Tennessee Announces Its 20th Captive Insurance Company
The great State of Tennessee recently announced that it has licensed its 20th captive insurance company (CIC. This is solid progress toward the goal established by Governor Bill Haslam of licensing 30 CICs in Tennessee 2013. Governor Haslam is widely considered to be “pro-business” and he has stated his conviction that a thriving captive insurance industry is good for Tennessee, its businesses and Tennessee workers. Captives can free up business capital to support business growth. The Haslam administration clearly views CICs as a means for Tennessee businesses to reduce the impact of rising insurance costs, increasing regulation and rising taxes to their bottom line. The result is more business capital (wealth) in Tennessee businesses that can be invested to grow and create more jobs.
This Is Not Your Father’s Captive Insurance Industry
Tennessee’s success is a microcosm of the growing CIC industry and it follows a 30 year 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 start-up costs, capital requirements and reduced red tape required for captive formation.
Tennessee overhauled its captive insurance laws in the Summer of 2011 with the goal of attracting and licensing CICs in Tennessee. The state also expanded its captive insurance division and has gone on the record stating “with proper paperwork, captive approval in Tennessee takes a week or less.”
Big Win for Business Owners
Clearly, captive insurance is a growing industry, and the positive stance of our 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 game 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.