Is Choosing a Captive Right for Your Client?
Captives, the self-insurance tool, were introduced in the early 1900s but are still largely viewed as a tax evasion tool for companies and individuals because there are so many ways for fraud to occur. Indeed, for the past three years, captives have been included on the IRS’s annual list of Dirty Dozen Tax Scams. The chief concern of the IRS is that captives are being used solely for their tax benefits and not for risk management reasons. However, more than 90 percent of Fortune 1000 companies use captives as a risk management strategy, and a growing number of small to mid-size companies are adopting the use of captives (referred to as micro-captives) as well.
With the increase in captive use,
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the IRS has begun to crack down on the requirements and regulations and, as of May 1, 2017, an IRS ruling will require the majority of micro-captives and their “material advisors” to disclose more information on ownership, underwriting practices and reasons behind its formation. Among the many requirements from the IRS, a captive must prove it is legitimate in a number of ways including two key metrics: 1. No more than 20 percent of the net premiums are owned by one policyholder. 2. The insured company cannot be owned by one person (directly or indirectly) and the captive by his or her successors by more than 2 percent. Despite scrutiny from the IRS, a tightly crafted captive is something to consider for your clients and is a legitimate way for companies to mitigate their risk and reap financial rewards. As of January, the tax-deductible premiums for captives roughly doubled to $2.2 million under the PATH Act (Protecting Americans from Tax Hikes Act), making them even more attractive. The IRC 831(b) election (a part of the Internal Revenue Code that offers tax incentives to qualifying small insurance companies with micro-captives) allows a captive that generates overwriting profit to more quickly generate surplus which can be used to more quickly increase its capacity. This can be an effective tool in the overall risk management objectives of a client. Traditionally, the CPA or financial advisor at the family office might have been the obvious manager for captive programs, but more and more thought should be given to handing the job to you, the broker. The involvement of a property and casualty broker in the formation and management of the captive helps keep the focus on risk management. A strong broker can use the captive wisely in the design and structure of a client’s insurance programs. However, captives remain tricky and there are more than a few things to consider. If you understand the requirements and favor the advantages of a captive over the drawbacks below, there are a number of reasons to consider managing the program for your clients who would benefit. Captive Advantages ● Broadened coverage – Captives give businesses access to more coverage areas that might have been unattainable before, either due to limited market options or economic feasibility.
Some examples include catastrophic coverage such as earthquake & flood insurance, deductible buydown or reimbursement programs for large or even routine fire deductibles, cyber risks, workers’ compensation retention buydown programs, excess D&O, terrorism, credit or bad-debt, and more.
● Risk management – Captives offer the parent company a more sophisticated toolset with which to manage their enterprise risk by utilizing the captive in conjunction with the commercial insurance marketplace. This provides an opportunity to insure against liabilities that may be generally uninsurable or excessively priced but also to strategically retain certain risks via the captive to improve attachment points and evaluate risk financing alternatives.
● Control – One of the major perks of operating a captive for your own company is the control you’re given. This gives the company an active role in the insurance aspect of their business, something that is generally out of their hands. Captives also give the parent company greater control of
claims. ● Possible tax enhancements – One key benefit of captives is its tax-exempt status on underwriting income (taxed only on investment income). The company benefits from the tax treatment of the ceded premiums, investment income and, most importantly, protected generational wealth. It’s best to refer to your specific ownership and tax strategy before embarking on the 831(b) election by bringing your tax consultants into the process early. Captive Drawbacks ● Audit risk – With tightened regulations comes closer scrutiny from the IRS. Captive owners are under a greater risk of being audited by the IRS. ● Capital – Captives require a large amount of money to establish the captive and to maintain on an ongoing basis. ● Claims – Since the captive is set up to assist in coverage of additional areas and mitigate the risks of the parent company, captives require funds to be able to pay claims on a consistent basis. ● Complexity – The complexity of micro-captives has just increased in recent years given the sophistication of the buyer and their expectations, but from a regulatory perspective that has caught up to the numerous captive managers, CPAs, tax attorneys and financial planners that have marketed these captives as a pure tax planning tool. Clients with micro-captives, or those contemplating them, will need to focus more so on the risk management and insurance aspects of owning a captive. Benefits of Using an Insurance Broker to Assist in the Management of Your Captive ● Knowledge – Your insurance broker has worked closely in creating the insurance policies for your business and can assist in the risk assessment, underwriting exposure information, rate / price benchmarks (using open market indications and trends), and, most importantly, can design the actual coverage form which is the foundation of coverage. Using a broker brings an unbiased party to the table in the event of an IRS audit and a great advocate to help document the management, underwriting and pricing of captive business. ● Regulatory compliance – Micro-captives are under greater scrutiny to comply with regulations given the IRS’s attempts to weed out “abusive” tax shelters. Having your knowledgeable broker involved shows your true risk management purpose. broker involves Brokers are required to be well-versed and understand various regulations, coverage forms, policies and more, and a broker who is attentive of the underwriting process and the risks being underwritten can greatly strengthen the validity of the captive. ● Program design – Micro-captives are being challenged to write more conventional risks, exposing it to more volatility and severity. These captives must be able to pay claims on a routine basis. An insurance broker can help to design a program specific to the needs of the captive and the parent company. ● Seamless program – Micro-captives must work in conjunction with the existing insurance policies of the parent company. To accomplish this, the broker needs to be utilized to manuscript policy language, structure towers of insurance to complement the captive coverage lines, and create a seamless program. ● Claims – Since a captive must be in a position to pay claims on a regular basis, it’s important to have someone who is knowledgeable of claims that may arise and can assist in the claims process. Brokers can provide a great deal of insight on the risks associated with exposures and can evaluate the severity and frequency of loss. ● Client Communications – Brokers are accustomed to synthesizing esoteric insurance information and presenting it to their clients in a way that resonates with their business. This can be a vital intermediary link between the captive management firm, whose focus is primarily regulatory compliance, and the captive owner. Miscommunications and misaligned expectations can create issues that take years to unwind, making the broker’s involvement at the onset critical to proactively address concerns and make sure all parties are on the same page. While the increase in the premium limitation for qualifying 831(b) captives is a welcome change, both existing and contemplated arrangements taking advantage of the provision must now run the gauntlet of the diversification requirements to determine if existing eligibility remains valid or if the election remains a viable business arrangement in the first instance. The creation of a captive should not be made lightly, and the use of your insurance broker might help to ease the complications and drawbacks while helping to increase the advantages of a captive. Since the May 1 deadline, you may want to look back and determine if your Broker in fact qualified as a “material advisor” and thus made the appropriate fillings. Dale Anderson is a Managing Director of Venbrook Insurance Services and is responsible for production and account management services. He has placed many clients into a wide variety of micro-captives, and is an expert at the design, implementation and management of such programs. During his 34 year career, he has worked with both risk management and middle-market clients, serving as an executive vice president at Willis Towers Watson and Marsh Group of Companies.
The risk management program provides for collaboration among all departments and services within HNI, and provides policies, procedures and protocols to address events which may create various business-related liabilities to HNI. This plan will influence the leaders of the following departments to achieve quality and protect HNI’s resources: 1. Senior Management 2. Administration. 3.
Allstate insurance is the second largest property and casualty insurance company by premiums in the United States. Allstate insurance handles about 12% of the U.S home and auto insurance market. (Allstate, 2014). Many of Allstate’s customers fall under what one could refer to as a traditional selection of insurance for automobiles. Recently, Allstate has noticed a major shortcoming in lifestyle insurance, which includes coverage for motorcycles, boats, and other recreational vehicles, in comparison to its competitors. The motorcycle insurance sector is a 10.4 billion dollar industry and growing (PRWEB, 2012). The U.S. Department of Transportation website reports some astounding figures, including that 5,370,035 motorcycles were registered three years before the article, 7,138,476 motorcycles registered at the time of the article, and grew to 9,477,243 registered motorcycles at the end of 2012 (NHTSA, 2013). It is obvious as to why Allstate would identify motorcycle insurance as a worthy lifestyle product to devote marketing research dollars into in order to develop new strategies for cornering a share of the market.
The amount of money that is spent on healthcare is a quite a bit of money but about 10% of all the money is a result of some sort of medical fraud or abuse. This is about 120 billion dollars. With HIPAA (Health Insurance Portability and Accountability Act) medical fraud and abuse can be tracked easier. HIPAA was enacted in august of 1996; this was to help improve the portability and continuity of the health insurance.
