Reducing Liability Exposure through an Agency Captive Solution

Summary:

A national building supply wholesaler sought to protect against unexpected high dollar claims on its employees’ long term workers compensation.

Challenge:

The multi-billion dollar business found that the occasional big dollar hit from a workers compensation claim – often many years later- could be very detrimental to the company’s finances.

Solution:

The Risk Manager wondered why the firm didn’t utilize a captive program to take part of the risk of the long term workers compensation liability.

Accordingly, he transferred the long-term workers compensation claims (over $50K and up to $1M) to a captive via deductible reimbursement.

Results:

The program has served the firm very well. The wholesaler was able to reduce its’ long-term liability by over 70%.

If you are interested in discussing if this is a solution for your company, please feel free to contact our office at 412-802-2600.  Thank you.

Using Captive Insurance to Provide Liability Insurance for Contractors/Installers

Summary:

A national building supply wholesaler looks to create comprehensive and long-term relationships with its’ contractor customers.  These deep connections lead to repeatable sales over many years.

Challenge:

Smaller contractors and installers can sometimes fall short of fully qualifying for needed general liability insurance.  Such limitations could prevent contractors from taking on jobs and consequently reduce contractors’ purchases.

Solution/Results:

The head of insurance for the supplier has found captive insurance to be a very effective vehicle to solve this business issue. He set up a captive a number of years ago to take on a portion of this general liability risk (the captive pays a significant percentage of the first $500K of claims).

Several years later, the firm identified that some of their smaller deck installers did not qualify for their insurance requirements. Through the captive, the firm offered the installers affordable insurance whose premiums could be easily be deducted from the payments to installers at the conclusion of the project.

The program has strengthened the relationship between the wholesaler and its’ contractor/installer base.

 

If you are interested in discussing if this is a solution for your company, please feel free to contact our office at 412-802-2600.  Thank you.

Advocacy Work Continues

There may be a lot going on in Washington these days…but that does not slow down SIIA’s advocacy work to better educate and inform lawmakers about captiveinsurance and its’ many benefits.

In November, my #SIIA colleagues and I met with Pennsylvania Senator Bob Casey’s Chief of Staff, Kristen Gentile, as well as Representatives Trey Hollingsworth (R-IN) who is on House Financial Services Committee, and U.S. Congressman James Comer (R-KY).

In February, I will travel to Miami for an event with Senator Marco Rubio and Julie McPeak, former Insurance Commissioner of Tennessee.

Advocacy work takes time, effort, financial resources, and involves many individual meetings. My SIIAAdvocacy colleagues and I are committed to the journey.

Gaining Access to Coverage Is Top Benefit of Having Captive

Captive International surveyed its readers on the top benefit of captive insurance.

Many Americans, especially those who work outside of the insurance industry, think that the single biggest reason to have a captive is to gain tax benefits. This idea became more entrenched when the ceiling for tax deductions on captives was raised to $2.2 million in 2015’s PATH Act.

Interestingly, respondents to this 2019 end of year survey (readers who work in the industry) said tax benefits ranked low among choices for the top benefit.  Instead, nearly half of respondents (45%) said that gaining access to coverage not available elsewhere is the single biggest benefit of having a captive.

About a quarter of respondents said gaining greater control over claims was the biggest benefit.

Less than 10% said the biggest benefit was gaining access to reinsurance markets

And only 5% cited tax advantages as the number 1 benefit of a captive.

Some respondents argued that it was hard to single out a single top benefit as the true value of captive insurance is “the accumulation of multiple factors, including strategic control of risk finance over a sustained period.”

Published in Captive International.

Captives Set to Increase Cyber Coverage in 2020

Captive International surveyed its readers about which business lines they expect to see captives increase their activities in for 2020 (respondents were permitted toselect multiple answers).

Cyber coverage came in first, with 64 percent of respondents predicting captives will increase their activities in that area.

Directors and officers (55 percent) and general liability (53%) were the next most popular choices, followed by professional liability (38%) and catastrophe (35%).

Notably, workers’ compensation, which is one of the lines most closely associated with captives, was only selected by 12 percent of respondents. It is likely that captives which need this coverage are likely already writing it.

