State of the Captive Insurance World SRMC

Transcript:State of the Captive Insurance World SRMC:
State of the Captive Insurance World SRMC Presentation October 23, 2014 Prepared by: Kathryn Marsh Somers Risk Consulting kmarsh@somersriskconsulting.com Somers Risk Consulting 2014 1 Somers Risk Index What we are Seeing in the Captive World Micro-Captive Update Pooling Arrangement Example Recent Case Studies Appendix 831(b) mechanics Somers Risk Consulting 2014 2 Continued interest in captives – both large and small Insurance community continues to recommend Accountants, lawyers and financial consultants learning and recommending more. More creative uses of captives as owners recognize additional revenue potential and/or risk management potential Domiciles continue to compete and become increasingly business friendly. New entrants vying for business. What we are seeing Somers Risk Consulting 2014 3 Micro-Captive /831(b) Company Option Ever increasing interest and growth in this sector – primarily due to the recognition of the following benefits: Potential to insure and pre-fund enterprise risks in a highly tax efficient manner. These risks have typically been self-insured with no proactive approach to mitigation. Potential to share risk and decrease exposure to catastrophic or large losses Asset protection Favorable tax treatment Estate planning/wealth transfer Me too factor! Somers Risk Consulting 2014 4 IRS Position IRS continues its of scrutiny of 831(b) captives through a review of the more aggressive pooling arrangements. Many were openly developed as tax shelters: No business purpose No proper process for pricing risk – or excessive pricing No documentation Circular flow of cash – money paid into captive, loaned back out, etc. Captive funds were used to buy life insurance Well constructed, more conservative programs are not being reviewed. Message – Microcaptives are a very legitimate risk management tool and can have significant positive tax advantages – but they must be formed for the right reasons and have operations consistent with traditional insurance companies. Somers Risk Consulting 2014 5 Sample 831(b) Pooling Arrangement A reinsurance pool that allows participating captive insurance companies to pool risk among themselves. Typically about 50% of the captive’s total premium is ceded to the pool and a similar premium is retroceded back to the captive. The retroceded premium is a mix of premium from all participants. It is unrelated, third party business and, as such, qualifies the captive as a bona fide insurance company. Insurance companies qualify for favorable tax treatment. Simple excess of loss structure with relatively small excess layer ceded to the pool ($210K xs $15K). Participants share risk within layer on quota share