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831 b presentation

  2. 2. - 2 - Your Business Just Got Easier. TABLE OF CONTENTS Captive Insurance Overview……………………….……………………….………….I The Small Captive Insurance Company..………………………………………..…..II Tax Issues and Compliance……………..…………………………………….………III Types of Issued Insurance Policies…………………………………………..…..……IV Steps to Captive Construct..………………………………………………….……….V CBIZ Alternative Risk Team……………………………………………………….…VI
  3. 3. - 3 - Your Business Just Got Easier. I. CAPTIVE INSURANCE OVERVIEW What is a Captive Insurance Company? A captive insurance company is one generally described as a closely held insurance company whose insurance business is primarily supplied by and controlled by it’s owners, and which the original insured’s are the principal beneficiaries. While in its purest form it is very similar to self insurance, if structured properly a captive may provide significant risk management, enhanced cash flow and ancillary tax benefits when compared to “pure” self insurance. Types of Captives  Single Parent Captives  Group or Association Captives  Sponsored or Rent-A-Cell Captives  Agency Captives  Micro Captive Insurance Company Captive Facts  Over 10,000 captives are incorporated worldwide with over half domiciled in the United States  Captives command approximately 28% of all US premium dollars  Formed and regulated under special legislation (onshore or offshore)  IRS Guidance, Safe Harbor Revenue Rulings and case law
  4. 4. - 4 - Your Business Just Got Easier. II. THE MICRO CAPTIVE INSURANCE COMPANY & IRC SECTION 831 (B) What is a Micro Captive Insurance Company? A Micro captive insurance company is an alternative risk-management and business-planning tool for businesses and their owners. In its most simple form, a Micro captive insurance company is a small property and casualty insurance company. The Micro Captive may have common ownership with the party or parties, they are insuring. An insurance company, including a captive, may elect under IRC section 831(b) to be taxed on its investment income only, so long as the insurance company receives $1.2 million or less in annual premium income. A properly structured 831(b) captive insurance company provides a superior way to manage certain risks and allow for favorable tax provisions. Benefits of owning a Micro Captive Insurance Company? Captives may provide the most effective way to manage risk, control cost and provide possible income and estate tax deferral or reduction.  Reduce Insurance Costs  Control Risk – ability to formally fund for risk currently uninsured or too difficult or expensive to insure  Customized Insurance Plan  Asset Protection  Generate significant tax savings when compared to “pure” self insurance  Wealth Preservation  Estate Planning Structure of an 831(b) Micro Captive Insurance Company? Internal Revenue Code 831(b) provides a very powerful tax advantage to Micro Captives that utilize this IRS election. This election assumes that legitimate risk transferring is the foundation for forming an 831(b) captive. Key points related to the 831(b) election: 1. Annual premium up to $1.2M 2. Underwriting profits are not taxed 3. Investment Income taxed at normal corporate rates 4. Dividends may be declared to owner(s), which are taxed at the dividend rates in compliance with the corresponding IRS dividend tax rates.
