In our opinion, there is no better time to consider alternative risk transfer as a strategy to get more cost-efficient with respect to your current commercial property insurance, commercial liability insurance, workers compensation insurance, & commercial auto insurance.
As I write this the country and the world are about to exit the covid pandemic. If we frame the current conditions in terms of where we are in the property insurance, liability insurance & workers compensation insurance buying cycle; conditions couldn’t be more favorable to give your company a significant competitive advantage.
Taxes :
Since all 3 branches of government have changes hands in the last several years there are strong tailwinds pushing for significant tax increases which will erode corporate resources. We suggest utilizing a Captive Insurance strategy can give you significant tax efficiencies allowing you to keep the dollars inside your company to help reduce your variable cost structure. DOWNLOAD our Guide to Utilizing Captives by CLICKING HERE.
Coverage Availability & Rates :
Currently, we are in the through of a “HARD MARKET”; where conditions favor the insurance carriers as they restrict coverage and increase rates. Insurance buyers are frustrated because they have limited options. Further, they feel squeezed, and rightly so. The carriers are pointing to the “Social Inflation” of liability and commercial auto claims due to the insane jury awards. Buyers are pointing to “profits” earned and surplus growth to counter that claim. We think the buyers have a legit gripe.
Risk As Strategy :
Smart forwarding thinking CFO’s and C-Suite Executives understand that if they can leverage their balance sheets by increasing their retentions EFFICIENTLY, they can gain significant cost advantages that they can bake into their COGS (Cost of Goods & Services). If done properly they can reduce their insurance program costs by 35% which allows them to grow profits, market share, or both. Remember every dollar you save in your insurance program falls directly to the bottom line.
To understand if your company could benefit from a partial or full-on program restructuring CLICK HEREto schedule a 15-minute call. In 5 questions we can figure out if the strategy has legs for your org.
Have you ever wondered how utilizing captives, a high deductible insurance program, alternative risk transfer, self-insured retentions, or retrospective rating plans could further reduce your commercial insurance costs off your already low commercial insurance rates?
Too often business owners are chasing the wrong rabbit. They think that by purchasing their commercial insurance for less than they spent the year before is they accomplished their goal. We get it, it’s an easy benchmark to measure. If you succeed it’s a win; all be it a hollow win unless you really understand what you gave up to get that cheaper price.
Their real goal should be to lower their “Costs”, not the price of their insurance program. Nothing is more expensive to your balance sheet than cheap insurance.
The second huge mistake we see is that although their company has grown, sometimes significantly over the years, they are in essence the same insurance program they were when they were 20 employees; now they are 250, a thousand employees, and yet the commercial insurance is structured in the same way as when they first started.
This is a huge mistake because they are not leveraging their size and scale to reduce their insurance costs. I’m not talking about getting a lower rate because your sales are now at 100 million versus 10 million. That’s actually the illusion the commercial insurance market is selling. They are letting you feel like your reducing costs because of your scale; except they are holding back the best stuff only if you are smart enough to ask. We did a whole piece on the WHY they hold this information back in our “MISALIGNED GOALS” segment. Go there if you want to understand why.
For our purposes focus on the “HOW. First off we are assuming you have strong financials and a solid balance sheet. If you compare your balance sheet today with what it was 20 years ago, it’s probably night and day. Assuming you have solid free cash flow, credit lines, and cash reserves the question becomes, why are we buying so much insurance in the first place? To be clear I’m not talking about insurance limits. That stays the same due to your contractual obligations to your customers and lenders.
Leverage Your Balance Sheet To Reduce Costs At Scale
By leveraging your balance sheet you could restructure your present insurance program to incorporate some “risk-sharing” through higher retentions than by purchasing a “first-dollar plan. In a “first-dollar plan” the insurance carrier funds the loss from the “first dollar”. Any smart CFO worth their salt knows that any insurance coverage accessed for claims is essentially a credit line in reverse, except the interest rate on that credit line is crazy-expensive.
By increasing your retentions you score a lot of runs with one swing of the bat, pardon the baseball analogy. It’s called a grand slam. As your retentions increase the insurance marketplace looks at you entirely different than simply a purchaser of insurance products. You become a “Risk Partner” with them. This is important because the smart insurance carriers know that when you the end-user has “skin in the game” you generate significantly more underwriting profits than those that simply purchase first-dollar insurance plans. For this risk partner relationship, they give you significant discounts off the total premium for your risk sharing. A first dollar or low deductible insurance plan can never discount their rates low enough to get to the risk-sharing discounts.
