from his taxes, accumulate tax-deferred, and can later be taken as dividends or as liquidated capital at capital gains rates.
One can own all or part of a Captive. Generally, it depends on your annual premium and available funds for capitalization and the number of years Captive premiums will be paid. If you will be averaging premiums of less than $800,000 annually, it is probably better to own part of a Captive. For example, if you intended to deduct premiums of $250,000, you might own 25% of a Captive with three other firms and thereby only need $62,500 of capitalization as opposed to a considerable higher rate if owned alone. We provide actuarial studies and underwriting that will assist you in providing the proper information needed to make a wise decision.
Obviously, there are a number of complicated rules that must be scrupulously adhered to in establishing and owning all or part of a Captive insurance company and maintaining them on an annual basis; policy construction and risks underwritten; proper capitalization; premiums must be actuarially based; annual audits are required; a registered agent must be selected, on-shore or off-shore managers must be selected; very importantly, risk pools must be established since the tax code mandates that, in most cases, the insurance company cannot take on all of its own risk. Generally, the IRS doesn’t consider an insurance company to be legitimate if it only insures the owner’s risks. We make all this a simple one-step process.
It is critical to choose your Captive formation partners wisely. In reference to the above mentioned rules, many Captive companies do NOT meet ALL the necessary minimum standards acceptable to the IRS in case of an audit and many have undistinguished fees, etc. Bottom line…if not properly structured, a change in audit can be a costly event as the IRS typically considers this fraud and there are not any limitations to fraud so they can go back to the inception of the Captive and apply taxes and penalties!
Our audit record is impeccable and a vast majority of our clients return from year to year. Our fee structure is all inclusive so there are no surprises; the fee structure is typically only a percentage of the taxes that would otherwise be paid. We would welcome the opportunity to assist you in “properly” structuring your Captive and then the on-going compliant maintenance. Please see Contact Us.
Available Coverages
The Captive premiums are for business risks “particular” to the business owner who is writing the premium checks; hence the term “Captive” insurance. But these risks are not the ones where there are typically a lot of claims; as a result underwriting profits can be created. The risks typically considered are called “first party payee” coverages (see below) that focus not on liability to a third party arising from conduct emanating from a business, but on the business itself and protecting the owner that has a stake in the business. Every small business owner has these type risks!
Traditionally, “large” companies would use Captives to capture commercial insurance premiums such as workers’ comp, property insurance, general liability, etc. Slowly, as IRS policies changed, the opportunity evolved for middle to small sized businesses to the sole proprietor to use Captives. This discussion will be generally directed to the small to middle sized businesses. To be cost effective, the smallest premium that must be justified through actuarial studies and underwriting of the parent company’s operations is $100,000 of “aggregate” risk premiums. NOTE: most competitors will state that the minimum premium will be approximately $250,000+; due to our expertise, size, etc, we have been able to reduce that amount so that the everyday business owner can consider a Captive.
Depending upon the facts and objectives of an owner and how the Captive is structured and owned, there can be numerous benefits but first a business must determine what coverages are applicable to their business. Some examples are listed below.
The Most Common Captive Coverages (First Party Payee Coverages):
Formation Domiciles
The Captive insurance marketplace is a worldwide business. Captive insurance companies can be incorporated in certain states (about half the states now have Captive legislation) or certain foreign jurisdictions with Captive legislation compliant to Section 831(b) of the IRC. Offshore domiciles compete with these states by establishing Captive legislations compliant to the IRC and are generally less expensive and require less capitalization costs. Each offshore domicile has requirements that differentiate that particular jurisdiction. Some of the most popular venues are the British Virgin Islands, the Turks and Caicos Islands, Barbados, St Kits, Bermuda and the Cayman Islands.
There are many more Captives incorporated offshore than in the U.S., but there are pros and cons that need to be discussed depending on the specifics of your situation. Captives incorporated outside the U.S. take 953(d) Elections to be treated and taxed as U.S. “C” corporations.
It should be pointed out that we have experience in several states and in several foreign jurisdictions; providing flexibility to our clients as to capitalization costs, lower premiums, etc.
Risk Rentention Group
A Risk Retention Group (RRG) is a group self-insured program or Captive insurance company formed under the provisions of the federal Liability Risk Retention Act of 1986, by or on behalf of businesses joined to insure their liability exposures. All Owners are Insured’s and all Insured’s are Owners.
The intent of the Congressional leadership was to facilitate the operation of group insurance programs, reduce costs, provide alternative mechanisms for insurance coverage and promote greater premium competition among general liability insurers.
Typically, the purpose of a RRG is to provide the required medical malpractice coverage limits with a “high” policy deductible. A Physician owned Captive Insurance Company would provide coverage for the “high” deductible medical malpractice policy provided by the Risk Retention Group. For physician practices that would like to reduce their medical malpractice premiums and their local hospitals will not accept coverages from Captive insurance companies then this represents a potential alternative. (See Below*)
We have established a RRG in Kentucky which could be approved and admitted in most states. Our goal is to provide personalized expert solutions to meet specific liability needs. We concentrate on one specific area of expertise…Medical Professional Liability Coverage for the Health Care Professional.
Free Quote: To receive a free quote, please provide a copy of your declarations page and tell us about your loss history. Quotes are How a Captive Worksprovided within 24 business hours. Please send to RRGquote@Captiveproviders.com.
If you have any questions about your current financial situation or wish to schedule an appointment, for a personal and confidential discussion, please Contact Us.
*Many States will not recognize nor admit an international Captive Insurance Company to do business in their state. In such a State only a Domestic Insurance Company is authorized to provide valid insurance coverage. Domestic Insurance Companies apply to be “Registered” and “Approved” by that State’s Dept. of Insurance. Even in a State that does recognize an International Insurance Company to do business in that State, the Hospitals which grant privileges to the Physician may NOT consider international Captive insurance coverage to conform to by-laws. Therefore, it is very important to check with the hospital before setting up any insurance alternative. Copyright 2009-2010. Captive Providers, LLC. All rights reserved.