There has been a lot of discussion about captive coverage for cannabis growers, only 22 percent saw this as a growth area for captives next year.

Many of the respondents to the survey said their focus will be on areas with the biggest rate rises in 2020 making the question, in effect, a prediction about where rates will rise.

Published in Captive International.

Partnering with SIIA to Shape Captive Insurance Policy in DC

By Sandra Fenters

Over the last 5 years, we have seen a whirl wind of activity around captive insurance in Washington. Some very positive; some less so.

Consider the following:

  • Farm mutuals received a boost with the 2015 PATH (Protecting Americans from Tax Hikes) Act.
  • In the initial versions, small business captives (taking the 831b election) were originally omitted, but with some lobbying, they were ultimately included in the final bill. Consequently, these captives enjoyed a healthy increase in tax deductibility limits of insurance premiums; this was a big boost for small business captives, and it looked like the captive market for small businesses would boom.
  • The Treasury and IRS had seen abuses over the years with select captive plans and began to cast a suspicious eye on many existing captive policies. The IRS issued a series of onerous Notices (for example: 2016-66), ramped up audits and filed a number of lawsuits to target broadly any possible abuses.
  • Part of the challenge was that Congress did not specify much of the detail of the new rules which led to industry and government confusion.
  • So despite the gains for small business captives (taking the 831b election) in 2015, an aggressive IRS has muted much of the gains.

 

Helping to Steer the Policies

With this uncertainty, SIIA (The Self-Insured Institute of America) and its Captive Advocacy Team have been active for the last few years to help shape the legislation and policies related to small business captives utilizing the small captive tax election.

I have been active on the Captive Advocacy Team since 2015 and have made over a dozen trips to DC to support these efforts. We focus on informing the legislators about the benefits of captives and are aware of the onerous reporting requirements.

My most recent trip was this Spring when colleagues and I met with the legislative teams of Richard Burr (NC), PatToomey (PA) and David Perdue (GA). During the blitz, 13 SIIA Advocacy Team members met with 38 legislative teams.

 

SIIA Advocacy Going Forward

Ryan Work, Vice President, Government Relations of SIIA, leads this governmental advocacy program and comments that after a few years of a more reactive mindset of ‘putting out fires,’ the Team plans to be more proactive in its lobbying efforts in Washington.

My next scheduled visit is November 20, 2019.

Please let me know if you have any questions or input on this program.

Gaining Momentum: Hybrid Captives

By Sandra Fenters

Clients have traditionally looked to captive programs as a business strategy to protect their businesses by insuring property and casualty coverage gaps and/or their enterprise risks not covered in the traditional market.

Importance of Human Capital

One trend we’ve seen gaining momentum for a number of years is business owners looking to better manage the risks and costs on what many view as their ‘most important’ asset: their human capital.

These owners are asking us how they can utilize their existing captive structures to:

  • insure their employee benefits,
  • improve safety programs,
  • enhance risk management techniques, and
  • encourage behaviors to avoid certain types of risk.

For those with existing captives, particularly with property and casualty licensed captives, we are able to formally request a business plan change to add coverages, such as medical reimbursement.

‘Blend’ Captives

This is a hybrid type of program which allows the captive to issue property casualty policies, enterprise risk policies and some health care-related policies.  It is a  true blend.

What Does This Mean for Existing Captives?

There are ‘moving parts’ with all captives, but there are additional things to think about when writing coverages that involve your Company’s Human Capital, including but not limited to educating yourself on requirements of The Department of Labor and ERISA.  If you add such coverages, you may notice changes within the captive, including the following:

  • It changes balance sheets.
  • There are different requirements around reporting to regulators.
  • It alters required loss reserves.

Therefore, some caution is warranted.

But there are certainly advantages for some Companies to add coverages, such as medical reimbursement to their underwriting program, and we expect to continue to see this trend.

Questions?

If you have questions about how such a plan could benefit you, please contact us.

Capterra Risk Solutions, LLC

842 5th Avenue

Coraopolis, PA 15108

412-802-2600

information@capterrarisk.com

IRS Announces Settlement Offers for Select Captives


Update from Sandra Fenters

The IRS issued a notice earlier this week which provides a settlement offer to certain taxpayers who are currently under audit and possess bad fact patterns within their captive program.