Retaining Your Risk
Secondly, you purchase less coverage; the same limits, because you’re retaining some of the risks through deductibles or retentions. How you structure that retention matters. That’s another article. You can check out our quick piece on The Difference Between a High Deductible v.s. Self Insured Retention Since you are purchasing less your costs drop far more than just fighting for a lower rate. By taking higher retentions you can lower your costs by magnitude over just getting a lower rate.
Lastly, you can get access to a whole other section of the commercial insurance marketplace that caters to “Alternative Risk Financing” than you would otherwise have access to. You would never see a quote from this marketplace at the lower retention limits because that is not their appetite. They want larger, middle-market companies that want to be risk-sharing partners and not just insurance product providers.
Once you get a taste of what this looks like and how it can benefit you, then you will be tugging at our shirttails for a CAPTIVE STRATEGY.
So if you have been swimming at the same watering hole for years, with the same broker, and the same insurance carriers quoting you every 3 years we suggest you seek a whole new oasis. Call a Risk Advisor today, with 5 simple questions we can test whether this is an option for you.
How much does it cost to start and run a captive insurance company? It’s the most frequent upfront question we get from organizations that are looking at starting their own captive insurance company for their organization. The short answer is zero, but when we tell business this they’re left in shock. After we walk them through the process of how we got zero as the price, it makes perfect sense.
Let’s start at the end and work back; reverse engineer this. First off it’s an investment that yields an ROI, not an expense like your current insurance program. A well-run captive generates has gross savings of at least 30% off your current insurance program on average; irrespective of what structure you’re coming from; unless of course, it’s another captive. That’s because the captive shares in the underwriting profits would typically go 100% to your insurance carrier. Curious about Captives? If you want a better understanding of what a Captive is, and how it could fit in your organization CLICK HERE to download our free ebook.
Further, the risk-sharing mechanism is designed to reduced your upfront premium outlay. Your betting on yourself that your losses will be less than your premium & admin costs. In a well-designed, well-run Captive the results are undeniable. You can only generate & retain these profits, with tax efficiency, in a captive structure. Thus if you back out the cost to run and administer the captive from the profits you generate the cost is ZERO! Someone smart told me years ago that you have to spend money to make money.
In order to consider a captive structure you need these three (3) attributes :
Size & Scale: You need to be spending in excess of $500k in your property & casualty insurance program. You can include employee benefits here too if you wish. Many captives are set up to fund employee health expenses to save on their health & benefits insurance premium. The closer you get to $1 mill in total insurance spend, the better this solution looks. As the numbers you expense in your insurance program increase there is a direct correlation by % to your end benefit.
Free Cash Flow: In finance terms, you need to have strong financials and good free cash flow. The captive will plug into this “resource” and amp it exponentially for your company by keeping that free cash flow tax free instead of it having the direct profits spill down into the partners’ individual tax return.
Underwriting Profits: Too often when we interview companies and CFO’s about a Captive Alternative their main driver is looking for a cheaper insurance quote. They think that by forming a captive they can out run their claims problems and high insurance premiums. This is a fools’ errand. The last thing you want to do is switch places with the insurance carriers if THEY aren’t making money on your account.
Our demarcation line is a minimum of 35% undeveloped loss pic; which is a ratio between incurred claims & premiums paid. If your loss pic is just over that 35% threshold we should have a discussion. If your over 50%, you need to solve your claims problems first before you can consider a captive solution as a potential option.
Breaking Down the Cost of a Captive
You can’t simply compare the “cost” of a captive to the “cost of your current insurance program”, especially in a 1-year snapshot. The correct way to evaluate whether a captive solution is right for your organization purely from a numbers standpoint is a (5) year window. The data set is larger and more representative of your management team. It’s less “noisy” from a numbers standpoint, enabling you to see the big picture.
Further to simply look at this purely in terms of financial implications we suggest is short-sighted as well. This a long-term strategic play. Captives have major strategic advantages as you compete for business on the street than simply buying and expensing insurance year over year.
