You have probably heard the story about legendary New York Yankees slugger, Babe Ruth, pointing to the center field wall. It was the fifth inning of Game 3 of the 1932 World Series at Wrigley Field in Chicago. As it was late in his career, the Home Run King had lost some of his punch. In his usual form, he was down in the count with two strikes. At this point, he stepped back and pointed his bat at the center field wall. After calling his shot, Ruth put the next pitch high over the center field wall for a home run.
Governor Bill Haslam of Tennessee called his shot and hit a home run of his own in 2013. According to Captive Review, Tennessee recorded 250% growth in 2013 in the number of captive insurance companies domiciled in the state. The state licensed 23 CICs in 2013, bringing the state’s total to 32. Captive Review noted, “Although captive legislation has a long history in Tennessee, with the first iteration of the statute being passed in 1978, it wasn’t until 2011 when its captive legislation was overhauled that Tennessee began to develop as a credible on-shore captive domicile.”
To read the entire article in Captive Review, click the link below.
In 2012, Governor Haslam called his shot, giving the Department of Commerce and Insurance the goal of 30 captives domiciled in Tennessee by the end of 2013. His administration delivered a home run over the centerfield wall with 32 captives domiciled in the state. At the 2012 Tennessee Captive Insurance Association Annual Meeting, Governor Haslam made it clear that he believes a thriving captive insurance industry is good for Tennessee, its businesses and Tennessee workers. The governor emphasized the importance of freeing up business capital to enable businesses to grow and make investments in Tennessee. He pointed to captive insurance as a means for Tennessee businesses to reduce the impact of rising insurance costs, increasing regulation and rising taxes to their bottom line.
Why More and More States Are Pointing At Centerfield Walls
Tennessee’s success is a shining example in the growing CIC industry, and it follows a 30 year global trend characterized by increasing accessibility to CICs. Setting up and operating a captive insurance company is increasingly easier, faster and more affordable. Competing states and offshore domiciles have driven down capital requirements, lowered start up costs and reduced paperwork required for captive formation.
Home Run for Business Owners
Clearly, captive insurance is a growing industry, and the positive stance of Tennessee state officials is encouraging. This is a big win for business owners as profitable small and mid-sized businesses have the ability to “Own Their Own Insurance Company.”
Benefits of Owning Your Own Insurance Company
A captive insurance company is a powerful changing financial vehicle that can provide tremendous added value to businesses and business owners. In this case, we are describing what is known as a captive insurance company or small casualty insurance company under the Internal Revenue Code section 831 (b).
First and foremost, a captive insurance company can provide more effective risk management and casualty insurance protection to a parent company or companies. This should be the primary purpose for creating a captive insurance company. A captive insurance company also affords many ancillary benefits to the business, its owners and its CFO. Owning one or more captive insurance companies enables business owners to solve for many other financial needs and wants.
Owning a captive insurance company can enable business owners and professionals to more effectively address the following wants and needs:
- Reduce insurance costs
- Improve risk management and insurance protection
- Experience significant tax savings
- Improve asset protection
- Accelerate wealth accumulation
An experienced attorney and captive management firm can ensure captives are set up properly with an operating plan and procedures that meet the requirements necessary to function as a licensed insurance company.
What Is A Captive Insurance Company?
A captive is a unique but REAL casualty insurance company. It includes its own corporation, insurance license, reserves, policies, policyholders, and claims. It is a formal way for business owners to self-insure, and captives are generally formed to insure the risks of owners and related or affiliated third parties.
There are many risks that all businesses regularly face and informally self-insure. It’s worth noting that businesses informally self-insure with after tax dollars, meaning that a businesses’ “rainy day fund” is usually comprised of retained earnings that have already been taxed. With a captive in place, businesses can formally insure risks not normally insured by third party insurers.
Premiums are paid from the parent company to the captive with tax deductible or pre-tax dollars, and can accumulate tax-free as reserves of the captive (up to $1.2 million annually). Reserves can be transferred into virtually any other type of asset (some domiciles have restrictions). Hence premiums paid are in effect a “transfer of wealth” and are protected from the parent company’s creditors and lawsuits.