CIC Services, LLC recently attended the Captive Insurance Companies Association (CICA) Conference in Palm Springs, California as part of our on-going efforts to stay abreast of shifting trends, strategies and regulations in the captive insurance industry. The conference was thematically focused on the future of the captive insurance industry. We attended multiple presentations and workshops covering a wide range of topics, including demographic trends, risk management, medical malpractice, preparing witnesses in a lawsuit, reinsurance, captive investments, regulatory trends, and the creative employment of captive insurance companies.
Creative Uses of Captive Insurance
CICA 2013 included a session titled “Creative Uses of Captive Insurance.” One of the presenters was Dan Schock of GMAC. GMAC is a top 20 U.S. writer of automobile insurance with over $1.3 billion of premium written in 2012. GMAC provides cover to private passenger autos, recreational vehicles and motorcycles.
It was no surprise that GMAC owns and utilizes captive insurance companies. What was surprising was that the first reason provided why GMAC utilizes captive insurance companies was the role captives play in agency development and retention.
Captives Can Be Utilized to Reward and Retain Talent?
Specifically, GMAC owns a Protected Cell Captive domiciled in Bermuda, and many individual agencies and producers are given ownership of their own cells as part of their relationship with GMAC. Insurance lines are written through the protected cell captive and then reinsured in the reinsurance market. Because individual agencies are owners in their protected cells, they share in underwriting profits in the captive.
This approach incentivizes individual agencies to be very thoughtful and take more ownership over the policies their agency writes (as they are rewarded by a combination of sales commission and captive profitability versus simply receiving sales commission). Also, profits accumulated in the captive by agencies receive favorable tax treatment.
Additional benefits of captive ownership cited by GMAC included:
– Support expansion into new markets
– Effective deployment of capital
– Provide medical stop loss coverage for agencies with 50 or more employees to enable them to self-insure and reduce the impact of ObamaCare
Put On Your CFO Hat
The creative use of a captive insurance company (CIC) by GMAC clearly demonstrates the versatility of CICs. Like many successful companies, GMAC not only views their CIC as an insurance and risk management tool, it views it as a powerful financial vehicle as well.
Can Your Business Reward Owners, Agencies Or Key Employees Like GMAC Does?
In many cases the answer is “yes.” 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.
What Makes This Approach To Reward Key People So Effective?
Owning a captive insurance company enables the parent company via anticipated profits of the captive insurance company to set aside funds for key employees and owners in a more tax efficient vehicle. The parent company can deduct the premium payments it makes to its captive, and the profits (accumulated retained earnings) within the captive are taxed at 0%. The result is a remarkably efficient vehicle to fund a supplemental retirement plan. In fact, it is more efficient than any profit sharing plan and any qualified plan (e.g. a 401k plan). As an added benefit, the captive can invest in investment grade life insurance on the lives of key employees and/or owners to provide a pre-retirement death benefit – in case the key employee doesn’t live and work long enough to fund retirement for their loved ones.