In our view, Captives are an investment that yields a consistent, measurable ROI, not a cost or expense. It’s an investment in YOU, for YOU! If you want to be at the vanguard and stay 3 steps ahead of your competition we suggest you open up a dialogue of what this solution could look like for you. CLICK HERE to have a 10-minute discussion with one of our Risk Advisors.
With respect to your commercial general liability insurance policy; choosing between a high deductible or self-insured retention can have a major impact on your competitive position as your business competes on the street. We we want to give you some direction BEFORE you pick the insurance program structure for your commercial general liability policy.
Difference Between Self-Insured Retention & Deductible When It Comes To Credit
The first is who is issuing your company “credit”. With a deductible, it’s the insurance company. When a claim needs to be paid out, it’s the insurance carrier that pays the full dollar amount; provided coverage was triggered. The insurance carrier then invoices your company for the agreed-upon deductible amount. Your client (if we are speaking about a liability policy ) is made whole. Thus it’s the insurance companies balance sheet that’s out front, not yours. This is important an important distinction.
With self-insured retention, it’s YOUR companies balance sheet that gets put out front. The reason being; if a claim is presented that needs to get funded YOUR COMPANY pays the claim (up to the retention limit) ; THEN the insurance carrier comes in & funds the remainder of the loss. The point being your customer is issuing you “credit” in hopes that you have the financial capacity to fund the loss.
Difference Between Self-Insured Retention & Deductible When It Comes To Infrastructure
The second big issue is one of infrastructure. When you purchase an insurance policy with a deductible all of the insurance carriers infra-structure comes with it. This may include insurance adjusters, legal representation, engineering & forensics, professional accident investigation e.t.c. An insurance policy that has a deductible structure includes the carrier’s infrastructure for you to leverage.
In a Self Insured retention structure, you must provide the infrastructure. Adjusters, Loss Control Engineers, Legal representation (defense), a professional accident investigation team. At Metropolitan Risk we have all of this pre-built for our clients that choose to leverage the self-insured retention advantage.
Too often we meet the executive team of a company that cannot articulate the strategy of how they ended up in a particular insurance program structure. These companies are backed into their insurance programs because the insurance is the cheapest quote they’ve received. We are brought in because their costs keep rising because they started with the wrong goal. Our clients understand the price they pay on their insurance program is a direct result of how they prevent and manage their claims.
If your main challenge is “frequency” we suggest the self insured retention model. The main reason, you have far more control with a self-insured retention. Since it’s your infrastructure, they work for YOU, not the carrier; it’s your money. Thus you have a degree of control and efficiency that you don’t with a high deductible program. Where we see this being the most successful is where there are a lot of small nuance claims, trip & falls as an example.
Insurance carriers are claims processing factories, they just can’t achieve the same results that our self-insured retention clients can because they handle too much volume to give these small claims the kind of attention they need. Thus our clients that adopt this structure significantly compress their claims.
Those that stay inside a deductible program, or worse a 1st dollar plan (the carriers pay all claims from the first dollar). This is what we call the stealth commercial insurance squeeze. This is where the “incurred” claims continue to rise, resulting in commercial liability insurance premium increases! Remember; commercial insurance is essentially a really expensive credit line. The surcharges on these first dollar plans can result in a death spiral if you don’t take action.
A high deductible program works best in severity issues; (where you have 1 or 2 large claims in a policy year, think LABOR LAW!) No need to build out and pay for infrastructure; incurring those costs if you’re not going to materially impact the ultimate incurred loss which is key to achieving your goal. The more you positively impact your claims results the cost of the entire program reduces which is your goal.
Review your current loss history, run a loss pic, analyze what’s driving the results of your claim. Do you have a “frequency” issue or a “severity” issue? Once you understand your main challenge, then pick the correct insurance program structure to leverage. The best way to improve the results of your claims and lower the ultimate cost of your insurance program is to prevent the losses from happening in the first place.
Call a Risk Advisor today @ (914) 357-8444 or schedule a 10-minute callto walk through your challenge with our team.
The New York Workers’ Compensation Insurance Rating Board (NYCIRB) has released a new class code for ‘Telecommuter Reassigned Employees’.
