July 2013

In addition to gaining the ability to self-insure and to own a profitable second business, a captive insurance company can also serve as a remarkably efficient vehicle to house a deferred compensation plan for key employees and business owners.  The logic behind this approach is quite simple.  Rather than giving ownership or deferred compensation to key employees in the parent company, businesses can offer deferred compensation and ownership through a separate company – their own insurance company.  This provides asset protection to the parent company and prevents dilution of the parent company’s ownership.  This arrangement also provides a more tax efficient platform to fund a deferred compensation arrangement.  However, prior to addressing this unique benefit, it’s worth noting the primary reasons that businesses form their own casualty insurance company – specifically a captive insurance company.

The Captive Insurance Times (CIT) recently published an article about a California bill that would drastically curb self-insured health plans for small and mid-size businesses.  The article is titled “SIAA Opposes Stop-Loss Legislation” and is written by Jenna Jones.  The article notes:

The Self-Insurance Institute of America (SIIA) has opposed a recent state bill, as it would stifle self-insured health plans.

According to the SIIA, the bill would threaten the employer-sponsored health benefit plans of thousands of California employees and their dependents, particularly among small- to medium-sized businesses.

The proposed bill, SB 161, would restrict employers’ use of stop-loss insurance to protect against catastrophic losses and also includes special restrictions on self-insured employers for groups of 50 or less.

SIIA chief operating officer, Michael Ferguson, explained the institute’s reasons for opposing the bill in a recent letter to Health Care Committee chairman, Senator Ed Hernandez.

There are many compelling reasons for businesses to own their own insurance company.  We recently attended a session called “Captive 102” at the Captive Insurance Companies Association (CICA) Conference that presented four unique business challenges.  In each case, business owners and CFOs overcame their challenges by choosing to own their own insurance company – specifically, a captive insurance company.    While the primary purpose of captives is to insure risk, they also serve as powerful financial vehicles that provide flexibility, favorable tax treatment and numerous additional advantages to the parent company or its owners directly.

Captive 102 Case Studies

#1 – A powerful financial vehicle that supports the parent company beyond simply providing insurance coverage

#2 – A vehicle that provides flexibility to manage rising insurance costs (often unjustified increases)

#3 – A solution when a business or organization is uninsurable or can’t acquire affordable insurance

#4 – A solution when a business has addressed a major source of loss / risk but continues to be penalized with higher insurance rates based on past claims history  

If you read a report from the:

Bureau of the Committee on Fiscal Affairs

Centre for Tax Policy and Administration

Organization for Economic Cooperation and Development

…headquartered at:

2, rue André Pascal 75775 Paris Cedex 16 France

… you probably would not be surprised to find a report suggesting businesses do not pay enough in taxes.  And, you might possibly expect to find references to “fairness” and “responsibility” regarding businesses and their efforts to reduce their tax burdens on behalf of their shareholders.