2020 TIME FOR FORWARD THINKING
- 1. 2020 – TIME FOR FORWARD THINKING Why Do 90% of Fortune 500 Companies Own Captive Insurance Companies? All mid-market companies yearn for the day when they will be financially secure. Financial security implies a freedom from many threats surrounding a business. Financial security creates an emotional paradigm which is paramount in the approach of a successful business. It empowers and validates a mid-market business. Financial security means a business has adequate reserves and can take prudent business risks. Fear is reduced, confidence is enhanced and determination is strengthened. Financial strength increases perceived and real business opportunity. It develops a clearer thought process which leads to a positive forward-thinking approach to business. It builds confidence and the mental dexterity to operate in the complexities surrounding business development. Large Fortune 500 companies understand this dynamic. Mid-market businesses also understand this dynamic but are constrained by size and change. Change is a component of business that Fortune 500 companies are more adaptable to deal with than mid-market businesses. They are constantly creating strategies to manage change more effectively than mid-market business. They utilize their intellectual prowess to strengthen their position, employing a bench of in-house professionals in Legal, Accounting and Human Resources to give them advantages over their competitors. Advantages over mid-market business. One area where this is apparent is in the private insurance sector. For over 60 years Fortune 500 businesses have been involved in Captive Insurance Companies....Exxon, Apple, Target....all industries. There is something to be learned from the experience of these Fortune 500 companies. If 90% of Fortune 500 businesses are now using Captive Insurance Companies then why aren’t the majority of mid-market companies also using Captive Insurance Companies? Captives have the ability to offer businesses advantages that are often overlooked in the mid- market space. Captives: • replace a portion of commercial insurance • insure risk that is uninsurable. • create greater financial prowess
- 2. • reduce taxes • build reserves • provide asset protection A Captive Insurance Company and the reserves available to the underlining sponsoring businesses hold many strategic financial advantages. Captives allow businesses to not only protect themselves against risk but to do it while developing greater financial strength and flexibility. There are many obvious reasons for forming and maintaining a Captive Insurance Company. First, a Captive Insurance Company significantly improves the risk management posture of the business. This results in a mind shift by management with respect to risk management and business profitability. Management senses an opportunity to impact the bottom line directly through its actions. In addition, the Captive can complement existing commercial insurance by providing a broader range of insurance coverages to the parent company, thus enhancing traditional property, casualty, worker's comp, healthcare and other coverages. This results in a broader umbrella of insurance coverage with far fewer exclusions and gives management a sense of certainty in their daily operations. Second, a Captive Insurance Company can expand insured risks not currently covered by third party commercial retail insurance. There are many risks that business faces when they self- insure or are unable to purchase coverage in the commercial marketplace. These coverages are often too expensive or too difficult to obtain. Self-insurance can put a business in a position that creates a financial strain on corporate resources due to volatile ups and downs. A Captive gives management greater control as the vertical highs and lows are more even, thus, less volatility. Third, all insurance costs are considered expense items under the U.S. Tax Code and are therefore tax deductible. The expansion of existing coverage by creating a Captive Insurance Company is encouraged in order to strengthen businesses and prepare them for unexpected risk. Congress utilizes its authority in this manner to encourage businesses to act in a more responsible way by granting this deduction. Congress believes a healthy business, properly insured, protects jobs and builds a stronger economy. Congress uses its taxing power repeatedly to encourage business to build stronger retirement plans, individuals to purchase homes, businesses to replace or acquire new equipment and a host of other responsible actions. Moving from a self-insured model to a Captive model makes sense. By using a Captive Insurance Company, a business benefits from the tax-deductible nature of an ordinary insurance company deduction. Since the 1986 tax reform law was passed, some businesses can now make an 831(b) tax election. Insured business expenses can be transferred into an insurance company that the business owns and these premiums will not be recognized as income for tax purposes by their insurance company. This election permits a tax-free transfer of up to $2.2 million (indexed for inflation) annually. Fourth, surplus in a Captive can lower future commercial insurance costs. A sponsored private insurance company can choose to increase the size of deductibles on its retail commercial
- 3. insurance coverage. This results in a reduction in commercial insurance cost and if managed properly an increase in surplus in the Captive. Over time, the company's Captive Insurance Company will build surplus that will give a CFO greater flexibility to make strategic financial choices. This greater flexibility combined with certainty and control develops a stronger more resilient business. Fifth, the surplus of a Captive Insurance Company can be paid as dividends to the owners of the Captive Insurance Company. Dividends are currently taxed at a lower rate than ordinary income tax. This can be used to reward management for its foresight in managing risk properly. These assets can also be used to make loans, give mortgages and take other business steps that management feels will strengthen the business’s bottom line. A Captive properly utilized can become a tool for fiscal management. Sixth, today we live in a litigious society. Insurance assets developed through Captives are protected from creditors. These assets can be invested. They represent a return of part of the annual premiums paid. These assets are normally lost to the insured through the use of commercial insurance. A private insurance company reduces brokerage commissions, commercial insurance overhead and many executive salaries which are normally built into commercial insurance cost. A Captive permits most commercial coverage to be purchased at wholesale rates rather than retail rates. A Captive Insurance Company increases business efficiency which leads to a more effective approach to business management. Seventh, Captive Insurance Companies are financial tools. They work in conjunction with most company HR (human resource), CFO (financial operations) and CIT (information technology) functions within a business. Company expenses for Human Resource functions and the related use of assets generated to each business result in helping to retain employees. Enhanced financial operations and improved financing enable each Captive business owner to develop an inter-company financial transfer program. Today information technology is critical for most mid-market businesses. Because this technology is changing rapidly, most commercial insurance companies are unable to provide the needed protection a business requires. A Captive can customize coverage for a business enabling a business woman to deal with this present danger and the ever-changing nature of cyber threats that are available in the business world today. With so many benefits to a mid-market business owner, it is easy to see why over 90% of Fortune 500 companies own Captive Insurance Companies. Mid-market businesses, CFOs and owners need adequate reserves as much as Fortune 500 CFOs. Independent Captive Associates has been helping mid-market business owners to develop and manage their own insurance company in this manner since 2003.
- 4. CORPORATE CAPTIVE THINKING “If you always do what you've always done, you'll always get what you've always got”..........Henry Ford. It’s time to understand the fundamental concepts inherent to captive insurance companies. It’s time to allow 2020 to be the year of self-examination, reflection and change............Joe T.