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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

Captive Considerations

What to know, What to avoid

#[insert hashtag here]

captive considerations1
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



#[insert hashtag here]

captive considerations2
Captive Considerations
  • Michael R. Mead, CPCU
  • 2011 CICA Distinguished Service Award Winner
  • Captive consultant, manager, broker
  • President, Missouri Captive Insurance Association,
  • Vice President, Director, International Center for Captive Insurance Education,
  • Director, Captive Insurance Council of the District of Columbia,
  • Past Chair, Captive Insurance Companies Association,
  • Past President, Director, Arizona Captive Insurance Association
  • Expert Commentator,
  • 312-316-5084
captive considerations3
Captive Considerations
  • Agenda
    • Basics
    • Uses
    • Challenges
  • Ask questions at any time
  • Presentation will be available on the WRCIC website, or AZ, MO, UT sites.
captive considerations4
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
captive considerations5
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
captive consideration s
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
captive considerations6
Captive Considerations
  • Uses
    • Workers compensation
    • Pollution
    • Terrorism
    • Medical malpractice
    • Directors and Officers/Fidelity
    • General Liability
captive considerations7
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
captive considerations8
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

captive considerations9
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.
captive considerations10
Captive Considerations
  • Tax Issues
  • Do you want a deduction?
  • State versus Federal
  • Risk Shifting
  • Risk Distribution
  • Facts and Circumstances
captive considerations11
Captive Considerations
  • IRS red flags
  • FAS 113
  • Not finite risk
  • Actuarial Study
  • Surplus to premium ratio
  • Paying claims
  • Unusual coverage
  • Purpose
captive considerations12
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?
captive considerations13
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
captive considerations14
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.)
captive considerations15
Captive Considerations
  • Structuring strategy
  • Domicile choice
  • Operating the captive
captive considerations16
Captive Considerations
  • Key components of captive management
    • Underwriting
    • Claim management
    • Financial management
    • Compliance/reporting
captive consideration
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.
captive considerations17
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.
captive considerations18
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
captive considerations19
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
captive considerations20
Captive Considerations
  • Advanced Issues
  • Captives can be used for
    • Estate / Gift Tax Planning
    • Asset Protection
  • Ownership succession
  • Specific subsidiary issues
captive considerations21
Captive Considerations
  • Asset Protection