Captives: Risk vs Reward
By Robert Metzler
Captives, both group and single member micro captives, are alternative risk management programs that can offer significant benefits for roofing contractors. This article will attempt to address both the benefits and risks associated with captives.
Types of Captives:
Group Captives include liability coverages: contractors, general liability, workers compensation and auto liability and physical damage.
Single Member Micro Captives have limitless coverages available, such as deductible reimbursements, subcontractor and cyber liability.
Captives, by design, should only be considered by companies with a proven safety program and track record. Furthermore, only companies in business for a minimum of five years with combined traditional market premiums of $200,000 are eligible.
So why should you explore captives?
Entrepreneurs/business owners want absolute control—and that is what they provide.
When it comes to insurance premiums, claims processes and payments, captives transfer control to their members. The icing on the cake is profit is also retained 100% by the owners.
To further explain, premiums in a captive are calculated based on your (only your) loss/claims history. The rates used are not the high roofing rates tied to our industry, but rates dictated only by your specific claims history. Claims settlement is dictated and controlled by the member. No claim can be paid without member authorization.
Captives invest member premiums, reserving amounts to be paid for real claims and return unused premiums with invest income to their members. The trade is the assumption of a large, typically $100,000–$300,000 retention/deductible per claim. Thus, this risk/reward mention earlier.
How are Micro Captives different? Micro (single member) captives differ substantially from group captive. They are designed to lower traditional market premiums, absorb potential group captive assessments and offer unlimited policy design for coverages not available in the traditional market. The 831B election allows non taxed profits to grow with only investment income taxed and thus can provide a unique owner wealth accumulation strategy.
The Basics of a Micro Captive:
Below are some key criteria on micro captives:
- A micro captive is a real insurance company, with reserves, surpluses, policies and claims, formed by a business owner(s) to insure and underwrite the risks of their operating company (or multiple operating companies).
- The operating company pays premiums to the captive and the captive insures the risks of the operating company. The premiums paid must correlate with the underlying risks.
- A micro captive DOES NOT replace your existing insurance but is tailored to work in conjunction with and enhance your existing insurance coverages.
- A company commonly forms micro captives to insure uninsured or underinsured risks other than standard market exposures (such as workers comp, property/ equipment, auto and general liability).
- A micro captive provides a mechanism for the company to finance and plan for their self-insured risk and retain profit from policies otherwise insured in the traditional market.
- An 831(b) micro captive is an election created by the federal government to allow companies to pay for uninsured or underinsured (self-insured) risks with pre-tax dollars.
- Micro captives with less than $2,300,000 in net annual premiums (indexed for future inflation) and which meet certain diversification requirements and are adequately capitalized may elect to be taxed under Internal Revenue Code §831(b).