Presentations text content in The Small Business Captive Revolution
The Small Business Captive Revolution
October 26, 2017
MICHAEL SERRICCHIO, JD MANAGING DIRECTORMarsh Captive Solutions
DAWNE DAVENPORT , ACAS, MAAASENIOR VICE PRESIDENTMarsh Captive Solutions
GLENN SASLOW AUDIT PARTNERCrowe Horwath
SMALL CAPTIVES BY THE NUMBERSSlide3
October 24, 2017
Continued Growth of Captives Worldwide
Small 831(b) Captive Emerge!Slide4
Small Insurance Company831(b) Election – How it Works
Premium income accumulated tax free.Investment income taxed as ordinary income.Dividends taxed capital gains rate.Claim payments are tax neutral.
Small Captive Insurance Company
A significant number of small captives rely on unrelated risk (25%) in the form of a well-developed and prudent risk
pool. This is because so many middle market and small organizations are structured as Limited Liability Companies (LLCs) or Subchapter S corporations, which necessitate a
strong and stable risk pool to meet tax requirements. 4Benchmarking 2016831(b) - Small Captives
Marsh-Managed Small Captives Making the 831(b) Tax Elections
Approach to Achieve Insurance Tax Status for All Small CaptivesSlide6
Small CaptivesSimilarities to Large Captives
At a very high level, small captives are just like large captives...Fund retained corporate risk.Means to access reinsurance markets for capacity.Profit center (underwriting risk of third parties).
Must satisfy risk transfer and risk distribution.
only smaller and with a special tax
Captive CreationIdentifying Candidates
What does a small captive candidate look like? Substantial high-severity/low frequency risks that are uninsured or self-insured.US taxpayers.
Privately held or closely held (doesn’t have to be).Revenue: $200 million or greater (varies based upon industry).Cash flow positive.Willingness to post necessary capital (minimums typically $250,000, plus $1M+ based on business plan).Willingness to assume some risk and sometimes the risk of others (if a risk pool is needed).Slide8
US Domestic Captive Domiciles As of 2016
No specific captive statutes
Captive Domicile, Number of Captives
District of Columbia
Source: Business Insurance Directory - Captive Managers and Domiciles,
“Counting Captives,” March 2015: 3.
CT = 14 CAPTIVES AND GROWINGSlide9
CAPTIVE MANAGER’S PERSPECTIVESlide10
Captive Manager’s Perspective
further examination8886 filing
Given the new rules, should a captive manager advise against the formation/ operation of captives taking the §831(b) tax election?
What Captives Need to Do
THE ACTUARY’S ROLESlide14
1) Feasibility & Implementation
Does the parent entity have a risk profile suitable for a small captive?
Limits/deductible/reinsuranceExposure basisLoss experienceWhat do we file with the domicile to set up the prospective small captive?Five-year expected cash flowsExpected/adverse cases
Risk transfer discussionSlide15
2) Ongoing Actuarial Services
ReservingRenewal premiumsChanging policy terms or limits
Introduction of new coveragesSlide16
AUDIT AND TAX MATTERSSlide17
REAL LIFE CASE STUDIESSlide18
1) Construction Client (Privately Held)
$500 million in sales.
Large commercial market premium spend.Recommended coverages:Supply chain/contingent business interruption.Rip and tear.Professional liability.Equipment property coverage.Subcontractor default.Benefits:Cover current exclusions/hard to place insurance (rip and tear).Tax efficient funding of risks.
Wealth transfer by using trusts.Challenges:Posting capital.Pledging assets.Potential economic impact:$350,000 annually.Slide19
2) Beverage Distributor (Privately Held)
$145 million in sales. Recommended coverages:
Accidental contamination.Supply chain/contingent business interruption.Workers’ compensation and general liability buy down.Terrorism.Benefits:Product not readily available in commercial market.Funding retained deductibles.Tax efficiencies (savings) with additional coverage's written.Challenges:No material challenges.Potential economic impact:$400,000 annually.Slide20
QUESTIONS AND ANSWERSSlide21
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