Introduction to Enterprise Risk Captives - 2015 (1)

Synergy Insurance, LLC 2015 1

Introduction to Enterprise Risk Captives


• An Enterprise Risk Captive is the premier risk-management and business planning tool available to business owners.

• It allows the owner(s) to participate in the underwriting, claims, and operation processes of the captive.

• A captive is an insurance company, not an insurance product.

What is an Enterprise Risk Captive?


Why an Enterprise Risk Captive? Reduce Insurance Costs

Capture Underwriting Profit

Pricing Stability

Purchase Based on Need

Retain Premium Dollars

Tax Benefits

Investment Income

Additional Profit Center

Greater Control Over Claims

Increase Coverage

Increase Capacity

Underwriting Flexibility

Access Reinsurance Market

Incentives for Loss Control

Asset Growth

Additional Profit Center

Minimize

Insurance

Cost

Wealth

Accumulation

Risk

Control

Improve

Cash Flow


• Operations

• The primary business operation for an ERC must be risk management.

• Policies

• All premiums and policies written must be comparable to policies available on the open market.

• Premiums and risk associated with the ERC must be actuarially supported.

• Capitalization

• Domiciles require the captive to maintain a specified amount of capital at all times. This is generally $250,000 but may vary by domicile.

• Risk Transfer

• Must meet IRS requirements regarding risk transfer & distribution to qualify as a true captive. In order to comply the captive must participate in a licensed risk pool.

Is it a true insurance company?


• Synergy Insurance is a fully licensed P & C broker

• Our captives integrate your traditional insurance with your captive allowing you to;

• Reduce premiums

• Shift ancillary risk to the captive

• Retain more low frequency risk in the captive

• Provides a more comprehensive approach to policy selection during feasibility

• Allows for easier access to carriers in the reinsurance market

Traditional Insurance & Captives


• Deductibles

• Exclusions

• Contract

• Supplier Interruption

• Regulation

• Receivables

• Competition

• A/R Concentration

Examples of Insurable Risks

• Construction Defect

• Product Warranty

• Economy

• Market Litigation

• Business Interruption

• Breach of Data

• D & O

• Intellectual Infringement


Actuarial Examples


Actuarial Examples


Shareholders

Business $1.2M annual

insurance premiums paid to

captive

Premiums paid to captive are tax

deductible

Captive Writes policies and provides insurance

coverage to the business(es)

Basic Structure


Stand Alone Captive

Operating Company A

Company A Captive Insurance Company

49% ($588,000)

Same Owners as Company A

Up to $1.2 mil in premiums paid

per year

Current Owners of Company A

Risk Pool Trust

Account 51%

($612,000)


Multi-Cell Captive

Company B Company B Captive Insurance Company

Same Owners as Company B

Up to $1.2 mil in premiums paid per year

Current Owners of Company B

Owner 1 Bank Account

$150,000

Premiums

Total of all Owners’ premiums $700K

annually


$200,000

Premiums


$125,000

Premiums


$225,000

Premiums


In 12-15 months from initial premium payment:

• All claims are settled

• 51% funds are then sent to captive’s 49% account

Premium Flow

Operating Company D

51% of funds are held in the

Risk Pool Trust Accounts

Company D Captive Insurance Company

49% Account

100% of annual premiums paid

Risk Pool Trust Account Dunham Trust Company


Risk Pool Structure

Trust Account ($2,346,000)

51%

Captive C

($1,150,000)

Captive A 49% Account

($563,500)

Captive D

($1,150,000)

Captive A ($1,150,000)

Captive B

($1,150,000)

Captive D 49% Account

($563,500)

Captive C 49% Account

($563,500)

Captive B 49% Account

($563,500)


• Claims up to $250,000 are handled out of the respective captives’ 49% account.

• Anything in excess is handled directly out of the risk pool.

Claims Process

Example: Claim amount is $1,000,000 Amount from 49% account ($250,000) Excess from Risk Pool $750,000 100 Participants in RP ($750,000/100) Amt. per participant $7,500


• Bermuda

• Cook Islands

• Barbados

• Isle of Man

• Turks and Caicos

• British Virgin Islands

• Anguilla

• St. Kitts & Nevis

• Antigua

• Aruba

• Bahama’s

• Cayman Islands

On-Shore vs Off-Shore

We at Synergy only recommend Domestic jurisdictions for your captive.

With the introduction of the “Stop Tax Haven Abuse Act” of 2009, several formerly friendly jurisdictions are now identified as “off-shore secrecy jurisdictions”. These jurisdictions are scrutinized by the IRS as probable locations for tax evasion.


• Initial Questionnaire

• Gathering of business information, which allows Synergy to review and establish if the captive would be beneficial for a business.

• Feasibility Study

• Independent feasibility study.

• Formation

• Synergy will coordinate the formation and licensing of the captive in the domicile of your choice.

• Management

• Synergy provides full management including: domicile filings, annual audits, quarterly actuarial reviews, claim coordination and tax preparation.

• Total estimated timeframe: 45 days

Formation Process


• Why doesn’t everyone do this? • Many businesses do not have the required revenue or risk to justify an enterprise risk captive.

• Is it possible to own more than one captive? • Controlled group rulings limit an individuals ownership to one captive; however, the ownership of the captive can

be structured to allow for multiple captives.

• Why would I self insure? • If your business has any uninsured risk you are already self insuring against the loss. When a claim arises if no

policies are in place, the business itself will liable for any losses.

• What are the next steps? • Our team can further analyze your business to see if a captive would be beneficial for you.

