Captive Insurance Changes for 2017

Posted by: Hilger Hammond On: 4th April 2017 | no responses.

By: Mark A. Rysberg

On December 18, 2015, the Protecting Americans from Tax Hikes Act of 2015 (PATH Act) was signed into law. Proponents and sponsors of captive insurance structures often refer to the tax benefits of I.R.C. Section 831(b), which allows eligible insurance companies to make an election to be taxed only the company’s taxable investment income. In effect, the 831(b) election allows such insurance companies to collect a set amount of insurance premium without having to pay tax on said premiums. Effective January 1, 2017, insurance companies electing taxation under 831(b) can collect up to $2.2 million in insurance premiums while being taxed only on the taxable income generated from the collection and retention of such premiums. This increase expands the benefits and opportunities available for companies that can implement a captive insurance aspect into their risk management strategies by, among other things, increasing the amount of otherwise potentially taxable income and leverage that money into expanding into coverage lines that may otherwise not be available.
Mark A. Rysberg is a construction lawyer who maintains a local and national practice representing owners, contractors, subcontractors, and suppliers on a variety of issues affecting all aspects of the construction industry.

Captive Insurance Structures Designed for Different Needs, Goals and Funding Abilities

Posted by: Hilger Hammond On: 29th March 2017 | no responses.

By: Mark A. Rysberg

Captive insurance entities can be structured in a variety of ways depending on the participant’s needs, goals, and funding abilities. The following are some of the more common structures that can be used.

Pure Captive
In this model, a captive insurance company is typically a wholly-owned subsidiary of a parent company. These captives are usually closely controlled by the parent company and are generally used by companies that have insurance and risk management needs that are significant enough to justify the financial costs of being solely responsible for the captive’s operational costs. Companies that consider forming a pure captive generally do so to improve risk management and to maximize the benefits of I.R.C. 831(b) election thereby sheltering up to $2.2 million in taxes.

Group or Association Captive
These captives are formed to provide captive insurance solutions to several members composed of trade association members or companies engaged in the same industry. This model can allow groups of smaller companies that have similar risk profiles to pool their insurance needs and resources to improve their risk management efforts at lower possible costs than traditional risk transfer vehicles.

Rent-a-Captive
This form of captive is typically selected by users that may not have the capital resources to participate in a traditional captive insurance program. To that end, insurance companies provide access to captive facilities by requiring users to provide collateral to mitigate risk to the rent-a-captive.

Mark A. Rysberg is a construction lawyer who maintains a local and national practice representing owners, contractors, subcontractors, and suppliers on a variety of issues affecting all aspects of the construction industry.

Captive Insurance and Risk Retention

Posted by: Hilger Hammond On: 24th February 2017 | no responses.

By: Mark A. Rysberg

The concept behind captive insurance companies is based on the principle that rewards are derived from the assumption and retention of risk. Traditional insurance vehicles purchased through third-party agents is directed at shifting definable risks onto insurance companies that assume such risks based on weighing the statistical probability that, when viewed in the aggregate, the costs to the insurance company for paying claims will be less than the premiums the insurance company charges for assuming those risks. In that sense, insurance companies operate on the business model that they generate revenue, and ultimately profit, by assuming risk. A captive insurance company operates on a similar principle with the main difference being that rewards are the result of retaining risks by the parent company rather than shifting those risks to traditional insurance companies. In short, captive insurance companies are formed as part of a risk management strategy to take advantage of the economic benefits derived from risk retention. One of the more notable benefits of captive insurance models relates to the tax benefits provided to so-called micro captives. Under I.R.C. Section 831(b), micro captives can elect to only be taxed on investment income and avoid tax on income derived from the collection of up to $2.2 million in insurance premiums. As a result, incorporating captive insurance concepts as part of a risk management strategy can provide opportunities to go beyond simply planning for catastrophic and non-catastrophic losses.

To offset the retention of risk, captive insurance companies are formed.

Mark A. Rysberg is a construction lawyer who maintains a local and national practice representing owners, contractors, subcontractors, and suppliers on a variety of issues affecting all aspects of the construction industry.