If you are a business owner you might be wondering how do I adjust my workers’ compensation rates for employees that we kept on the payroll, but did not actually perform their duties? It doesn’t make sense to pay workers comp premiums for an expensive labor class during a workers comp audit when those employees were essentially paid to sit home.
Over the past eight months, we have experienced difficult and trying times due to the pandemic. One critical aspect of the first few months of the pandemic was the ability of employers to keep their employees on the payroll whether or not they were actually performing their duties. The PPP program went a long way in helping employers achieve that important concession.
The question that has come up recently with many employers is how do we properly account for that portion of payroll we paid our workers when they actually didn’t perform their actual duties. In industries like construction or healthcare, the insurance costs basis can generate a lot of insurance premiums because the class codes for those labor components have a high insurance rate tied to it.
Now there is a relief for workers compensation premiums for these “reclassified” employees.
The New York Workers’ Compensation Insurance Rating Board (NYCIRB) has released a new class code for ‘Telecommuter Reassigned Employees’.
Temporarily Reassigned Employees, which establishes new classification code 8873, Telecommuter Reassigned Employees, requires that it be applied to the payroll of employees who, during New York’s stay-at-home order related to the COVID-19 pandemic (and future stay-at-home orders), are reassigned to either (a) not perform any work duties (idle), or (b) perform clerical work duties at home that they otherwise would not perform. The rate per $100 of payroll for Classification 8873 will mirror the rate for Classification 8810 (clerical office employees).
Further, this provision is applicable at the start of New York’s stay-at-home order and for up to 30 days after its conclusion. Employees who are classified to code 8871, Telecommuter Clerical Employees, are to remain classified as 8871.
In other words, the new 8873 classification only applies to employees who are reassigned and meet one of the two conditions described above. These amendments are effective for all new and renewal policies effective May 1, 2020, as well as to all in-force policies as of March 16, 2020.
We would be happy to review the parameters of the new class codes and the impact it may have on your business. Please contact one of our Risk Advisoryto discuss further.
Understand that purchasing Cyber Insurance does not protect your organization from hacking. It simply finances some, not all components of the loss. A recent report by cybersecurity company Barracuda reported that Google-branded Spear Phishing attacks are up significantly since the start of 2020. These attacks only accounted for 4% of the total cyber attacks in 2020 so far. Barracuda reported over 100,000 form based attacks since Jan 1. 2020, 65% of them were branded to look like a Google form. These Google-branded attacks are significantly more prevalent than other branded competitor attacks. Microsoft was the 2nd most impersonated account at 13% of the total spear-phishing attacks (2).
With 43% of all cyberattacks targeting small businesses (1), and the attacks increasing by 73% since the pandemic we encourage your company to build out “Operation Lockdown”. That’s what we called it at Metropolitan Risk after we read a Wall Street Journal article on how cybercriminals are increasingly attacking small businesses and holding their work files for ransom. Cybercriminals understand that many small and medium-sized businesses haven’t the focus, the budgets, and the staffing to defend against these cyber attacks. They are in effect low hanging fruit and easy prey.
Further many businesses now are even more vulnerable due to the recent mobilization of the workforce from the physical office. This is because home networks aren’t secure, the data doesn’t sit behind a firewall or is not encrypted like in the office. While newly remote employees were struggling to create routines, employers focusing on this new shift in workflows, cybercriminals know the back door is unlocked.
Here are two really important concepts to understand assuming we have your rapt attention with respect to the soft underbelly of your org. Understand that locking down your company from a cyberattack doesn’t guarantee that you won’t be hacked and won’t suffer damage. What it does do is significantly lower the probability that such an attack will be successful or cause much damage. A friend of mine Nick Lagalante from Tenable Cyber Security explains it this way. “Your goal is not to outrun the bear, your goal should be to outrun the slowest runners”. In essence, by making it more difficult to penetrate your systems and employees, cybercriminals should in effect move on quickly and find a softer target.
Here’s the second big picture item to understand; Cyber Insurance is NOT cyber risk management. Cyber insurance functions as a way to finance the loss you incurred from the hack. It’s a safety net when plan A (Operation Lockdown) fails. It should NEVER BE PLAN A. Here’s more good news. Once you have been hacked the chances of you being hacked again goes up exponentially. Insurance carriers know this which is why the Cyber Insurance policies increase significantly in cost once you have been hacked as the carriers’ exposure to loss increases if they decide to insure you!
