A wise man (Stephen Covey) said “Seek first to understand, then to be understood.” It seems that the Captive Insurance Association (CICA) doesn’t understand small businesses and small business owners. This myopia is not hard to understand. Many members of CICA’s board are associated with large captives and large corporations. The great danger is that misunderstanding can lead to misrepresentation. Because they don’t understand the unique challenges and risks that small businesses face, it is easy to misunderstand and misrepresent small businesses that own their own captive insurance company and make an 831(b) tax election.
Recently, CICA recently issued a Statement on 831(b) Captives titled “Do 831(b)s Right Or Don’t Do Them At All.” We most certainly agree that captives should be done correctly and employed as proper risk management vehicles. However, the same statement could be made about large captives making an 831(a) tax election. “Listen here corporate giant with your teams of lawyers and accountants… Do Captive Insurance Companies Right Or Don’t Do Them At All.” There, we said it.
Fortunately, and to CICA’s credit, the tone of their statement was somewhat measured. We certainly appreciate this, but nevertheless would prefer to see a more positive view of small captives presented. Many small businesses benefit tremendously from the robust risk management solution that captive ownership makes possible. As a captive manager, we are members of CICA and feel they provide a tremendous service to the industry and the companies that rely on alternative risk vehicles like captive insurance companies and risk retention groups.
However, the statement on small insurance companies by CICA betrays a misunderstanding of the challenges and risks facing small and mid-size businesses. In fact, such a statement can come across as downright discriminatory – favoring large captives over small captives. Over the years, Congress has intervened on numerous occasions to “level the playing field” to help prevent large corporations from trampling the rights of small businesses. It’s for this very reason that Congress created the 831(b) tax election in the mid-80s. Large corporations had the resources and staffs to manage an insurance company. Small businesses could not afford to hire the lawyers, attorneys and actuaries necessary to calculate reserves and underwriting profits annually. The 831(b) election streamlines the operation and accounting for small captives, making it possible for small companies to enjoy the same risk management and financial benefits of a captive that were only enjoyed by large corporations prior to the mid-80s.
Seek first to understand. Small business owners have different risks than large businesses and their approach to risk management will often be different. Too often the “old guard” thinks “doing it right” means small businesses should run their CICs like large corporations do. The U.S. Tax Court doesn’t seem to agree with this view. In fact, in the recent Rent-A-Center case where the IRS was defeated soundly in its attack on a captive insurance company, the court noted that Rent-A-Center did NOT have to manage its CIC in the same way commercial insurers operate. By extension, one would expect the court to rule that small CICs must not by necessity mirror large CICs in how they are managed.
As further proof that CICA does not understand small businesses consider CICA’s statement that criticizes wealth managers for introducing CICs to small business owners. Many small business owners don’t have a CFO or large finance department developing complex financial strategies for the business and its shareholders. Whereas a CFO and staff provide financial strategy to a large corporation, a wealth manager often provides financial strategy to a small business or small business owner. And, all risk and risk management is financial. Risk management and finance are intertwined. If wealth managers shouldn’t introduce business owners to the risk management benefits of a CIC, then any large corporation where the CFO or finance department played a role in establishing a Captive Insurance Company should be equally suspect.
To read the statement by CICA, click here.