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Is There a Captive Insurance Solution for Your Company?


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This article will simplify the captive insurance arena into a
few broad categories to better help middle-market business
owners understand the potential advantages of these risk
financing arrangements.

Published in: Business
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Is There a Captive Insurance Solution for Your Company?

  1. 1. I D E A S T O H E L PG R O W Y O U RB U S I N E S S©Copyright2013.CBIZ,Inc.NYSEListed:CBZ.Allrightsreserved.Over 28% of all commercial insurance premiumstoday are paid to captive insurance companies. Yet,there still exists a sense of mystery and confusionamongst middle-market commercial insurance buyers asto what benefits this arrangement can provide. The goal ofthis article is to simplify the captive insurance arena into afew broad categories to better help middle-market businessowners understand the potential advantages of these riskfinancing arrangements.DefinitionA captive insurance company is a privately-ownedinsurance company whose owners are also its insureds.These insureds are then the principal beneficiaries ofall underwriting profits and corresponding investmentincome generated from premiums paid into the captive.Captives have been utilized by business owners for morethan 100 years, with over 6,000 captives operating today.Let’s look at the potential benefits for middle-marketcompanies, using a few different scenarios.Group CaptivesPrivately-held or smaller public companies usuallydo not have the size or legal/taxable diversity toqualify for insurance company status on their own inthe eyes of the IRS. These companies typically havean annual commercial insurance spend of between$150,000 and $2 million. For certain portions of theircommercial insurance program (General Liability, WorkersCompensation and Automobile) they can participate ina group captive arrangement whereby up to 65% of theirpremiums are available for them to retain if not used forclaims. Companies in this space currently utilizing highdeductibles or retrospectively-rated programs will findcaptives less expensive and more financially efficient overthe long term. Additionally, most privately-held companiesown their captive stock outside their personal estate,thus allowing captive profits to be held in a vehicle notsubject to estate taxes.Balance Sheet (Micro) CaptivesHigher pre-tax profit companies can set aside thesepre-tax profits, on a tax deductible basis, into a captive toinsure business risks for which they currently do not buyinsurance or for which they do not buy enough insurance.As long as premiums are less than $1.2 million per year,profits are retained inside the captive on a tax-exempt basis.Profits distributed from the captive are in the form of adividend and are taxed as such.Stop Loss Health Insurance CaptivesOne of the hottest trends in the health insuranceindustry is the group stop loss health insurance captive.This vehicle gives current fully-insured employers with as fewas 25 employees the ability to achieve qualified self-insuredstatus, along with all the advantages of being “self insured”and without the economic volatility of being self insured ontheir own. Additionally, current self-insured employers inthese vehicles have access to profits normally only availableto their current stop loss insurance provider.Insurance is the purest form of socialism; the “haves”subsidize the “have nots”. Captive insurance companiesare designed to reward those companies that, throughtheir risk management discipline, consistently pay farmore in premiums than in claims. With a limited amountof “risk” attached to captives and with the client’s abilityto keep the underwriting profits and investment income,it’s no wonder the captive marketplace has grown at over200 times the rate of the traditional market in the past15 years. our business is growing yoursArticle reprinted from Summer 2013GROWTHBIZS T R A T E G I E SCOURTNEY W. CLAFLINCBIZ Insurance Services, Inc. • Minneapolis, MN612.436.4614 • cclaflin@cbiz.comInsurance StrategiesIs There a Captive InsuranceSolution for Your Company?