This is why we built this case study on how at Metropolitan Risk took this challenge on for ourselves. It’s not the holy grail of cybersecurity prevention, and we don’t want to lead you to believe it is. What our case study does is make you a bit faster than most of your competitors who will suffer a hack and the corresponding costs that go with it. At Metropolitan Risk our goal is to keep you cost-efficient and cost consistent. When you read our Case Study it gives you an idea of how to organize the challenge, and address each item incrementally. The case study is only available to current Metropolitan Risk clients or potential prospects.
Last point, this is a big one. You don’t have to figure all this out on your own. As a reminder, we actually built a Cyber Assessment built for small to medium-sized businesses that assess your current systems, protocols, and security measures. Upon completion, you get a report that gives you a green light for things you have done well, yellow for items that need to be tweaked, and red for let’s jump on this ASAP.
Then we suggest we get you a really solid cyber insurance policy as a Plan B just in case. Our Cyber polices are 25% less expensive IF you execute our assessment and tackle the items in red.
On Friday, March 25, 2020, the US Senate passed the CoronaVirus Aid, Relief and Economic Security Act (CARES Act), to help provide financial relief to the people and business of America. This bill is a $2 Trillion dollar relief in response to the economic fallout from the fast-developing Coronavirus pandemic. The CARES Act is meant to provide direct financial aid to American families, payroll and operating expense support for small business and loan assistance for industries affected by the pandemic. Here is a breakdown of some of the topics the CARES Act covers:
What is the Paycheck Protection Program?
The Paycheck Protection Program, one of the largest sections of the CARES Act, is the most important provision in the new stimulus bill for most small businesses. This new program sets aside $350 billion in government-backed loans, and it is modeled after the existing SBA 7(a) loan program many businesses already know.
Who Qualifies for the Paycheck Protection Program?
This program was created as an incentive for small businesses with fewer than 500 employees and select businesses with 1,500 employees to maintain payroll through June and expands the SBA network so that more banks, credit unions, and lenders can issue those loans. The goal is for small businesses to no lay off workers and rehire laid-off workers that lost jobs due to COVID-19 disruptions.
What Is The Maximum Loan Amount A Business Can Recieve Though The Paycheck Protection Program?
The maximum loan amount under the Paycheck Protection Act is $10 million, with an interest rate no higher than 4%. No personal guarantee or collateral is required for the loan. The lenders are expected to defer fees, principal and interest for no less than six months and no more than one year.
What Can These Funds Be Used For?
Businesses can use funds from the Program loans to cover expenses including:
Payroll costs, including compensation to employees; payments for vacation, parental, family, medical or sick leave; severance payments; payments required for group health care benefits (including insurance premiums), retirement benefits, and state and local employment taxes
Interest payments on any mortgage obligations or other debt obligations incurred before February 15, 2020 (but not any payments or prepayments of principal)
Rent
Utilities
However, the money cannot be used for compensation of individual employees, independent contractors, or sole proprietors in excess of an annual salary of $100,000; compensation of employees with a principal place of residence outside the United States; or leave wages already covered by the Families First Coronavirus Response Act.
How Are Loans Made Under The Paycheck Protection Program Different From Traditional 7(a) Loans?
Unlike traditional SBA 7(a) loans, no personal guarantee will be required to receive funds and no collateral needs to be pledged. Similarly, the CARES Act waives the requirement that a business shows that it cannot obtain credit elsewhere. In lieu of these requirements, borrowers must certify that the loan is necessary due to the uncertainty of current economic conditions; that they will use the funds to retain workers, maintain payroll, or make lease, mortgage, and utility payments; and that they are not receiving duplicative funds for the same uses.
The SBA will not collect any yearly or guarantee fees for the loan and all prepayment penalties are waived. Payment of principal, interest, and fees will be deferred for at yeast6months but not more than a year.
The SBA has no recourse against any borrower for non-payment of the loan, except where the borrower has used the loan proceeds for a non-allowable purpose.
What Are The Loan Forgiveness Requirements?
Borrowers are eligible for loan forgiveness for 8 weeks commencing from the origination date of the loan of payroll costs and rent payments, utility payments, or mortgage interest payments. Eligible payroll costs do not include annual compensation greater than $100,000 for individual employees.
