TYPES OF CAPTIVES

 

 

TURNING PREMIUMS INTO PROFITS

 

To better grasp the benefits of captive insurance, it is important to understand that there are a variety of types of captives developed to deliver specific benefits to specific business types.

Types of Captives

There are two primary types of captives: Single Parent and Group Captives.

Single Parent (Pure) Captive. If you are paying a significant amount in premium, typically a million dollars or more in casualty premiums, you may want to form your own captive so you are not sharing risks with other companies not related to you.   The single parent captive is a legal entity formed separately as a subsidiary to a parent organization. The parent controls the captive to insure the  parent company and its affiliates. It gives the parent company the ability to directly access the reinsurance market, as well as customize your insurance program as well, thereby reducing your costs of protecting your business while improving your insurance program.

Group (Association) Captive.  A Group Captive entails joining in with a group of other companies that also have a significant focus on preventing and mitigating claims.  In a group captive, you may be able to enter the captive for as little as $75,000 of casualty premiums. Casualty premiums are premiums for your “liability” coverages, such as workers’ compensation, general liability, and auto coverage.  However, some group captives require $250,000 or more for casualty lines premium.  Due to the lower premium requirement as an entry point as compared to self-insurance, you can receive a significantly lower Total Cost of Risk that is similar to that of self-insurance, plus you do not have to deal with all the regulatory headaches associated with being self-insured.  Plus, participating in a captive can have tax advantages over self-insurance as well.  Because of these advantages, you can see why Group Captives are the most popular form of alternative risk financing.

In some situation, an association may form a group captive to benefit the members of the association. In those circumstances, it is not uncommon for the association program to include coverages needed by the members that may not be available in the marketplace, or would require them to purchase multiple separate policies to obtain.

Agency Captive. Sometimes, an insurance agency or broker may form a captive insurance company to underwrite and insure (or reinsure) a number of their business clients.  The agent may do that as they believe their clients' policies will produce an underwriting profit and the agency is looking to expand its sources of revenue, or it will allow them to be able to offer a more competitive program either via specialty coverages or rates.

831(b) Captive. The Tax Reform Act of 1986 created the 831(b) section of the Internal Revenue Code, making it advantageous for small-and mid-market companies to own their own insurance company. Therefore, 831(b) is really a tax election that allows small captives with gross premium income of less than $2.2 million annually to pay taxes solely on investment income and not on any underwriting profit. It may also allow for the tax deductibility of premiums, as well as the proceeds/dividends of captive may be taxed as a capital gain in lieu of ordinary income depending upon the captives ownership and should the captive meet the risk sharing and distribution requires laid out in the IRS code. These are often called "micro-captives. Learn more about 831(b) Captives.

 

Structures of Captives

In addition to the types of captives, there are several structures you could be involved in:

  • Single Cell Captive.  There is only one organization in the legally filed captive company.  A single cell captive can be formed to benefit a single company (Single Parent) or multiple companies (Group, Association, or Agency).
  • Multi-Cell (Rent-A-Captive).  These are captives structured so there is a large, single captive company that allows multiple captives to be formed and operate inside of it.  Think of these captives as being similar to a condo building.  You have your own unit, but you are one of many units in the condo building.  This allows businesses or groups to enter into a captive program more economically as they will not have all the frictional costs of setting up their own captive.
  • Traditional Multi-Cell Captive. Each of the captives in the large captive insures the risks of those separate captives whether they are a single parent, group, association, agency, etc. However, if one of the captive cells undergoes significant financial problems there may be collateral damage to the other cells in the captive, much like a fire may cause collateral damage to surrounding units.
  • Segregated (Protected) Cell Multi-Cell Captive. Similar to that of a Multi-Cell or Rent-A -Captive in that there are multiple captives formed within the larger captive structure, However, there is a regulatory barrier between cells that protects each cell from each other.  It is like having a super-firewall existing between each condo unit.  No damage is going to occur outside that segregated cell.  Therefore, you do not need to worry about the risk resulting from another captive cell collapsing.

 

Navigating Captives

SECTION 1

INTRODUCTION TO CAPTIVES

 

SECTION 2

CAPTIVE BASICS

 

SECTION 3

BENEFITS OF GROUP CAPTIVES

 

SECTION 4

TYPES OF CAPTIVES

 

SECTION 5

IS A CAPTIVE RIGHT FOR ME?

 

SECTION 6

HOW TO JOIN A CAPTIVE

 

SECTION 7

831(b) CAPTIVES

 

SECTION 8

HEALTH INSURANCE CAPTIVES

 

SECTION 9

TURNING PREMIUMS INTO PROFITS BOOK

Get in Touch

 

David Leng, CWCA,

CPCU, CIC, CBWA, CRM

724-863-3420 x 3329

dleng@duncangrp.com

 

John M. Duncan, Jr

CIC, CWCA

724-863-3420 x 3311

jduncan@duncangrp.com

 

 

© 2017 Premium Reduction Center, powered by Duncan Financial Group     •David Leng     •724-978-2139     •dleng@duncangrp.com