For Business Owners

Captive Insurance for Business Owners

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Manufacturing | Construction | Wholesale/Retail Trade | Transportation and Utilities | Health / Professional Services | Finance, Insurance, Real Estate and Technology


Captives: The Smart Alternative to Conventional Insurance

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Have you ever had an insurance claim be denied? If the answer is “yes,” then you’re not alone. Conventional insurance policies found in the marketplace are often limited—there are countless business owners who have filed claims, only to have them denied or covered for only a portion of its overall value. The significant premiums spent on these policies often fail to adequately cover the intended risks because of exclusions and high retentions.

Some hidden risks are best addressed through a solid alternative risk financing program—one that not only affords full coverage of risks, but one that offers ancillary benefits such as tax-deductible premiums, retained profits resulting from effective loss control measures, and reduced expenses.

Establishing a captive insurance company provides these benefits and allows its owners to specifically tailor customized policies for their businesses that are often too expensive or unavailable through the conventional insurance markets.

Put plainly, establishing a captive is the perfect alternative for qualified mid-market business owners.

Today, over 90% of Fortune 1000 companies own a captive insurance company . They enjoy the full benefit of risk coverage plus more efficient financial planning. Excess retained earnings can be held by the captive, paid out as dividends or loaned as part of a comprehensive investment portfolio.

Forming a captive may be one of the best risk management and financial planning tools available.

Who Should Form a Captive?

The best candidate for captive insurance formation is a business owner or group of owners that has meaningful uninsured or underinsured risks with pre-tax profits (before partners’ salary bonus and other forms of compensation) of $2 million or more.

The oil and gas, technology, manufacturing, medical, industrial, and other industries have inherent risks that may not be covered by conventional insurance. Malpractice, machinery malfunction, loss of key employees, business interruption, and other coverage provisions can be written right into the policy. Captive insurance policies can be tailored to a business’s specific risks without the fear of standard exclusions.

Captive insurance companies are regulated and must first be licensed by an insurance commissioner in a U.S. state or foreign jurisdiction (called a domicile). Once established, premiums are paid to the captive as with any other conventional policy.

Operating businesses are only allowed to deduct losses as they occur. In contrast, insurance companies are unique in that they are able to deduct loss reserves based on past claims experience. With a captive insurance arrangement, those reserves are available to fund losses, or in the event that losses are lower than expected, the profits can be distributed to the captive’s owners at advantageous tax rates. Meanwhile, the captive has a wide range of investment opportunities, and if properly structured, enjoy fully or partially tax-exempt status.

Risk coverages are varied and will depend on your location and the inherent risks associated with your business operations.

Manufacturing Industry

The transient nature of the manufacturing industry incurs risks for both workers and equipment. Employees of manufacturing companies continually move raw, in-process, or finished goods in the routine course of producing marketable commodities. Equipment and inventory are also transported often and must be maintained. Improper handling of these materials and tasks can cause overexertion, repetitive motions, strains/sprains, all of which can cause injuries. Hazardous material spills or accidents can also occur with some regularity.

Among the hazardous materials most frequently spilled or released into the atmosphere of a workplace are: acid, gas, toxic fumes, toxic dust or filings, and poisonous liquids or waste. Fire department hazardous material units are prepared to handle these types of disasters. Coverages most often written for the manufacturing industry through a captive are indicated below. Some companies may need more or less coverage, addressing their specific needs.

Sample Coverages

- Product Liability
- Pollution
- Cargo
- Loss of Services
- Legal Expense Reimbursement
- Tax Liability
- Equipment Breakdown
- Loss of Customer, Vendor, or Supplier
- Product Recall

Construction

The construction industry requires interpretation of and compliance with many laws, codes, and regulations, the gathering of considerable resources, including labor, equipment, and material, and communications. Compliance with these laws requires collaboration among multiple parties, such as the owner, the design professional, contractors and subcontractors, and suppliers, all of whom may have different purposes and goals. Risks associated with the industry can affect the completion of projects large and small and be costly for the construction company. Coverages most often written for the industry through a captive are indicated below. Some companies may need more or less coverage, addressing their specific needs.

Sample Coverages

- Pollution
- Loss of Services
- Employment Practices
- Tax Liability
- Construction Defects
- Completed Operations Liability
- Directors and Officers

Wholesale/Retail Trade

Those working in the retail or wholesale trade combat a set of unique risks—from product recalls to cyber attacks. Building solid relationships with customers can help to limit the brunt of a reputation disaster, but they do nothing in terms of financial  support to help business owners in lawsuits. Food safety, business interruption, supply chain risks, and even employee turnover are all risks to consider when forming a captive. Coverages most often written for the industry through a captive are indicated below. Some companies may need more or less coverage, addressing their specific needs.

Sample Coverages

- Cyber Risk
- Loss of Services
- Employment Practices
- Tax Liability
- Credit Default
- Legal Expense Reimbursement
- Product Recall
- Loss of Supplier
- Product Tampering

Transportation and Utilities

Injuries that occur during the loading and unloading process have become one of the many risks associated with transportation. Lift-aid equipment such as cranes, hand carts, dollies, and stationary rollers help, but can break down leaving business owners liable for repair costs. Other business risks include regulatory changes and cargo damage. Other risks are equally as damaging such as terrorist attacks, the outbreak of epidemical illnesses, and the widespread disruption of technology systems. Captive insurance policies can address all of these risks and more, if they are deemed inherent in a business’s operations. Coverages most often written for the transportation and utilities industry through a captive are indicated below. Some companies may need more or less coverage, addressing their specific needs.

Sample Coverages

- Cyber Risk
- Loss of Services
- Employment Practices
- Tax Liability
- Legal Expense Reimbursement
- Directors and Officers
- Business Interruption
- Regulatory Changes
- Cargo

Health / Professional Services

Surgical, pharmaceutical, and business risks can put heavy financial pressure on a closely-held healthcare facility. The threat of a lawsuit or loss of key employees can come into play at any point. Ultimately, the industry is in a constant state of flux. A recent United Nations report stated that the percentage of people in developed countries over age 65 will rise from 17% today to 24% by 2035. Aging populations are exerting significant pressures on health-care systems. According to the National Institutes of Health, approximately half of lifetime health-care spending occurs after age 65 in the U.S. Demand for quality healthcare will continue to rise and private facilities will need to prepare for this increased activity—and potential risks. Coverages most often written for the health and professional services industry by way of a captive are indicated below. Some companies may need more or less coverage, addressing their specific needs.

Sample Coverages

- Medical Stop Loss
- Cyber Risk
- Loss of Services
- Employment Practices
-Tax Liability
- Professional Liability
- Malpractice Gaps
- Regulatory Changes
- Breach of Privacy

Finance, Insurance, Real Estate, Technology

The economic climate, employee matters such as a breach of contract or employment, discrimination, harassment, and wrongful termination, and data loss are risks present within the finance, insurance, real estate, and technology industries. The World Economic Forum reported that cyber attacks are the biggest threat followed by state-sponsored and non-state sponsored and criminal activity. Businesses in these fields can protect themselves against such risks with comprehensive coverage.

The coverages that are written for these industries by way of a captive are indicated below. Some companies may need additional or less coverage, addressing their specific needs.

Sample Coverages

- Cyber Risk
- Loss of Services
- Employment Practices
- Tax Liability
- Credit Default
- Legal Expense Reimbursement
- Errors and Omissions / Professional Liability
- Intellectual Property Protection
- Regulatory Changes
- Crime

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