The year-end is a great time to think about your organization’s risk management needs and how best to control costs and reduce taxes.
One possibility is through the use of captive insurance companies, or captives.
What Benefits Do Captives Provide?
In essence, captives are insurance companies owned and controlled by those they insure.
The benefits of captives often include stable premiums, low administrative costs, the ability to cover unique risks, and participation in the captive’s underwriting profits and investment income.
Captives also offer significant tax advantages because the premiums paid are deductible, unlike self-insurance reserves.
To qualify as an insurance company for federal taxes, captives must base its premiums on actuarial studies and underwriting considerations, and the arrangement must sufficiently distribute risk.
According to the IRS, a captive that covers only the risks of its parent does not distribute risk.
Recent court cases may create new opportunities for companies to develop captives, according to experts.
The courts’ have ruled risk distribution exists when there is a large enough pool of unrelated risks, but the number of entities involved does not matter.
That means a captive can achieve risk distribution in the same entity as long as coverage gets spread over a sufficient number of employees, facilities, vehicles, products or services.
While the courts’ have made this interpretation, it remains unclear how the IRS will react.
Reviewing Your Insurance Needs
As you assess where your organization stands and where it is heading, this is an excellent time to consider a captive insurance strategy.
Remember, it will take several months to set up the captive and get all of the actuarial studies completed.
This article is only an overview of the subject. If you are considering a captive insurance program, seek specific advice about your circumstances from a trusted professional.
Chivaroli and Associates Insurance Services is a full-service brokerage firm specializing in the custom-design and placement of insurance and alternative risk funding solutions for your healthcare organization.