Interview with Clete Thompson, Vice President, Capstone Associated Services, Ltd:
Q: So what is a captive, exactly?
“A captive is a regulated insurance company that must first be licensed by an insurance commissioner in a US state or foreign jurisdiction. Once established, premiums are paid to the captive like any other conventional policy premiums, except instead of being paid to an outside organization; monies are paid into the captive insurance company.”
“Captives typically provide supplemental coverage to existing conventional policies, which upon examination are often found to be inadequate. Business owners find that owning their own insurance company helps control the rising cost of risk and provides broader insurance protection by filling in the holes and exclusions of conventional policies that all too often do not match the risks of the operating businesses.”
Q: What are some of the tax implications of captive insurance?
“Captives are usually tax advantaged, for-profit insurance companies. Provisions under the IRS code have been in place before 1920, providing tax exempt treatment for small insurance companies. Similar provisions now apply to insurers with annual premiums under $1.2 million.”
“Today, over 90% of Fortune 1000 companies and many successful mid-market businesses have captives. An estimated 50% of all property & casualty premiums are written through captives.”
Q: So Can I own my own insurance company?
“Yes. Ownership of the captive often mirrors the ownership of the operating business. You can own your own captive insurance company. Examples of risks insured through a captive might include coverages for loss of key employees, loss of key supplier or vendor, changes in government regulations, professional liability and employment practices, loss of business license or professional license, and business interruption, among others. A captive allows its owners to use specifically tailored and customized policies that are often too expensive or unavailable through the conventional insurance markets.”
“Once premiums are paid into the captive insurance company, let’s say, for example, $1M in annual premiums, they are then invested in typical investments of an insurance company: stocks, bonds, mutual funds, CDs, money markets, corporate lending arrangements. The owners of the operating business hold the checkbook and are responsible for managing the captive assets. Many clients choose to have professional investment advisors to help manage the captive investments.”
Q: What happens to any profit my insurance company makes?
“Captives provide a platinum level of coverage to the operating business while allowing the owners to benefit from the profits of the insurance company in a highly tax efficient manner.”
Q: How much regulation is involved in owning my own insurance company?
“Captives must operate with dual regulatory parameters: the Internal Revenue Code and the domicile where the insurance company is established. The formation and ongoing management of a captive must be overseen by experienced professionals that understand the insurance, financial, tax and legal aspects of the captive. Because it is a regulated insurance company, our clients often prefer to have a professional third party administer the captive on a turnkey basis. Most regulators demand ongoing professional management.”
“We, along with our affiliated law firm, The Feldman Law Firm LLP, are experts on these sophisticated tax-exempt insurance entities. Having formed over CAPTIVE_FORMATIONS such companies over the last CAP_YEARS_NUMBER years, we can say with confidence that forming a captive may be one of the best risk management and financial planning tools available for middle market businesses.”
Q: Who would you say could benefit from Capstone’s services?
“Our clients consist of closely-held businesses that make millions of dollars a year. Whether they are manufacturers, distributors, machine shops, engineering and service firms, or perhaps physician-owned businesses, they all share one thing in common: an exposure to uninsured or underinsured risks.”
“For owners of closely-held businesses, one alternative to effectively managing risk may be to form their own insurance company—or a “Captive Insurer” as they are known.”
Editor’s Notes: As of CURRENT_YEAR, Capstone has been operating for CAP_YEARS_NUMBER years and has formed over CAPTIVE_FORMATIONS captives. As of CURRENT_YEAR, The Feldman Law Firm has been operating for LAW_YEARS_NUMBER years and has successfully resolved over TAX_CONTROVERSIES tax matters. As of CURRENT_YEAR the cap on 831(b) captive insurance premiums is CURRENT_PREMIUM_CAP million.