A positive aspect of this mechanism is that it adds in a middle man, controlling and regulating insurance, minimizing risks of adverse selection for both the insurance company and the customer. When insurance is distributed by private companies, adverse selection occurs and companies refuse insurance to high risk groups and institute costly underwriting practices to others (Heath, 123). In addition to preventing adverse selection, this insurance mechanism provides all individuals with the basics of care. As of 2011, it was reported that 100% of the Canadian population was covered under the public health insurance (Nationmaster). Unfortunately, the public insurance mechanism has
The claimant is a female (DOB 12/21/1977) who works as a Technical Customer Service Support Tier II Advisor who is claiming disability from 10/15/2017 onwards. The physical requirements of her job include multitasking; listening and talking to the customer, while typing to research issues, and to review and update the customer account information; and continuously using keyboard and mouse.
Later, another panel member argued that the purpose of health insurance is not to insure everyone. It should be provided to only cover catastrophic health conditions. Today, not only does health insurance cover catastrophic events, but also there are limits on the amount of out-of-pocket health care costs for essential health care (The White House, 2016). Also, most out-of-pocket costs have been eliminated for preventative care (The White House,
(c) a requirement that firms with over 50 employees offer coverage or pay a penalty, (d) a major expansion of Medicaid, and (d) regulating health insurers by requiring that they provide and maintain coverage to all applicants and not charge more for those with a history of illness, as well as requiring community rating, guaranteed issue, non-discrimination for pre-existing conditions, and conforming to a spec...
One of the most egregious examples of insures finding loopholes is in Melissa Morelli’s story. According to the New York Times, a 13 year old girl named Melissa Morelli was “taken to the hospital, she was suicidal and cutting herself”, her mother says (Abelson). She was transferred to a psychiatric hospital and stayed there for more than a week. Her doctors told her mother that it was not safe for her to return home but the problem was is that her insurance company, Anthem Blue Cross, wouldn’t continue to pay for her to stay in the hospital. Her mother, Cathy Morelli, kept on trying to get them to agree to pay for her daughter’s treatment, but they wouldn’t agree. “It was revolving doors”, Ms. Morelli said (Ibid). She has been constantly going to her insurance company for over 5 months just to hear them reject to pay for the care...
Q1) Health insurance, whether provided publically or privately, suffers from the problems of moral hazard and adverse selection? How can health insurers get around these problems?
Reductions in health insurance coverage costs occurs largely through the reduction in costs obtained by the adverse selection related to the individual purchase of health insurance. Hackman, Martin B., Jonathan T. Kolstad, and Amanda E. Kowalski. "Adverse Selection and an Individual Mandate: When Theory Meets Practice." American Economic Review 105, no. 3 (March 2015):
In previous years the big financial institutions that are “too big to fail” have come to realize that they can “cheat” the system and make big money on it by making poor decisions and knowing that they will be bailed out without having any responsibly for their actions. And when they do it they also escape jail time for such action because of the fear that if a criminal case was filed against any one of the so called “too big to fail” financial institutions it...
The US healthcare system is focused on a mixed insurance system with both private and public insurance institution. The health insurance system also relies heavily on employment. It depends heavily on corporations and employees to be key sponsors for insurance. This has led to many companies going bust as they are unable to sustain the amount of funds required just to keep their employee’s insurance policies going. Insurance has become so profitable that there are more than a thousand private companies that want to share this very profitable business. These companies are also not regulated on a country level. The profit-targeting companies have also come up with many overlapping and unnecessary policies to fully utilize the loophole in the American healthcare system. These are all in addition to the public insurance policies such as Medicare: covers elders, disable and end stage renal diseases, and Medicaid: children, war veterans and self-employees. As of 2015, 15% of the population is without insurance; one of the major reason is due to the people not having sufficient knowledge on their eligibility.
If however the parent company wants to insure the assets of the subsidiary, the parent company must be able to present Insurable Interest (together with other factors beyond the scope of this report) to the insurer, that is, an insurance contract requires the presence of Insurable Interest. When an insurance contract is taken out, insurers tend to put little emphasis on the existence of Insurable interest in order to get customers on board. However, in many cases, the insurer has repudiated claims when it is discovered that the asset that was insured does not belong to the insured (which is very likely to be unfurled in the investigation when a loss occurs) claiming the absence of Insurable Interest.
Insurance companies may also enter into agreements with specific providers and the insured pay extra to use non preferred suppliers.
You have spent a lot of time and finance to prepare for the best trips to different countries around the globe with your beloved ones and expect to have the best moments with relaxing and enjoyable experience in those countries. However, there are unexpected incidents which may happen on your trip such as luggage missing, sickness, delayed flight, etc. Therefore, preventive preparation for any risks that may happen is very critical.