The amount of loan forgiveness may be reduced if the employer reduces the number of employees as compared to the prior year, or if the employer reduces the pay of any employee by more than 25% as of the last calendar quarter. Employers who re-hire workers previously laid off as a result of the COVID-19 crisis will not be penalized for having a reduced payroll for the beginning of the relevant period. Forgiveness may also include additional wages paid to tipped workers.
Borrowers must apply for loan forgiveness to their lenders by submitting required documentation (as discussed in further detail below) and will receive a decision within 60 days.
If a balance remains after the borrower receives loan forgiveness, the outstanding loan will have a maximum maturity date of 10 years after the application for loan forgiveness.
How Does A Business Apply For A Loan Under the Paycheck Protection Program?
We expect additional guidance from the SBA regarding how to apply for Program loans, including additional resources on the SBA website about how to find a qualified lender. Borrowers who have outstanding SBA loans may also want to contact their existing lenders to inquire about applying for loans under the Program.
Is Relief Available For Businesses With Pre-existing SBA Loans?
Yes. The SBA will pay the principal, interest, and associated fees on certain pre-existing SBA loans for 6 months.
Does the CARES Act Affect Any Other Loans Available To Small Businesses?
Yes. The maximum loan amount for an Express Loan is increased from $350,000 to $1 million.
The CARES Act also expands eligibility for borrowers applying for an Emergency Economic Injury Disaster Loan (EIDL) grant. Under the Act, emergency EIDLs are available for businesses or cooperatives with fewer than 500 employees, sole proprietors or independent contractors, or Employee Stock Ownership Plans (ESOPs) with fewer than 500 employees. Additionally, the Act waives requirements that (1) the borrower provide a personal guarantee for loans up to $200,000, (2) that the eligible business be in operation for one year prior to the disaster, and (3) that the borrower be unable to obtain credit elsewhere. The SBA is also empowered to approve applicants for small-dollar loans solely on the basis of their credit score or “alternative appropriate methods to determine an applicant’s ability to repay.”
Most significantly for borrowers seeking an immediate influx of funds, borrowers may receive a $10,000 emergency advance within three days after applying for an EIDL grant. If the application is denied, the applicant is not required to repay the $10,000 advance. Emergency advance funds can be used for payroll costs, increased material costs, rent or mortgage payments, or for repaying obligations that cannot be met due to revenue losses.
Borrowers may apply for an EIDL grant in addition to a loan under the Paycheck Protection Program, provided the loans are not used for the same purpose. If a borrower received a loan under 7(b)(2) after January 31, 2020, the borrower may refinance the outstanding balance as part of a loan under the Program.
To help you manage your business through the coronavirus crisis, the U.S. Chamber of Commerce has created a toolkit for businesses and a customizable flyer for businesses to communicate their coronavirus efforts to customers.
For more information pertaining to your specific location, you can find your local Chamber of Commerce here.
Commercial Insurance Is Essentially A Very Expensive Credit Line In Reverse…
Have you ever missed a payment on a Visa card only to watch your interest rate double because of that simple mistake? Misaligned goals are common and, unfortunately, costly. This happens all the time, and currently there is no way to take back that simple mistake. Like an offense, it stays on the record wherever you go, meaning being proactive and anticipating mistakes like this can be crucial to narrowing costs regardless of the amount of claims filed.
Find out how the commercial insurance marketplace works the same way. Why their goals and your goals are misaligned, trapping the commercial insurance buyer in a cycle of escalating premium increases.
Knowing their playbook helps you adjust your game plan to beat them and your competition. While your goals will never be aligned and on the same page, understanding their objective better will help navigate yourself to your own objectives: lower claims, lower premiums, less costs in general.
Still confused? Still have questions? We are here to help. That is, after all, our job!
Contact one of our professional risk advisors right now at 914-357-8444 or visit us at our website here.
Let’s start from square one. Captives, unlike insurance companies, are risk financing structures that do not pool risk between thousands of companies in exchange for a premium. They are expressly built to act just like and replace insurance companies by efficiently managing claims and paying losses from a special captive account themselves.
The reason very large companies like Monsanto and Coca Cola utilize captives is because they have risk management departments that manage their losses and risk so well. Rather than pay premiums to an insurance company boosting the carriers profits they ARE the insurance company which means they pay premiums to themselves substantially lowering their risk financing (insurance costs) with the potential of earning profits on those same lower premiums.
