View
64
Download
1
Category
Preview:
DESCRIPTION
Captive Considerations. What to know, What to avoid. #[insert hashtag here]. Captive Considerations. R. Wesley Sierk , III ARM, ACI, ChFC Author , Taken Captive 110 Pine Avenue, Suite #310 Long Beach, Ca 90802 P: 562.472.2846 x210 F:562.435.7886 M:310.993.9762 - PowerPoint PPT Presentation
Citation preview
Captive Considerations
What to know, What to avoid
#[insert hashtag here]
Captive Considerations
R. Wesley Sierk, III ARM, ACI, ChFC
Author, Taken Captive
110 Pine Avenue, Suite #310Long Beach, Ca 90802 P: 562.472.2846 x210F:562.435.7886M:310.993.9762wsierk@riskmgmtadvisors.com
#[insert hashtag here]
Captive Considerations
• Michael R. Mead, CPCU• 2011 CICA Distinguished Service Award Winner• Captive consultant, manager, broker• President, Missouri Captive Insurance Association, www.mocia.org• Vice President, Director, International Center for Captive Insurance
Education, www.iccie.org• Director, Captive Insurance Council of the District of Columbia,
www.cic-dc.org• Past Chair, Captive Insurance Companies Association,
www.cicaworld.com• Past President, Director, Arizona Captive Insurance Association• Expert Commentator,Captives irmi.com• www.mrmeadandco.com• mmead@mrmeadandco.com• 312-316-5084
Captive Considerations
• Agenda– Basics– Uses– Challenges
• Ask questions at any time• Presentation will be available on the WRCIC
website, or AZ, MO, UT sites.
Captive Considerations
• What is a Captive? Insurance company wholly owned and
controlled by its insureds Insurance company that insures the risk of the
parent company
Captive Considerations
• Who has a captive?• Over 50% of the commercial
property/casualty market• Virtually all of the Fortune 500• All energy companies, utilities and most
hospitals• Over 5000 globally
Captive Consideration s
• Why a Captive?Get control of the cost of insurance Improve claims handling Improve cash flow Design coverage that will benefit their own
business Obtain income tax deductions Potentially provide gift and estate tax free
transfers
Captive Considerations
• Uses• Workers compensation• Pollution• Terrorism• Medical malpractice• Directors and Officers/Fidelity• General Liability
Captive Considerations
• What Problems Can a Captive Address Unavailability of insurance Insurance that is too expensive Premiums that don’t match the company’s
losses Inflexible language Inflexible terms No tax benefit to retain the risk
Captive Considerations
• Types of Captives:Rent-A-Captive
Protected Cell CaptiveSingle Parent CaptiveIndustry CaptivesAssociation CaptivesRisk Retention Group CaptivesAgency CaptivesSpecial Purpose
Captive Considerations
• What are the steps to form a Captive?• Prepare Feasibility Study• Actuarial Analysis• Choose a domicile• Choose a Captive Manager• Determine structure• Create the Business Plan• Prepare Incorporation Documents• Biographical Affidavits• Complete the Application• Submit to Commissioner • Receive Certificate of Authority.
Captive Considerations
• Tax Issues• Do you want a deduction?• State versus Federal• Risk Shifting• Risk Distribution• Facts and Circumstances
Captive Considerations
• IRS red flags• FAS 113• Not finite risk• Actuarial Study• Surplus to premium ratio• Paying claims• Unusual coverage• Purpose
Captive Considerations
• Feasibility Study• Is a feasibility study the same as an actuarial report?• What are the main purposes of a feasibility study?• Who conducts the feasibility study?• What does a feasibility study cost?• Is a feasibility study required for getting licensed as an
insurance company? • How long does it take to complete a feasibility study?• Should I be concerned about confidentiality?
Captive Considerations
• Elements of the Feasibility Study1. Clarifying the objectives2. Defining the risk 3. Measuring the risk
• Retained risk and loss projections • Expense budget for the captive• Tax impact
• U.S. (or other country) income tax• Excise taxes• Excess and surplus lines taxes• Domicile premiums taxes• Local premium taxes• Other taxes/assessments
• Premium strategy
Captive Considerations
• More elements3. Measuring the risk- Continued
• Premium strategy• Capitalization • Pro forma financial statements-These financials
should include:1. Income statements and balance sheets2. Five-year pro forma results3. Presentation of tax consequences4. Financial assumptions (interest rates, growth rates, cost
of capital, etc.)
Captive Considerations
4. Structuring strategy 5. Domicile choice6. Operating the captive
Captive Considerations
• Key components of captive management– Underwriting– Claim management– Financial management– Compliance/reporting
Captive Consideration
• Reviewing and evaluating risk• Setting premium rates• Reviewing coverage applications• Writing policies• Create the underwriting policy
– established guidelines that the underwriter should follow– Coverage review and require financial strength of the
insured– Should cover how policy terminations or loss of coverage is
handled.– It should also cover any target market or geographic
restrictions.
Captive Considerations
• Claims Management• Decide WHAT risk you will cover• Then decide HOW to handle the claims that arise• Claims Management Policy
– Claims Team – Internal vs. External to the captive– Internal team to the parent organization?– Investigations– Settlement Authority– Other policy matters to consider:
• defining roles, responsibilities and authority levels for all those involved in the process;
• establishing case-reserve protocol; • identifying and retaining the law firm that will handle litigation or
other negotiations requiring legal expertise.
Captive Considerations
• Financial Management• Understand the Purpose of the captive
– Improve Risk management– Build and increase wealth
• Create board policies to address – signature/wire transfer authority, – cash management and other accounting policies, – risk limitation and operating ratios, – investment policy, – internal and external compliance communications, – contract signature authority
Captive Considerations
• Compliance Reporting• Domicile and Type of captive specific• Starts with the annual audit:
– Opinion of Independent Certified Public Accountant – Report of Evaluation of Internal Controls – Accountant's Letter – Financial Statements– Certification of Loss Reserves and Loss Expense Reserves
• Organizational / Jurisdiction Review• Risk Pool Certification / Compliance
Captive Considerations
• Advanced Issues• Captives can be used for
– Estate / Gift Tax Planning– Asset Protection
• Ownership succession• Specific subsidiary issues
Captive Considerations
• Asset Protection
Limited Partnership
Captive Insurance Company
Business Owner/Corporation
Foreign Trustee
Business Owner
100% Owner
1% General Partner
99% Limited Partner
ForeignAsset Protection
Trust
Captive Considerations
Limited Partnership
Captive Insurance Company
Business Owner/Corporation Irrevocable Trust
Business
100% Owner
2% General Partner 98% Limited Partner
Policies Issued
Premiums Paid
Captive Ca
Recommended