A captive is an insurance company that has been specifically formed to insure the risks of an affiliated business. Captive insurance companies are becoming wildly popular with owners of privately-owned mid-market businesses because they provide powerful benefits unseen with other planning strategies. With a captive insurance company, business owners receive platinum-level, tailored coverages that can fill gaps in their existing commercial policies. Additionally, captive insurance companies provide great ancillary benefits such as:
- Tax-exempt or tax deferred premiums paid to the captive insurance company
- Tax-advantaged dividend income
- Improved cash flow through secured loans to the operating company
Internationally, there are NUM_GLOBAL_CAPTIVES captive insurance companies in operation, with most sponsored by United States entities.
Captive legislation is being passed across the U.S., providing greater opportunities for closely-held businesses to take charge of their risk management. Business owners of profitable closely-held companies in manufacturing, transportation, construction, healthcare services, and other industries are seeing first-hand what captive insurance companies can do.
How Captive Insurance Companies Work
Captive insurance companies work in very much the same ways as conventional insurance companies, but with a few key distinctions. A business owner, typically referred to as the “insured,” pays premiums to the captive insurance company. If the captive is formed under Section 831(b) of the Internal Revenue Code, premiums are paid at a 0% Federal income tax level. And as of January 1, 2017, the cap on premiums is CURRENT_PREMIUM_CAP million and is indexed for inflation. These funds accumulate inside the captive over time, offering business owners a source of funding for operational needs. This is in addition to tailored risk coverage, which may be expensive or unavailable through the commercial markets.
After a given year, if there is undistributed surplus in the captive with no claims for losses, it can be used as a secured loan back to its affiliated operating company or as a dividend. In industries such as manufacturing, construction, and agriculture, business owners have used secured loans from their captives to buy or repair equipment, expand their operations, and more.
Captive insurance companies are highly regulated entities--they are bona fide insurance companies. These regulations are determined by the “domicile” or jurisdiction in which they’ve been formed. A captive can be regulated in the state where the business owner (the insured) is based or by another location. Domiciles can be found onshore (regulated by a U.S. state) or offshore (in countries such as Anguilla) and each one has their own set of rules, requirements, and track records for compliance.
Captive insurance is an alternative risk strategy that is both practical and sustainable for those who qualify.
If you have uninsured or underinsured risks inside your business, forming a captive insurance company may be the best way to keep your business resilient, operational, and profitable.
Want to learn more about captives? Call us at WEB_TEL.
Custom-Built Captive Insurance Coverages
One of the key features of forming your own captive insurance company is the ability to write coverages tailored to your specific risk exposures. For example, commercial general liability insurance, or CGL typically covers damages due to bodily injury or property damage. But exclusions in the policy might include pollution damages, employer’s liability, and contractual liability.
Coverages written under a captive insurance company can cover those risks; it is essentially a more cost-effective choice than expensive “specialty” coverages in the conventional market. In addition, some coverages may not be available at all commercially. It is why more business owners are forming captives of their own.
General liability insurance, for example, in the commercial market may not cover the loss of a major business to business relationship. Losing a major client can lead to a reduction in staff, in a worse-case-scenario, completely stall operations until the business can recover. In a similar fashion, punitive wrap coverage written under a captive can fund exemplary damages that are deemed to be uninsurable due to the enforcement of a law or judicial ruling that prevents an existing policy to cover a loss. In states such as California, Florida, Utah and North Dakota insurance coverage of punitive damages is disallowed.
Bottom line, captives stave off high out-of-pocket costs for companies who have non-standard risk exposures. Even for risks such as cyber-attacks, captives provide an air-tight alternative to volatile insurance products found in the conventional market.
Captive insurance is one of the best risk management and risk financing tools for mid-market companies available.
Partner with an Attorney-led Captive Insurance Manager
The expertise of Capstone and its affiliated law firm has led to what is believed to be the industry's best track record in forming and administering captive insurance arrangements. We are a world-class team of players that delivers risk management, insurance, regulatory, financial, legal, tax, accounting, and regulatory services.
Capstone has been in operation for CAP_YEARS_NUMBER years and has formed over CAPTIVE_FORMATIONS successful captive insurance companies. Capstone’s award-winning, attorney-led approach continues to set the standard for the industry. Capstone specializes in intermediate pure captive arrangements, though there are many types of captive insurance companies in operation.
To learn more about captive insurance and Capstone’s attorney-led captive planning, give us a call at WEB_TEL or Download Captive Insurance Explain in Plain English – It’s Free!