According to DugganBertsch, the IRS has touted several recent victories with respect to “micro-captive” transactions, but these cases have illustrated bad taxpayer fact patterns that were strongly in the IRS’s favor. By litigating these bad fact pattern cases first, the IRS hopes to discourage taxpayers with stronger fact patterns from continuing their defense of their positions. However, many of the several hundred pending cases in Tax Court have more taxpayer-favorable facts and circumstances; they are likely to create a more favorable precedent.

Capterra Risk is very active on Capitol Hill, and our staff regularly conducts Congressional meetings focused on key committees of jurisdiction, including Senate Finance and House Ways and Means, as well as leadership and Chairman offices. This ongoing engagement centers around educating Members of Congress and their staff about captive insurance in general, the importance of risk mitigation and the issues facing the captive owners and managers. As part of this effort, Capterra is working to establish a set of proactive principles to help further advance and benefit the industry, in partnership with state and federal regulators.

While the recently announced settlement only applies to a small percentage of captives under current IRS examination, we wanted to make you aware of the Notice.

If you would like to discuss this news further, please contact Capterra Risk at 412.802.2600.

Sandra Fenters Discusses Benefits and Trends of Captives

In this wide-ranging interview, Sandra and Mike discuss:

  • Trends in captive insurance including (1) expanding captives to cover a company’s most valuable asset, its employees and (2) growing market for Enterprise Risk Captives (ERCs) for the middle market
  • Challenges by the IRS about suspected captive abuse
  • SIIA’s work on Capitol Hill to positively impact legislation

Is Captive Insurance Right for Your Construction Business?

Every firm deals with risk. Yet risk is particularly significant for companies in the construction industry.

Consider some of the obvious risks and dangers at a construction site:

  • Active use of equipment and tools
  • Strenuous work by team members such as climbing and lifting
  • Moving large amounts of raw materials and heavy building supplies
  • Weather events or lack of supplies causing business interruption
  • Theft of supplies and equipment
  • Workmanship defects or design errors
  • Pollution and environmental liability

In addition, it is very common for construction firms to engage external teams such as suppliers, contractors or sub-contractors who bring with them their own set of processes and risks.

It is not hard to spot the many challenges in managing risk at a construction business.

Managing this risk

Savvy construction firms spot these risks and take steps to limit their exposure.

Yet, commercial insurance is often not the best fit for construction firms to manage these risks as the insurance can be expensive and still leave major gaps in coverage.  To fill the gaps, construction firms often need to pay significant premiums.

Construction companies increasingly look at captive insurance as a way to manage their unique risks and even reduce costs.

Case study: Captive Insurance as a Risk Management Tool

We share an example of a construction firm which finds significant risk in missing deadlines.

Click here to view the firm’s risks and how a captive would benefit the firm.

 

What is captive insurance?

A captive insurance company is a form of self-insurance organized for the primary purpose of providing insurance protection to its parent company (operating company), owners, and/or related entities.

For decades, large corporations have established captive insurance arrangements to create a tailored insurance portfolio to fit specific needs. Today, closely held businesses including construction firms are also taking advantage of the numerous benefits afforded by captive insurance arrangements.

What are the benefits for construction firms?

There are a number of benefits of creating a captive insurance company:

  • Stabilized insurance budgets – have consistent expenses around insurance
  • Improved claims handling– the firm controls the claims review process
  • Creation of profit center– firms keep underwriting profits, providing an incentive for loss control measures

Many construction firms have sought out more information on captives given these benefits.

What should we do to properly manage our firm’s risk?

Managing risk should be a full program utilizing traditional insurance, captive insurance, and means of risk mitigation such as safety procedures. Risk management should be reviewed at least annually as the Company grows.

The benefits of forming a captive company can be fully realized when owners partner with experts such as Capterra Risk Solutions. As your Captive Manager, Capterra Risk will help you look at the big picture of how you manage your risk so that you are aware of potential exposures and make educated decisions on your overall insurance program.

Contact Capterra Risk Solutions today to learn more.

Contact Information:

Capterra Risk Solutions, LLC

842 5th Avenue

Coraopolis, PA 15108

412-802-2600

information@capterrarisk.com