  5. 5. - 5 - Your Business Just Got Easier. III. TAX ISSUES AND COMPLIANCE Tax Issues related to achieving the necessary requirements to successfully make the IRC section 831(b) election 1. Will a small captive insurance company achieve risk distribution solely from the risks of an insured’s own organization? 2. If not, can the captive participate in a risk sharing pool – on a well defined basis – with other “like-minded” captives to accomplish risk distribution? 3. Will the captive take in less than $1.2 million in net premiums annually, so as to qualify the captive for favorable treatment as a “small insurance company” under Section 831 (b) of the Internal Revenue Code? Requirements for Captives to Constitute “Insurance” for Tax Purposes 1. Risk Shifting o Risk must be transferred 2. Risk Distribution o Risk must be spread o The law of large numbers must apply 3. True Insurance Risk o Insurance in the commonly accepted sense o Formalities must be observed
  6. 6. - 6 - Your Business Just Got Easier. III. TAX ISSUES AND COMPLIANCE “Safe Harbor” Explanation If properly structured and underwritten, the premiums paid for captive insurance should be deductible as ordinary and necessary business expenses under Section 162 of the Internal Revenue Code. For captive premiums to be deductible the captive must meet the risk shifting and risk distribution requirements set forth in a series of IRS Revenue Rulings issued since 2002; including but not limited to Revenue Rulings 2002-89 and 2002-90. 1. Revenue Ruling 2002-90 (Safe Harbor #1)  Captive contains 12 or more brother/sister subsidiaries  No single brother/sister subsidiary with less than 5%, nor more than 15% of risk and premium
  7. 7. - 7 - Your Business Just Got Easier. III. TAX ISSUES AND COMPLIANCE 2. Revenue Ruling 2002-89 (Safe Harbor #2) – Captive Pooling Arrangements  50% of risk exposure is derived from unrelated entities  Like minded entities or individuals each form a captive and take the 831(b) election  In certain circumstances this percentage may be as low as 30%
  8. 8. - 8 - Your Business Just Got Easier. III. TAX ISSUES AND COMPLIANCE 3. Revenue Ruling 2002-91 (Safe Harbor #3)  7 or more distinct separate legal, taxable entities  Proportionate amount of frisk (premiums) for each entity  Risk Sharing Component within Captive Insurance Co. Company 1 Company 2 Company 3 Company 4 Company 5 Company 6 Company 7 Captive Insurance Company $ Premiums $ $ $ $ $ $ $ Group Captive Arrangement per Rev. Ruling 2002-91
  9. 9. - 9 - Your Business Just Got Easier. IV. TYPES OF ISSUED INSURANCE POLICIES What kinds of risks can be covered? A business can insure risks that are currently covered by commercial insurance such as property, general liability, business interruption, errors & omissions, legal defense, employee practices liability, product recall, operating risk, construction defect, exclusions from current policies and many others. Some additional coverage’s are listed below.  Gap Fillers  Excess layers  Deductible layers  Advertising/Media liability  Cyber Risk  Directors & Officers  Exclusion buy back (various coverage exclusions)  Intellectual property  Limited environmental liability  Loss of license  Patent/copyright Infringement  Product recall & legal expense  Regulatory exam & legal expense  Publishers liability  Prepaid countersuit coverage for professional liability  Any potential liabilities homogeneous to the group of captive owner
  10. 10. - 10 - Your Business Just Got Easier. V. STEPS TO CAPTIVE CONSTRUCT Implementation and Timelines  Phase I Feasibility Analysis o Examine Insured and uninsured Risk o Quantify Risk – Premium Range o Actuarial and Underwriting Analysis  Phase II License Application o Insurance License o Incorporate Insurance Company o Actuarial and Underwriting Analysis  Phase III Capitalize Company  Phase IV Issue Insurance Contracts Captive Design Cycle: 90-120 days Estimated Expenses  Cost to construct captive including analysis and initial formation fall in to the range of $75,000 to $100,000 dollars.  Annual administration expense to run the captive is approximately $65,000- $90,000 depending on the final structure of the captive. Included in this figure are the cost related to actuarial, legal, accounting, regulatory, administration, domicile fees & taxes, policy issuance and broker fees.  Collateral to provide surplus to captive $250,000 can be in the form of cash or letter of credit (LOC) which is normally released back to the captive owner after 1 year.
  11. 11. - 11 - Your Business Just Got Easier. VI. CBIZ NATIONAL CAPTIVE INSURANCE PRACTICE GROUP The CBIZ National Captive Insurance Practice Group utilizes a vetted team of professionals to orchestrate the creation of your captive. The professional resources include actuaries, attorneys and captive administrators that are well respected experts in captive field. For additional Information contact: Courtney Claflin, National Captive Insurance Practice Leader Phone: 612.436.4614 Email: cclaflin@cbiz.com Brief of the CBIZ, Inc. National Captive Insurance Practice Group: CBIZ, Inc. has a National Practice Group dedicated to the design, execution and management of alternative risk financing vehicles which take on many forms including captive insurance companies. During the past 12 years our Practice Group has been instrumental in the creation of numerous successful captive insurance companies, including group, single-parent and association captives. In addition to our ability to design/build captives to our clients individual goals and objectives, we also have over 70 operating captive facilities in our portfolio to serve the needs of clients not diverse enough to create their own captive insurance company.