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Please join us next month as we discuss the modern trends surrounding captive insurance. Wealth managers who have an interest in captives will likely find the information and presentation useful. CLICK HERE TO REGISTER

For additional information on captives see, Advisorfyi.com–States Competing for Captives Insurance Business, Alternative Risk Transfer Revisited, Captive Market Continues to Grow, LLC Series and Cell Companies, Group Captive Insurance Companies and Year End Tax Considerations, and A Dollar Saved…Captive Insurance Company Costs

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Why is this Topic Important to Wealth Managers? Serves as a reminder to wealth managers who may already have, or are currently, considering any alternative risk transfer products for their clients.  Discusses basics applied to captive insurance companies in consideration with traditional prepaid expenses. 

As we have discussed in previous blogticles, captive insurance can be a viable method to more efficiently protect against certain risks under various circumstances.  For discussion on these topics please see our blogticles on AdvisorFYI from the week of August 30^th, Monday through Wednesday, Alternative Risk Transfer Basics, Risk and Self-Insurance, and Captive Insurance Company Introduction.  

In addition, we have discussed in previous blogticles the ability to deduct prepaid expenses for certain items, both from an accrual basis and cash receipts and disbursements method taxpayer approach.  One such class of deductions that is generally allowable is, “insurance premiums against fire, storm, theft, accident, or other similar losses in the case of a business, and rental for the use of business property.” [1]

See generally our blogticles from November entitled, Year End Tax Planning: Pre-Paid Insurance Expense For Accrual Accounting Taxpayers, and Year End Tax Planning: Pre-Paid Expenses For Cash Accounting Taxpayers.

A discussion of the deductibility of insurance premiums paid to a captive insurance company is complex.  It is recommended that wealth managers work with knowledgeable attorneys and other experts who specialize in the field of alternative risk transfer taxation.  Nevertheless, there are a number of captive insurance options that “fit” the many rules required for the deduction of premiums as an insurance expense. 

Moreover, as the year draws closer to an end, some of those options have become infeasible due to time constraints.  Other options, however, still may be available to clients’ businesses that have insurable interests that are currently being uninsured or insured through some other less effective means. 

One such example could be the class of captives that is generally known as the group, association or rent-a-captive model.  These captive insurance models provide for some of the very same benefits as ownership of an insurance company, which include, but are not limited to: 

• individualized underwriting and premium allocations
• retained underwriting profits depending on claims experience
• access to insurance products currently unavailable or too costly to insure

These models can also offer a lower price point for businesses who may be considering using alternative risk transfer products for the first time. 

Some considerations wealth managers should account for include, but are not limited to: 

• upfront and annual cost to insureds
• jurisdiction and regulatory oversight of insurance company
• officers, directors, and management of company, products and programs

Lastly, there are a number of promoters, companies, individuals and professionals who promote captive insurance products.  It is important to realize not everyone knows what they’re talking about.  In fact, some are even outright crooks.  When consulting with individuals who are “qualified” ask lots of questions and try to verify the information shared with you.  Remember a little extra due diligence now can save you a lot in the long run.

Tomorrow’s blogticle will continue to discuss additional resources available to wealth managers.

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

[1] 26 C.F.R. § 1.162-1; U.S. v. Weber Paper Co., 320 F.2d 199, 63-2 U.S. Tax Case. (CCH) P 9630, 12 A.F.T.R.2d 5256 (8th Cir. 1963). 

Why is this Topic Important to Wealth Managers? Provides specific information in regards to costs relating to the formation of an insurance company.  Discusses multiple domicile options and how they relate to each other.

