Captivating Thinking

Most small and medium size businesses are under-insured.  Today, businesses face far greater risks than similar businesses faced in the past.  In addition to common risks like theft, fire and general liability, there are a host of other risks that businesses face that are specific to their industry and exacerbated by shifts in technology, regulations and the legal system.

Lawsuits are far more common in the current business climate, and lawsuits can come from both outside or inside a company.  Businesses face more and more regulations, and it’s not uncommon to read a news article about a business crippled or closed down by regulators.  Many businesses today also face cyber risks and threats to data security and IT systems.  As if that is not enough, terrorism in the U.S. now poses a legitimate threat to businesses.  And, many of these “new” risks are not covered by typical third party insurance policies.  These types of coverage often require additional policies that are often very expensive.

In addition to gaining the ability to self-insure and to own a profitable second business, a captive insurance company is one of the most formidable asset protection vehicles available to businesses and business owners.

However, prior to addressing this unique benefit, it’s worth noting the primary reasons that businesses form their own insurance company – specifically a captive insurance company (CIC).

1. To manage business risk by formally self-insuring certain risks with pre-tax dollars
2. To protect assets from creditors of the operating business and its owners or other risks
3. To realize profits and accumulate wealth inside of a separate business entity

These are well known reasons that legitimate captive insurance companies are formed by businesses. Assuming a captive insurance company is formed for the above reasons (or similar ones), it can also serve as the backbone (and full body armor) of a business owner’s asset protection strategy.

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.