Remember when you purchase insurance from a company like AIG you are essentially financing future losses from general liability or workers compensation claims due to employee injuries or future litigation. If your losses are low the insurance carrier, AIG, generates a profit. Coke and Monsanto essentially say they have such a high degree of confidence in their ability to mitigate and manage their future losses and claims that they want to keep that profit for themselves. Further they believe financing those futures losses themselves rather than have an insurance carrier finance those losses by charging for that service is a more efficient way of utilizing their cash reserves.
Micro Captives 5 key features & objectives:
Substantially lowers your cost of Risk Financing (buying insurance)
Having skin in the game should boost your results in terms of reducing losses.
Gives you far more control than the present system which benefits the carriers and the brokers first as goals are misaligned.
Should produce an ROI on your cash reserves which is how insurance carriers make money.
Lowers your overall unit cost structure generating higher profits and/or greater market share due to better competitive position.
A fraction of the cost to start and impliment compared to a standard captive arrangement.
Typically, captives are set up to replace commercial insurance carriers for one or multiple businesses with the initial goal to lower the companies’ risk based costs, eventually having the captive become a profit center. This is accomplished through all the above stated bullet points.
Micro-Captives are smaller captives designed for mid-sized companies under $ 1 billion in sales. The reason you usually only see large companies set up Captive Insurance companies is because it takes a lot of capital to fund it. Essentially, you need a lot of money to build up a large cash reserve to pay or fund future losses. Further, you need to set up infrastructure including a claims management intake team, legal representation, adjusters, actuaries, accountants, etc. These departments and functions come with the insurance carriers as one bundled product when you purchase insurance from a carrier such as AIG. When you set up a captive you need to build this infrastructure out for your own captive which can be a significant investment. This is why you don’t see many small businesses utilizing captives; UNTIL NOW!
Recently there seems to be huge interest and growth in Micro-Captives to efficiently fund certain tranches of risk, particularly high deductible programs. Section 831(b) of the U.S. Tax code stipulates different income tax rules for smaller insurance companies or captives.
The Captive must meet the following qualifications:
The captive must qualify as an insurance company for tax purposes. Translated this means it must transfer risk in exchange for capital.
It must be operated & regulated like an insurance company with sufficient capital reserves.
The Captive must be a U.S. Taxpayer, either domiciled in the U.S. or domiciled off shore but having elected and qualified under tax code section 953(d) to be taxed as a U.S. insurer.
The Captive’s gross premium income for the tax year in question must be less than $1.2 million. This premium threshold applies to all insurers in a single consolidated tax filing in 2016.
Congress recently passed the Protecting Americans from Tax Hike (PATH) which increased the tax-free limit to $2.2 million in premium income beginning in tax year 2017.
WHAT’S THE BENEFIT Of A MICRO CAPTIVE ?
There are a few legitimately big ones. The first is that it allows small companies to really build a war chest. If you’re an S-Corp, or LLC any excess cash gets passed through to the owners’ personal tax return. This means contingent on your tax bracket, earnings and AMT you can lose almost 40% of those funds to taxes. Over several years that amounts to a lot of capital that could have been put to other uses where you could actually get an ROI.
In tax year 2017, if a business using a 831 (b) captive writes less than $2.2 million in premiums then the business is only taxed on investment income and NOT it’s underwriting income which could be substantial if your losses are low. This means that if the business paid $1 million in annual premiums this amount becomes a tax-deductible expense for the business while remaining an asset on the books of the company owned Micro Captive.
The purpose of this piece is not to provide the reader all the available information and calculations as it relates to Micro Captives. Quite simply, this is an intro piece meant to get folks who are buying first dollar or smaller deductible programs to begin to see a smarter more cost efficient program built specifically for small to mid-sized companies.
One of the reasons you don’t see these solutions being offered by your insurance broker or insurance carriers is because the net effect is it lowers the premiums you pay which do not benefit either of them as they are compensated on higher premium volumes.
If you would like to have deeper level discussion on how this solution may fit into your current insurance program, a Risk Advisor is waiting to field your call. Call (914) 357-8444 or simply CLICK HERE to schedule a call.
