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@captived01-blog
The “Group” part of a Risk Retention Group or rrg often consists of agents and brokers who have a pressing need for a type of insurance that is not readily available in the open market. For example, in many “inner city” areas of the USA, most insurance companies would prefer not to issue automobile liability insurance policies.
Private insurance Companies like to grow their client rosters. An insurance broker who introduces his client to a Captive manager may be rewarded with a share of the formation fee as well as a share of reinsurance commissions. Economics of Captive Insurance and review the components of An Insurance Premium as well as the Frictional Expenses associated with commercial insurance policies.
Forming and managing insurance captive is relatively expensive for small companies and relatively inexpensive for larger ones. But the benefits of a Captive are relatively larger for small companies than for large ones. For small to medium size Captives initial formation fees range from about $45,000 up to $75,000 or more. After the Captive is formed it must be capitalized.
Group Captive is formed by Co-ops and especially Farm and Grower Co-ops are a bit different. In those cases, members customarily rely on each other to a large degree. They share the same suppliers, the same weather, the same risks and often the same way of life. It makes good sense for such enterprises to explore the possibilities that Captive Insurance presents to them.
We use the term Multi-Parent to refer to Group Captives and Association Captives. Captives owned by Cooperative organizations also fall into this category. They can save substantial money and they can make insurance available to their membership that might not be available or affordable otherwise.
In most small captives the Captive owner out-sources the risk management functions to expert Captive Management teams and the Captive Management teams do the bulk of what needs to be done, so, they create a captive. In larger Captives a Risk Manager on the Captive's payroll coordinates with the Captive management team which handles most clerical, accounting and everyday business functions.
Ongoing Captive management costs vary depending mostly on the owner's choice of a domicile for his insurance company, the Captive management firm chosen, and the types and amounts of captives insurance that the insurer will provide. They include domiciliary fees, payments to the Captive's manager, actuary, accountant, and auditor. Many domiciles require local offices. Some require annual meetings at the domicile, and that can necessitate travel expense plus Green Fees, Lift Tickets, Boat Rentals and/or Gambling Expense.
Captive owners quickly realize that premiums in excess of losses and expenses accrue to their benefit. This sometimes tempts the owners for captive management to insure against rarely incurred losses at premiums that exaggerate the risk of loss. Yielding to that temptation may provoke the wrath of the IRS.
Nearly every Captive manager is well acquainted with the tax wrinkles attendant to Captive insurers. . All insurance companies, including Captive insurance companies get tax treatment appropriate to the business of building financial reserves sufficient to deal with fortuitous loss while also going forward as a profitable enterprise.
As a Captive insurer, you can insure your company and yourself, and the premiums you pay into your company are tax deductible. The premiums you pay into your Captive may grow and earn interest for years before they are drawn upon to pay a claim. No one knows what the future may hold.
Nearly every Captive manager is well acquainted with the tax wrinkles attendant to Captive insurers. . All insurance companies, including Captive insurance companies get captive insurance taxation treatment which is appropriate to the business of building financial reserves sufficient to deal with fortuitous loss while also going forward as a profitable enterprise. You are expected to operate your business wisely, cautiously and profitably.
Prospective Captive owners are wisely advised that they should not form a Captive simply for tax reasons, but on the other hand, most Captive insurance company managers will agree that if it were not for the captive insurance tax treatment , far fewer captives would ever have been formed.
There is a well educated and articulate Captive manager with a strong pro-customer bias and an emphasis on economy who encourages his clients to consider obtaining an IRS Private Letter Ruling for their Captive Insurance Company in order to guarantee the tax treatment their Captive will receive from the IRS.
The managers from the world of Captive Insurance Companies is very, very small. Thus, Captive Managers are highly protective of their reputations. If or when they make a mistake or draw adverse criticism of any kind, the word travels quickly among their competitors.
The Go or No-Go decision on Captive Insurance Companies always follows the preparation of a Feasibility Study. The Feasibility Study is an objective, actuarially based evocation of the probable outcome for a plan. It is a critical review of the assumptions that underlie the plan. In effect it is a vision of what is likely to happen if you do A,B, and C.
Your Captive ins co will issue policies that obligate it to pay claims. How much money are you willing to pay out on any single claim? How much could you afford to pay out over the course of one year? Do not create legal obligations that may keep you up at night.
Capital allocated to the Captive Insurance Company is an investment that earns interest income and provides a base for operational income. The Captive owner moves money from one pocket to another expecting a handsome return for doing so. The capital allocation requirement is usually between 20% and 40% of the annual premium income projected in the captive feasibility study.