Why is this Topic Important to Financial Professionals? Although the Captive Insurance Company is far from a new concept, it is certainly being discussed once again this fall.  The complicated subject, however, is logical and can be broken down.  Repetitive exposure to the ideas will help the financial professional incorporate alternative risk transfer prerogatives, such as captives, into their clients’ financial plans.

A traditional “single parent” Captive Insurance Company, or sometimes known as a captive, is defined as, “[a] closely held insurance company whose insurance business is primarily supplied by and controlled by its owners, and in which the original insureds are the principal beneficiaries.”[1] The single parent means the ownership of the insurance company is controlled by one company.  “A captive insurance company’s insureds have direct involvement and influence over the company’s major operations, including underwriting, claims management policy and investment.”[2]

A captive insurance company could write a variety of business depending on the jurisdictional restrictions, which brings up another interesting point.  Some financial professionals may know that captives can be formed here in the United States, Vermont for example, as well as foreign jurisdictions; popular jurisdictions for some forms of underwriting are Bermuda or the Cayman Islands.  Considerations for choosing a jurisdiction to domicile a captive can include a number of factors, including but not limited to:

• Types of underwriting permitted, for example life and/or casualty
• Capitalization requirements
• Investment and reserve requirements
• Manager and meeting requirements
• Fees
• Premium and/or underwriting taxes

Federal insurance taxation will also be an issue for the owner of an insurance company.  Depending on a number of factors such as ownership considerations, and underwriting types and premiums collected each year, the tax status of the company could change.  Another common issue surrounding captive insurance companies and taxation is, risk shifting and risk distribution.  Together these topics are detailed and go beyond the purview of today’s introduction.

However, some financial planners have found group captives to be helpful.  Generally, a number of group captives can provide similar benefits a single parent captive, but usually have an administrator who manages the underwriting, accounting, taxation and regulatory issues. These structures are similar to traditional mutual insurance companies.  A financial planner can also hire an attorney or third party administrator to manage a single parent captive for a client from the formation process through dissolution.

“These guys were discussing captives with me five years ago, but I didn’t quite understand the concept enough to present to my clients,” says Martin E. Levine, ChFC, MBA, CPA.  Mr. Levine is an author and principal of Macro Financial Services, a financial planning firm for wealthy individuals on Long Island, New York.  “Now, I see [captives] as a very useful tool to reach some of my clients’ planning objectives.”  He continues, “the actual benefits to clients from implementing certain practices has shown to be significant.”[3]

There are a number of different solutions available to businesses of all size.  From companies such as Ford or UPS, to small neighborhood businesses, captive insurance options are available, in that operational risk will always be present, a good risk management plan will generally consider some forms of alternative risk transfer.

Tomorrow’s blogticle will discuss reinsurance and how it is commonly used in alternative risk transfer.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

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[1] Captive Insurance Company Glossary. Pg 3.  Towers Perrin.  Captive.com. http://www.captive.com/service/TowersPerrin/images%20and%20pdf/Captive%20Glossary%20TP.pdf. Last Accessed 8/26/10.

[2] Id.

[3] Interview.  Martin Levine.  July 2010.  http://macrofinancialservices.com/

Tags: captive insurance

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