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Captive Considerations

Captive Considerations. What to know, What to avoid. #[insert hashtag here]. Captive Considerations. R. Wesley Sierk , III ARM, ACI, ChFC Author , Taken Captive 110 Pine Avenue, Suite #310 Long Beach, Ca 90802 P: 562.472.2846 x210 F:562.435.7886 M:310.993.9762

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Captive Considerations

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  1. Captive Considerations What to know, What to avoid #[insert hashtag here]

  2. Captive Considerations R. Wesley Sierk, III ARM, ACI, ChFC Author, Taken Captive 110 Pine Avenue, Suite #310 Long Beach, Ca 90802 P: 562.472.2846 x210 F:562.435.7886 M:310.993.9762 wsierk@riskmgmtadvisors.com #[insert hashtag here]

  3. Captive Considerations • Michael R. Mead, CPCU • 2011 CICA Distinguished Service Award Winner • Captive consultant, manager, broker • President, Missouri Captive Insurance Association, www.mocia.org • Vice President, Director, International Center for Captive Insurance Education, www.iccie.org • Director, Captive Insurance Council of the District of Columbia, www.cic-dc.org • Past Chair, Captive Insurance Companies Association, www.cicaworld.com • Past President, Director, Arizona Captive Insurance Association • Expert Commentator,Captivesirmi.com • www.mrmeadandco.com • mmead@mrmeadandco.com • 312-316-5084

  4. Captive Considerations • Agenda • Basics • Uses • Challenges • Ask questions at any time • Presentation will be available on the WRCIC website, or AZ, MO, UT sites.

  5. Captive Considerations • What is a Captive? • Insurance company wholly owned and controlled by its insureds • Insurance company that insures the risk of the parent company

  6. Captive Considerations • Who has a captive? • Over 50% of the commercial property/casualty market • Virtually all of the Fortune 500 • All energy companies, utilities and most hospitals • Over 5000 globally

  7. Captive Consideration s • Why a Captive? • Get control of the cost of insurance • Improve claims handling • Improve cash flow • Design coverage that will benefit their own business • Obtain income tax deductions • Potentially provide gift and estate tax free transfers

  8. Captive Considerations • Uses • Workers compensation • Pollution • Terrorism • Medical malpractice • Directors and Officers/Fidelity • General Liability

  9. Captive Considerations • What Problems Can a Captive Address • Unavailability of insurance • Insurance that is too expensive • Premiums that don’t match the company’s losses • Inflexible language • Inflexible terms • No tax benefit to retain the risk

  10. Captive Considerations • Types of Captives:Rent-A-Captive Protected Cell Captive Single Parent Captive Industry Captives Association Captives Risk Retention Group Captives Agency Captives Special Purpose

  11. Captive Considerations • What are the steps to form a Captive? • Prepare Feasibility Study • Actuarial Analysis • Choose a domicile • Choose a Captive Manager • Determine structure • Create the Business Plan • Prepare Incorporation Documents • Biographical Affidavits • Complete the Application • Submit to Commissioner • Receive Certificate of Authority.

  12. Captive Considerations • Tax Issues • Do you want a deduction? • State versus Federal • Risk Shifting • Risk Distribution • Facts and Circumstances

  13. Captive Considerations • IRS red flags • FAS 113 • Not finite risk • Actuarial Study • Surplus to premium ratio • Paying claims • Unusual coverage • Purpose

  14. Captive Considerations • Feasibility Study • Is a feasibility study the same as an actuarial report? • What are the main purposes of a feasibility study? • Who conducts the feasibility study? • What does a feasibility study cost? • Is a feasibility study required for getting licensed as an insurance company? • How long does it take to complete a feasibility study? • Should I be concerned about confidentiality?

  15. Captive Considerations • Elements of the Feasibility Study • Clarifying the objectives • Defining the risk • Measuring the risk • Retained risk and loss projections • Expense budget for the captive • Tax impact • U.S. (or other country) income tax • Excise taxes • Excess and surplus lines taxes • Domicile premiums taxes • Local premium taxes • Other taxes/assessments • Premium strategy

  16. Captive Considerations • More elements • Measuring the risk- Continued • Premium strategy • Capitalization • Pro forma financial statements-These financials should include: • Income statements and balance sheets • Five-year pro forma results • Presentation of tax consequences • Financial assumptions (interest rates, growth rates, cost of capital, etc.)

  17. Captive Considerations • Structuring strategy • Domicile choice • Operating the captive

  18. Captive Considerations • Key components of captive management • Underwriting • Claim management • Financial management • Compliance/reporting

  19. Captive Consideration • Reviewing and evaluating risk • Setting premium rates • Reviewing coverage applications • Writing policies • Create the underwriting policy • established guidelines that the underwriter should follow • Coverage review and require financial strength of the insured • Should cover how policy terminations or loss of coverage is handled. • It should also cover any target market or geographic restrictions.

  20. Captive Considerations • Claims Management • Decide WHAT risk you will cover • Then decide HOW to handle the claims that arise • Claims Management Policy • Claims Team – Internal vs. External to the captive • Internal team to the parent organization? • Investigations • Settlement Authority • Other policy matters to consider: • defining roles, responsibilities and authority levels for all those involved in the process; • establishing case-reserve protocol; • identifying and retaining the law firm that will handle litigation or other negotiations requiring legal expertise.

  21. Captive Considerations • Financial Management • Understand the Purpose of the captive • Improve Risk management • Build and increase wealth • Create board policies to address • signature/wire transfer authority, • cash management and other accounting policies, • risk limitation and operating ratios, • investment policy, • internal and external compliance communications, • contract signature authority

  22. Captive Considerations • Compliance Reporting • Domicile and Type of captive specific • Starts with the annual audit: • Opinion of Independent Certified Public Accountant • Report of Evaluation of Internal Controls • Accountant's Letter • Financial Statements • Certification of Loss Reserves and Loss Expense Reserves • Organizational / Jurisdiction Review • Risk Pool Certification / Compliance

  23. Captive Considerations • Advanced Issues • Captives can be used for • Estate / Gift Tax Planning • Asset Protection • Ownership succession • Specific subsidiary issues

  24. Captive Considerations • Asset Protection

  25. Captive Considerations

  26. Captive Ca

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