Over the last few months, we have had numerous discussions with various clients regarding the expanding scope of their business since their first involvement with captive planning (many of our clients have captives in place dating back to 1998). In this context, we have discovered that the existing alternative risk planning is significantly under-served by their current premium limitations.
More specifically, we have discussed how the coverages allowed under a single §831(b) captive, which allows up to CURRENT_PREMIUM_CAP million per year in property and casualty premiums are inadequate.
Captive Insurance Planning 101
As a result, clients have asked us to undertake a review of alternative risk planning options, which begins with an updated or revised feasibility study. Several captive clients have expressed a desire to expand the alternative risk planning for their business by forming a second captive insurance company.
For those clients who’s business have outgrown the limits of their captive, forming an additional captive, which may or may not be owned by a different ownership group from the existing captive, is often a reasonable and viable option.
Self-Insurance vs. Captive Insurance
Most business owners, knowingly or unknowingly, self-insure a large amount of risk. These often include the many hidden risks which are inherent in the operations of any business, as well as identifiable risks, which remain excluded or omitted in a standard conventional insurance arrangement.
One of the elemental benefits of owning your own captive insurance company is that a captive arrangement provides the opportunity to pre-fund future losses. With a captive, self-insured risks can be converted into tax-deductible premiums that are paid to a captive. Any realized risks can now be paid with pre-tax assets. If insurance claims are as or lower than projected, the captive will retain substantial profits that can be distributed to its owners.
Operating businesses are only allowed to deduct expenses (regular and ordinary expenses) as they occur. Insurance companies, however, are unique in that they are able to expense and then deduct premiums from their balance sheet for future losses. And in the event of a captive, those reserves accrue tax-free until the loss occurs, or in the event that the loss does not occur, the profits can be distributed to its owners.
Fortune 1000 Planning Now for the Middle Market
By recent estimates, Captive Insurance as an alternative risk management strategy is being used by more than 80% of the Fortune 1000 corporations. Capstone provides smaller or medium size companies a viable risk planning alternative to conventional insurance solutions, assessing our clients’ risk exposure and financing objectives.
Capstone provides the expertise to form, manage and operate your captive, enabling ownership to retain focus on primary business entities, while engaging a team of experts to effectively manage the compliance, regulations and financial aspects of the supporting captive.
Capstone’s services assures you will be in a position to capitalize on this viable risk management solution as well as the significant tax benefits the IRS has provided, as has been done by a growing number of large US corporations and multinationals.