Self-Insurance

Self-insurance is a general term used to describe funding that has been set aside for future losses. Among its meanings, self-insurance could refer to a simple loss fund, a savings account, or even a rainy-day fund. Self-insurance generically could also refer to a more sophisticated financial arrangement such as “captive insurance.” Whether it’s choosing a high-deductible insurance policy, declining the extended warranty on a new purchase, or engaging in a formal “captive insurance” arrangement, business people often make the decision to self-insure.

Many business owners self-insure because of policy exclusions or gaps in their commercial coverage. Those who opt for self-insurance plans typically lean on their own, after-tax funds to cover losses, ultimately retaining the risk and hoping that the funds will be there when needed by the uninsured catastrophe.

As a type of “self-insurance,” captive insurance is a formal plan whereby a business owner forms his or her own bona fide insurance company to fund losses. The insurance coverages are tailored to the needs of the business. The relationship between the insurer and the insured minimizes the often seen arbitrary claim denial from conventional insurers. Of course, the risk must still be covered up-front by a formal insurance policy from the captive insurer for which a fair premium is paid for the covered loss. Additionally, there is a 0% Federal income tax paid on the captive’s underwriting profits under Internal Revenue Code Section 831(b). The captive may also provide ancillary benefits, all depending on the insurer’s domicile and financial condition, such as dividends to the captive’s owners and secured loans to affiliates. Ultimately, business owners of self-insured companies can unlock powerful risk coverage and improved financial efficiency.

 

In connection with any self-funded captive insurance arrangement, the business owner must have bona fide uninsured risks affecting their businesses. These risks must be appropriate for captive insurance coverage. This is usually determined as part of an on-site feasibility study. For example, construction companies with General Commercial Liability conventional coverages may still be facing contractual liability exclusions (e.g., contractual liability coverage) which then can be insured through a captive arrangement. For all industries, the insurance needs of the business must be the primary goal, with the financial and tax benefits of self-insured captive arrangements being secondary.

The tax savings resulting from a captive insurance arrangement are then available to the business to finance its future losses and possibly to help fund ongoing operations. Tax-free underwriting profits become capital of the captive which are then available to finance future losses and may be ultimately available for tax advantageous dividend treatment. As noted above, sometimes the captive as part of its investment function makes secured loans.

Capstone’s Turnkey Approach to Self-Insurance

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Capstone Associated Services, Ltd. is one of the oldest and largest sponsors of 831(b) self-insurance captive arrangements. We also provide 831(a) and 501(c)(15) insurance programs. Under these varying programs, annual property & casualty premiums may be subject to various caps. In affiliation with the tax and corporate lawyers of The Feldman Law Firm LLP, Capstone provides the most comprehensive captive insurance planning available. Capstone's staff includes CPCUs (Chartered Property & Casualty Underwriters), ARMs (Associates in Risk Management), accountants and administrators.

Capstone is an attorney-led, captive insurance services provider, offering self-insurance consulting, tax, legal, insurance, captive asset management, and accounting for one turnkey fee.

Having formed over CAPTIVE_FORMATIONS captives over the past CAP_YEARS_NUMBER years, we understand the importance of excellence in captive planning.

Captive insurance companies involve an overlay of insurance on corporate, tax and insurance regulatory law. Additionally, self-funded insurance using a captive vehicle is regulated by the jurisdiction or captive domicile in which it is formed and possibly where the insureds are domiciled. Capstone has the in-house expertise to pair captive owners with the most appropriate domicile and to then assist the client in its successful operation.

There are many requirements for a captive insurance program to be treated as a bona fide insurance arrangement. Proper planning and advisory expertise are essential.

Contact us to learn more about how your businesses can benefit from self-insurance though a captive insurance company. Call WEB_TEL, or submit your information via the form.