Wealth managers may be interested to know generally what costs are involved to form and manage a captive insurance company in different jurisdictions.  Take for example Vermont.  It is known as the “Captive Capital” here in the States, and for good reason, Vermont has licensed over 900 captives at last count. [1]

The licensing fees in Vermont total $4,800 (in the first year and only $300 a year thereafter.) [2] However, there are a couple of downsides to the preliminarily greener pastures.  First, Vermont requires initial capitalization of a “pure”, which includes a traditional single parent, captive of $250,000. [3] Secondly, Vermont requires the captive to pay minimum premium tax of $7,500 which has an underwriting level of approximately around $2 million dollars at a rate of 0.38%. [4]

As a general rule, the formation and annual expenses, including premium taxes, of captive insurance companies will be lower in most offshore jurisdictions rather than domestic domiciles.  [5]

One offshore jurisdiction known for international finance is considered an industry leader in captive insurance; “Bermuda, where almost twenty-five percent of the World’s captives are registered.” [6] Next are the Cayman Islands which have a slightly less number of captives, behind Bermuda and Vermont with approximately 760 companies.  The domicile had total insurance reserves held in captive insurance companies of US $42.3 billion as of June 31, 2010. [7] The annual fee to the insurance department for a captive insurance company, or “Class B” insurance license, as it’s know in Cayman, is currently $10,365.85.  [8] One significant benefit at present, is that a captive does not have to pay a tax on premiums until 2016 (the company can still underwrite risks arising in or from the U.S., which raises additional issues and questions that will be addressed later this week).  Also,  the minimum capitalization to start is less than half of Vermont, only $120,000.  [9]

And yet still other domiciles such as St. Lucia, offers initial capitalization requirements as low at $50,000. [10] Additionally, here annual operating fees can be as low as, $2,500 annually. [11]

Some other annual costs and fees (approximately) that may be necessary for consideration, whether forming an insurance company either offshore or domestically, including, but not limited to:

• captive manager ($10,000-$150,000)
• registered agent ($100-$5,000)
• actuary, ($5-50,000)
• auditor, ($5-25,000)
• asset manager (10-40 basis points)
• legal counsel ($100-500 + per hour).

“Operating expenses can vary significantly from one domicile to another, but it is not unusual for the cost of services such as captive management, audit and legal fees, and others to be as much as 10-20% more in some of the more established offshore domiciles.” [12]

Nevertheless, costs and fees are only one of many considerations for a proper domicile when forming an insurance company and a full examination of insurance needs should be weighed.  A list of some of these considerations can be found on our earlier blogticle Captive Insurance Companies Introduction September 1.

Tomorrow’s blogticles will discuss taxation of international insurance companies.

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

[2] Vermont Captive Fees and Taxes.  http://www.vermontcaptive.com/regulations/fees.html.  Posted 1997.  Last Accessed 9/27/2010.

[3] Title 8 Vermont Statutes Annotated Chapter 141. “Captive Insurance Companies.” http://www.vermontcaptive.com/regulations/laws.html.  Last Accessed 9/28/2010.

[4] Vermont Captive Fees and Taxes.

[5] 3 Asset Protection: Dom. & Int’l L. & Tactics § 41:15.  Duncan E. Osborne and Elizabeth Morgan Schurig.  (2010).  Westlaw.

[6] Freedom In Captivity:  The Captive Insurance Legislation  of Nevis,  Jan Dash, Esq., Herman W. Liburd citing, International Association of Insurance Supervisors, Issues Paper on the Regulation and Supervision of Captive Insurance Companies, October, 2006, p. 50.; A Guide to Captive Insurance (Part 1), William Elliot, Journal of International Taxation, April, 2005.

[7] Inurance Managers Association of Cayman.  http://www.caymancaptive.ky/.  Updated 6/30/2010.  Last Accessed 9/27/2010.

[8] Cayman Islands Monetary Fee Schedule Effective January 1 2010.

[9] 2nd Annual Risk Management Captive Domicile Roundup.  Risk Management.  http://www.accessmylibrary.com/coms2/summary_0286-18713728_ITM.  Last Accessed 9/27/2010.

[10] Pinnacle St. Lucia.  http://www.saintluciaifc.com/online_registry/fees.htm.  Last Accessed 9/27/2010.

[11] Id.

[12] Wilmington Trust. “Captive Insurance Companies.” http://www.captive.com/service/WilmingtonTrust/images%20and%20pdf/captive101whitepaper.pdf.  2008.  Last Accessed 9/28/2010.