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Archive for August, 2016

Important Legislative Changes to IRC 831(b)

On Friday December 18th Congress passed the 'Tax Extenders Bill' as part of the "Protecting Americans from Tax Hikes (PATH) Act of 2015". On page 176 were new rules affecting small captive insurance companies.

The language is complicated, but in summary...

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Why form a captive?

To understand the potential benefits of forming a captive insurance company, it is helpful to first recognize that the decision to establish a captive is not a decision to abandon the commercial insurance market. Every company that operates a captive also carries various forms of commercial insurance. In a well-designed strategy, the two methods work together to provide the greatest benefits to an organization.

It’s also important to recognize that the key principle behind the captive insurance concept—self-insuring some of your risks—is already practiced in some form or another by every company in existence. Said another way, no company regardless of its size or sophistication has commercial insurance coverage for 100% of its risk...

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How widespread are captives?

Based on the existence of more than 7,000 operating captive insurance companies and more than three decades of mainstream market and regulatory acceptance, the captive insurance model can be considered, by nearly all measures, a well-accepted risk-management option in today’s market.

This was certainly not always the case. State and federal insurance regulators and tax authorities have scrutinized, analyzed and challenged from many angles the use of captives. In the end, the captive market is better for it. What stands in the market today are captive options that have been clarified and refined. The long-term value of a well-structured captive is now much more clear and predictable.

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What Risk Can a Captive Address?

The problems that are addressed today by captive insurance companies are problems that most organizations face in one form or another:

  • unavailability of coverage
  • coverage that is too expensive
  • coverage that can’t be tailored appropriately for an organization’s needs
  • premium rates that do not meet a particular organization’s loss profile
  • inflexible policies
  • inflexible terms
  • inability to estimate loss frequency or loss severity
  • lack of a tax benefit for retaining risk...

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