Last week, I wrote that America needs at least 100,000 captive insurance companies. Small and mid-size businesses that own their own insurance companies are better prepared for risk and uncertainty. The loss reserves they can potentially accumulate in their captive insurance company can easily be the difference between thriving, surviving or dying.
And speaking of loss reserves, the U.S. Treasury recently issued a report that calls for insurers to set aside additional reserves (a portion of premiums collected) for future terrorism claims. INSURANCE JOURNAL noted that, “In a report that concludes the federal terrorism risk insurance program ‘remains an important mechanism’ for ensuring that terrorism risk insurance is available… The U.S. Treasury Department also calls for changes including requiring participating insurers to set aside a portion of the premiums they collect under the program for future terrorism claims.
To read the entire article in INSURANCE JOURNAL, CLICK HERE.
As I have pointed out before, most commercial insurance policies exclude loss from terrorism, and the Federal Government has to provide a backstop for commercial insurers to even consider offering separate terrorism coverage.
Recent events have clearly demonstrated that small and mid-market businesses need their OWN LOSS RESERVES for terrorism. Terrorism can either directly (property loss, loss of key employees, business interruption, etc.) or indirectly (loss of key customers, supply chain interruption, utility outages, etc.) impact small and mid-market businesses. One of the most powerful solutions available to business owners is the ability to accumulate loss reserves in a tax favored way by owning their own captive insurance company.
Is terrorism a real threat to businesses in the U.S?
Don’t take our word for it, look at the Treasury Department’s guidance.
Is captive insurance company ownership possible for small and mid-size businesses?
Yes. It’s worth noting that Congress intended for the small and mid-size captive space to grow when they created the 831(b) tax election in the mid-80s. This bi-partisan legislation was passed by a Democrat controlled Congress and signed by Republican President, Ronald Reagan. The sad reality is that the growth of the captive industry has been too slow – far too slow. The industry picked up some momentum in the 1990s, when Vermont Governor, Howard Dean, decided to make Vermont a captive hub. Vermont undercut New York costs and capital requirements to own a captive and opened up captive ownership to most mid-sized businesses (small businesses were still largely left out and unable to enjoy the risk management benefits of captive ownership).
Why are captive insurance companies good for businesses and good for America?
Captive ownership is very good for small and mid-size businesses because it better prepares businesses to manage risk – and manage risk with a much more holistic approach. Captives can also help businesses better weather uncertainty and threats. Simply put, captives can help small businesses survive. Also, small and mid-size businesses are often hollowed out by taxation, leaving them unprepared to weather calamity or market downturns. A business with a captive in place, on the other hand, is better prepared to manage a wide range of risks and should have accumulated loss reserves to give the business buoyancy in difficult times.