Compliance with IRS regulations is important and the transfer and distribution of risks are two important factors. Putting all of the corporation’s rick into one captive will help with the diversification issue, but it will still be necessary to have third party business in the captive. This can be done in a few different ways.
Then the opportunity should be taken to review the insurance program. There will be some policies where claims are rare and reinsurance could be dispensed with. In other cases, there may be risks which were not covered and which could be brought into the captive, with or without reinsurance to back them up, depending on the circumstances.
The next stage would be to adjust the risk retained in the captive. Depending on the level of capitalization and on the appetite for exposing capital to risk, the amounts retained in the captive could be increased or decreased. Decreases might occur in property insurance where traditional insurers had imposed high deductibles to windstorm cover. Increases would be in lines where claims are usually small and can be more easily predicted.
The leads to the second level where the existing insurance policies are converted to reinsurance policies. The effect of this is to take the insured corporation from the retail insurance market and give direct access to the wholesale insurance market (otherwise known as reinsurance).
The simplest would be for the captive to issue polices that replace all of the insurance policies currently in place. However, it is unlikely that it would be capitalized at a level that is sufficient to carry this risk and would be struggling to pay claims in the worst case scenario. (i.e. if claims reach or exceed the Probable Maximum Loss or ‘PML’)
There is no reason, in theory, why a corporation should not place all if its insured risks in its captive. There are several ways in which this could be done.
Captives are a risk management tool that usually insures risks for which traditional insurance policies either do not work or are unusually expensive or cumbersome.
These notes embrace the concept of using a captive insurance company to cover all of the risks that are insured by the parent corporation.
The Universal Captive
What are the advantages?
First, employee benefit plans are considered to be third party business because the insured are the employees and not the corporation itself. Thus, If health insurance, life insurance or any other benefit granted to the employees is included the third party insurance problem may well be solved. However, the inclusion of employee benefits brings other problems since the provisions of ERISA have to be met and the Affordable Care Act (ACA) now has to be complied with as well.
The third solution is to use Americap’s proprietary solution, the Americap Line Slip. This is a proven solution that is only available to Americap’s clients and we will be happy to discuss it with corporations that are committed to our services.
All of the advantages of captive insurance companies obviously apply to a universal captive as well. The main difference is that the savings and flexibility would apply to the entire insurance program. Thus the savings will be greater, the additions to the bottom line will be larger, the captive will be in a stronger position to negotiate with reinsurers and the ability to cover those uninsurable risks is increased. There will be greater flexibility, improved cash flow and higher levels of investment.
A second solution is to come to a risk sharing agreement with one or more other captives. This has been tried, with varying degrees of success. Regrettably, some practitioners created a sharing mechanism that contained some serious faults and this has led to IRS investigations of that kind of arrangement.