The Captive Insurance Company Association (CICA), the captive industry’s foremost domicile-neutral association recently released an important statement regarding small captive insurance companies that make an 831(b) tax election. The Information Statement was released on August 24, 2015 and emphasizes the importance of using best practices and qualified experts when designing and operating a small captive insurance company.
To download the entire Information Statement by CICA, CLICK HERE.
The Information Statement is thoughtful and recognizes that small and mid-size businesses have different risk management challenges and approaches when compared with large corporations. The release of this balanced guidance is timely as it is designed to address abuses while defending the legitimate use of small captive insurance companies. Despite their legality and resilience in U.S. Tax Court, small captives have come under recent attack by the I.R.S.
Here are some key points. The Information Statement:
1). Recognizes the unique and concentrated risks, and resulting fragility, of small businesses.
2). Notes that captives are an important way to help small businesses diversify away the concentrated risks of their business models.
3) Recognizes that the resulting focus on having small captives provide first party insurance is entirely logical and necessary.
4). Recognizes that asset management (matching assets with liabilities) is an important consideration for captives.
5). Provides a sound and reasoned approach to making asset management decisions (the best interest of the captive) rather than making dogmatic pronouncements about good and bad investment strategies or asset classes.
6). Suggests there is value in having an independent attorney, independent actuary and independent captive manager.
7) Notes that it’s entirely proper, even necessary, for small business to rely on outside advisors (even competent nontraditional ones) to form and manage their captives.