FAQ’s


The IRS is pursuing those that have been promoting captives strictly as a tax shelter and with no legitimate insurance risk. Specifically let me point out a number of items that differentiates Synergy from the others the IRS cares about: some of our competitors.

• We combine our services with licensed independent insurance actuaries and attorneys that specialize in captive insurance to develop and produce the best feasibility studies in the industry. Feasibility studies are conducted before any captive is formed and/or licensed.

• We have over 63 lines of coverage in our program, which are determined by an independent underwriter on a captive-by-captive basis and pricing is certified by an independent actuarial firm.

• All insurance contracts are independently reviewed for “business purpose” by a third-party underwriter and actuary.

• We require our clients to maintain capital amounts that are in accordance with State regulations. Captives maintain capital requirements promulgated by their domiciling jurisdiction. Synergy reviews capital and liquidity requirements on a monthly-basis as part of ongoing management services. Synergy does not (and will not) domicile any captive under its management in any offshore jurisdiction, due to off-shore secrecy implications advised by the US Treasury Department. Most onshore jurisdictions require adequate capitalization prior to licensing.

• We use a combination of ISO industry standard policy forms and custom manuscript forms prepared by a reputable law firm, specializing in captive insurance.

• With the assistance of our independent actuarial firm – premiums are derived from the pricing data available on the open market. During the formation of a captive – we develop quotes from many different insurance carriers for many different policies. The point being – the policies we use in our captives can be purchased from major carriers on the open market.

• Synergy does not market or recommend CIC transactions on the basis of their tax treatment. Synergy evaluates potential clients on their legitimate need for an alternative risk transfer strategy, and it is not conveyed or recommended that a captive be used as a tax planning tool.

• Throughout the establishment and management of the captive – we constantly remind clients and their advisors that the captive is an insurance company FIRST. Any other benefits associated are secondary.

IRS Scrutiny


Do 831(b)s Right or Don’t Do Them at All CICA, the Captive Insurance Companies Association, is a 42 year old domicile neutral trade association representing the captive insurance industry with members throughout the world. CICA is uniquely situated to address challenges of a national and international nature, including reputational challenges to the industry. In recent years there has been significant growth in the utilization of small captive insurance companies that use the Internal Revenue Code 831(b) election for small insurance companies. In general terms, if a small property and casualty insurance company with annual gross premium income of $1.2M or less makes an election to use Section 831(b), it is not taxed on its underwriting income, but only on its investment income. However, that insurance company must still meet all the legal requirements established by law, including the US Supreme Court’s holding that insurance status generally requires the presence of two elements -- risk shifting and risk distribution.1 Unfortunately, these small captive insurance companies (also known as “mini-captives” or “micro-captives”) have received considerable attention from the “wealth management” industry and are often “over sold” as a tax shelter without adequate attention to whether these companies are truly insurance companies and meet the requirements of operating as a legitimate insurance company with risk shifting, risk distribution, and arms-length pricing. The attempt by some to use these small captives primarily as a tax shelter has created a significant reputational challenge to the entire captive insurance industry, which has always focused on the formation of captive insurance companies “to create a risk management program that will proactively anticipate the potential future risks arising in the parent/owner(s) business.”2 The traditional captive insurance company industry and CICA are extremely concerned about the misuse of small captives utilizing the IRC 831(b) election and the attendant publicity about “captives” being a tax avoidance device. Although there is nothing wrong with the utilization of the 831(b) election when a small captive insurance company is truly engaged in insuring the risk of its parent company/owner(s), the traditional captive insurance industry strongly oppose the utilization of small 831(b) captives primarily for tax sheltering purposes. In simple language, do 831(b)s right or don’t do them at all! 1 CICA “Captives: An Overview” publication, page 25. 2 CICA Best Practices Guidelines, Volume 1. “Business Alignment”, page 4

CICA Statement on 831 (b) Captives


Rent-A-Center, Inc. v. C.I.R., 142 T.C. No. 1 (2014) United Parcel Service of America v. Commissioner, 254 F.3d 1014 (11th Cir. 2001) Hospital Corp. of America & Subsidiaries v. Commissioner, T.C. Memo 1997-482 Kidde Industries Inc. v. United States 40 Fed Cl. 42 (U.S. Claims 1997) Malone & Hyde Inc. & Subsidiaries v. Commissioner, 62 F 3d 835 (6th Cir. 1995) Ocean Drilling & Exploration Co. v. United States, 988 F 2d. 1135 (Fed Cir. 1993) Harper v. Commissioner, 979 F.2d 1341 (U.S. App. 1992) Amerco Inc. & Subsidiaries v. Commissioner, 96 T.C 18 (1991) Gulf Oil Corp. v. Commissioner, 914 F.2d 396 (U.S. App 1990) Humana Inc. v. Commissioner, 881 F.2d 247 (6th Cir. 1989) Clougherty Packing Co. v. Commissioner, 811 F. 2d 1297 (9th Cir. 1987) Beech Aircraft Corp. v. United States, 797 F. 2d 920 (10th Cir. 1986) Crawford Fitting Co. v. United States, 606 F. Supp. 136 (N.D. Ohio 1985) Allied Fidelity Corp. v. Commissioner, 572 F. 2d 1190 (7th Cir. 1978) Commissioner v. Treganowan, 183 F. 2d 288 (2nd Cir. 1950) Helvering v. Le Gierse, 312 U.S. 531 (1941)

Case Law


• If you have any questions or concerns please feel free to contact:

Keith Langlands

Managing Member

[email protected]

Office: 702-473-5270

• For additional info please also visit www.SynergyInsuranceLLC.com

Contact Information

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Introduction to Enterprise Risk Captives - 2015 (1)