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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? This blogticle presents discussion related to the State Small Business Credit which is now being applied for by an increasing number of states. The program is intended to provide capital to small businesses. Wealth managers with small business clients in these states should be mindful of the potential access to new capital.

Late last month the U.S. Department of the Treasury announced the approval of State Small Business Credit Initiative (SSBCI) applications from Connecticut, Missouri, and Vermont. The planned use of SSBCI funds by these states is intended to help create new jobs and is expected to spur more than $534 million in additional small business lending. The SSBCI program, which supports state-level small business lending programs, is one component of the Small Business Jobs Act.

On September 27, 2010, President Obama signed into law the Small Business Jobs Act of 2010 (the “Act”).[1] The Act created the SSBCI, which was funded with $1.5 billion to strengthen state programs that support lending to small businesses and small manufacturers. In total, the SSBCI is expected to help spur up to $15 billion in lending to small businesses.

Under the SSBCI, participating states will use the federal funds for programs that leverage private lending to help finance small businesses and manufacturers that are creditworthy, but are not getting the loans they need to expand and create jobs. The SSBCI will allow states to build on successful models for state small business programs, including collateral support programs, Capital Access Programs (CAPs) and loan guarantee programs.  Existing and new state programs are eligible for support under the SSBCI.

“These critical funds will help small businesses access the capital they need to expand their operations, create new jobs, and continue supporting our nation’s economic recovery,” said Treasury Secretary Tim Geithner. “Public-private lending partnerships, such as the State Small Business Credit Initiative, have a proven track record of success, and I’m pleased that this funding is on its way to support economic growth in these states.”

Under the SSBCI, all states are offered the opportunity to apply for federal funds for state-run programs that partner with private lenders to increase the amount of credit available to small businesses. States must demonstrate a reasonable expectation that a minimum of $10 in new private lending will result from every $1 in federal funding. Accordingly, the $1.5 billion federal funding commitment for this program overall is expected to result in at least $15 billion in additional private lending nationwide.

Details on the applications approved earlier in March, which the states expect will generate a cumulative total of at least $534 million in new small business lending in Connecticut ($133 million), Missouri ($269 million), and Vermont ($132 million).

The Treasury has previously approved funding for SSBCI programs in California, Michigan, and North Carolina. Additional applications are expected to be approved in the coming weeks.

Next week’s blogticles will contain helpful tips for wealth managers.

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

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[1] PL 111-240.

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.

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[1] About Vermont Captive.  http://www.vermontcaptive.com/about-us.html.  Posted 1997.  Last Accessed 9/27/2010.

[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.