Presenting a 90-Minute Encore Presentation of the Teleconference with Live, Interactive Q&A Captive Insurance Companies: Business, Estate Planning and Asset Protection Considerations Best Practices for Structure, Implementation and Choice of Domicile Through Industry-Specific Case Studies TUESDAY, JULY 8, 2014 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Kevin Allgood, Senior Vice President, Hub International , Westmont, Ill. Michaeline Gordon, Principal, Dolgin Law Group , Chicago Lou Schendl, Manager, Timberview Captive , Peoria, Ill. Robert K. Wold, AFIS, CLCS, Vice President, Hub International , Westmont, Ill. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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Captive Insurance Companies Business, Estate Planning, and Asset Protection Considerations Dolgin Law Group, LLC Attorneys at Law
Disclosure IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with Treasury Department regulations, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used for the purpose of (i) avoiding penalties that may be imposed or recommending to another party any transaction or matter addressed herein. The examples contained herein are hypothetical and do not reflect specific strategies developed for actual clients. They are for illustrative purposes only. Dolgin Law Group, LLC Attorneys at Law 6
What is A Captive? • A captive insurer (or “Captive”) is a special -purpose insurance company formed primarily to underwrite the risks of its parents or affiliated groups. • It is classified as an Alternative Risk Transfer (“ART”) entity versus a Traditional Risk Transfer (“TRT”) entity. • Performs the same functions as TRT. It Issues polices, collects premiums, and pays claims. • It is formed to finance-underwrite the risk of its owners or related entities, which gives those owners maximum control of their at risk dollars. • A Captive traditionally supplements pre-existing risk management and financing procedures. • Does not offer insurance to the public. • Regulations governing Captives are typically less onerous than those regulations governing traditional commercial carriers 7
The Basic Captive Structure Premiums Premiums Parent Captive Risk Pool Corp. Pays Claims Pays Claims 8
History of a Captive • The history of Captives can be traced back hundreds of years to ship owners where they would share, exchange, and transfer risk. • Up to the 1950’s 100 Captives had been formed. • 1970’s and 1980’s saw significant growth in the captive industry due to captive laws passed in Colorado, Tennessee, and Vermont, and federal legislation making it easier to operate similar interest captives. • Tax Reform Act of 1986 congress passed IRC 831 (b) election for captive insurance. • By 1995 3,200 Captives had been formed. • In 2008 there were close to 6,000 Captives in existence worldwide, and more than 40% of all major U.S. corporations operating at least one Captive. 9
The Captive Space Ownership No Ownership • Pure/Single Owner • Sponsored • Small Captive – Protected Cell • Pure/Group Ownership • Association – Industry • Fronting with Re-Insurance – RRG International Risk Management Institute www.irmi.com Captives and the Management of Risk by Kathryn A. Westover Captive Practices and Procedures by Kathryn Westover Taken Captive R. Wesley Sierk, III 10
Current Captive Market 11
Profits and Trends Current Trends In the Insurance How to Profit from and Insurance Industry Company • Carriers are tightening underwriting • Out of every $1 you pay as premium, standards. roughly $0.60 goes to cover the • expected losses, $0.40 for Increasing Premiums (hardening commissions & administrative market). expenses. • New target combined loss ratio is 95%. • The insurer holds that $1 and invests it, • 2013-2014 2%-3% Property & G/L earning investment income. Increase. • Insurers set up a reserve for future • 2013-2014 5%- 10% Worker’s losses as a liability on their books, Compensation Increase. thereby deferring the recognition of income (and therefore income tax). • With a captive, you can flip the situation so these advantages become yours. 12
What is Uninsurable Risk? The fishermen know that the sea is dangerous and the storm terrible, but they have never found these dangers sufficient reasons for remaining ashore. -Vincent Van Gogh Insurable Risk • Boat & Building-Property • Slips and Falls-Third Party General Liability Claims • Staff and Employee Issues-Workers Compensation • Profits-Business Interruption Uninsurable Risk • Toxic Sea or Pollution • Over fishing • Regulatory Body or Administrative Actions • Loss of a Key Client or Market • Anything That Keeps The Fisherman Up at Night 13
Managing Risk Risk Control Risk Financing The goal of the risk control techniques is If losses cannot be avoided, they could to reduce the frequency and severity of occur; and they must be paid for. Two losses as much as possible with the options exist. resources available. • Risk Retention • Exposure Avoidance • Risk Transfers • Loss prevention • Loss Reduction • Segregation 14
Holistic Risk Management 1990’s Holistic Risk Management Trend or Enterprise Risk Management (ERM) By identifying and proactively addressing risks and opportunities, business enterprises protect and create value for their stakeholders, including owners, employees, customers, regulators, and society overall. (ERM) • Hazard Risk • Liability torts, Property damage, Natural catastrophe • Financial Risk • Pricing risk, Asset risk, Currency risk, Liquidity risk • Operational Risk • Customer satisfaction, Product failure, Integrity, Reputational risk • Strategic Risk • Competition, Social trend, Capital availability 15
Determining & Assessing Risk • Establishing Context • Identifying Risks • Analyzing/Quantifying Risks • Integrating Risks • Assessing/Prioritizing Risks • Treating/Exploiting Risks • Monitoring and Reviewing TRANSFER SEVERITY SHARE RETAIN FREQUENCY 16
Why Form a Captive? • Premium Stability • Premium Deductibility • Cost Savings • Exert Control • Cash Flow • Profit Center • Coverage Availability • Improved Risk Management • Works seamlessly with existing risk management team • Simple and as hands off as you desire • Access to Reinsurance • Favorable Regulations & Tax Treatment • Asset Protection • Unique strategies for philanthropy goals 17
Selling a Captive-Defining the Team Trusted Advisors • CPA • Attorney Consultants • Program Manager or Captive Manager • Insurance or Risk Consultant Takeaway • Never pre-judge a Captive opportunity. 18
Industry Candidates • Contractors • Builders & Developers • Car Dealerships • Manufacturers • Real Estate • Retail • Pharmaceuticals • Agribusinesses • Hotel Chains • Service Providers • Medical Profession • Healthcare Facilities • Professional Service Practices • Franchisor • Franchisees • Restaurant 19
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