Frequently Asked Questions
Q. What is a Captive?
A. There are many possible ways to describe a captive insurance company, in part because such companies can take a variety of forms. But in general, a captive can be thought of as a wholly-owned subsidiary whose stated purpose is to provide insurance to the company or entity that owns it.
From this description, one can deduce that a captive is really a form of self-insurance. A captive, however, is more formal than what many may think of when they think of “self-insurance.” It has a corporate structure, clearly defined roles for officers and third parties, rules of governance, and operations that are documented and reported. What the parent business must bear in mind is that, whatever the mix of benefits that a micro-captive may yield, the micro-captive must be constituted, and must operate, as an insurance-providing entity. One role of the micro-captive’s manager, working in tandem with the micro-captive’s CPA and legal counsel, is to help ensure that the micro-captive meets all of the structural tests and ongoing operating requirements that are required for a micro-captive to be recognized as an compliant insurance company.
Q. What is the definition of a Micro-Captive?
A. A.M. Best’s Captive Directory uses this definition when deciding which insurance companies should be included in the “captive” section of its insurance rating directory:
“A captive is an insurance company that is wholly owned and controlled by its insureds; its primary purpose is to insure the risks of its owners; the primary beneficiaries of its underwriting profits are its insureds.”
Q. What is IRS Section 831(b) and What It Means for Micro-Captives?
A. Under the scenario of a single-parent captive, the essential business relationship between the captive and the parent is relatively straightforward: the parent pays premiums to the captive, and the captive provides insurance to the parent. For tax purposes, the premiums that the parent pays may be deductible by the parent as a business expense, while the captive would treat the premium as taxable income.
Under Section 831(b) of the Internal Revenue Code, however, captives that meet certain requirements do not have to count premiums as taxable income. Instead, the captive is only taxed on its net investment earnings.
Q. Why form a Micro-Captive?
A. Captive insurance programs allow you to retain an interest in premiums and earnings on premiums. They give you more control over the claims process too. With a captive, you have an ownership interest in the insurance company you pay premiums to. Structured and managed correctly, captive insurance company participation can be a very good investment and make you more competitive. Captives are now more affordable to participate in than ever before due to recent innovations. They are no longer only for large companies, groups or associations.
Remember, insurance companies are in business to make money; lots of it if they can. So if you are a large purchaser of insurance or self-insure substantial risks, you could save money owning your own captive insurance company and create a new profit center leveraging your industry expertise.
Q. Are Micro-Captives a risky strategy?
It’s always wise to steer clear of any captive promoter who starts out with a pitch promoting tax deductions. However, if a captive is created and managed properly by experienced and specialized professionals, a private insurance company can deliver improved Risk Management, Compliance, Claims Assistance, Asset Protection, Estate & Tax Planning benefits, and efficient Exit strategies.
There are very specific guidelines to making your captive work, have it protect you, be compliant as an insurance company, and obtain tax advantages that interest business owners.
Almost every major national corporation operating in the United States uses captives. In fact, Congress just increased the premium limit for captives to $2.2 million – from a previous maximum of $1.2 million. That legislative vote of confidence warrants notices from business owners.
Q. How does a Micro-Captive work?
A. A Captive works as a participant in the sharing of risk which is at the heart of an effective risk management program.
A Captive does not issue direct insurance coverage to the parent. The parent obtains their selected risk coverages from an independent insurance carrier, often called a fronting carrier or front. The Captive participates in the parent’s selected risk coverages with the issuing carrier, by providing reinsurance to the fronting carrier.
Q. What are Safe Harbor rules/ Is my Captive compliant?
A. It is very important that captive owners implicitly understand that they are the owner of a private insurance company. Safe Harbor rules help determine whether a captive is operating properly and compliantly as an insurance company. Two key considerations are Risk Transfer and Risk Distribution.
Risk Transfer is the action of obtaining insurance coverages from an independent issuing insurance carrier, thus shifting the risk from a self-insured risk retained by your company to a risk insured by another. Risk Distribution is accomplished in the Captive model via the sharing of risk with unrelated insureds via the issuing carrier. Both features are essential to the valid and effective Captive model.
Q. Can I take money out of my Micro-Captive?
A. When Captive surplus reserves are no longer needed to support reinsurance functions, they can be distributed either as dividends or long-term capital gains distributions. If there are sufficient liquid investments to cover the Captive’s solvency requirements, then surplus funds can be loaned out on commercially reasonable repayment terms. In this manner, business projects can be funded from successful Captive operations.
Q. Who needs a Micro-Captive?
A. Captive Insurance Companies are an essential risk management tool and should be considered for any successful companies with a substantial cash flow. Captives can provide a structure for your company’s long-term insurance and financial stability. They can be considered as additional profit centers for your business, and provide investment funds from excess surplus. Captives can accomplish a multitude of long-term goals for your business and its owners.
The ideal target business for a Captive is a privately owned for-profit business with a gross annual income in excess of $1 million. SECURE works with private companies of all sizes in all major business sectors.
Q. What are the costs of a Captive?
A. Reasonable fees – on a sliding scale – are charged for the creation and ongoing management of the fronting program and the captive operations.
Q. Is my money safe?
A. SECURE goes to significant lengths to protect your captive funds. All new Captives receive a “Trust” operating account in a financial stable Bank of your choosing, and we follow a rigorous internal control process that requires multiple signatures for funds transfer. SECURE has viewing only rights into these accounts to help prepare financial statements, but you are always in full control of your captive funds. Distributions or loans from the captive are subject to minimum surplus rules and formal loan documentation.
Q. Why Us?
A. We are a group of specialized Producer Owned Reinsurance Company (PORC) professionals with over 77 years of combined experience. SECURE and our affiliated partners have formed and managed in excess of 2,000 reinsurance companies for our business clients in a variety of industries.
We offer you the most reasonably priced high quality captive insurance company design, formation and management services in the industry, and provide quality responsive services throughout the relationship.