Micro Captives For Workers Comp – Viable Alternative
Micro captives to cover Workers Comp losses is an interesting yet caveat-generating twist on an old subject.
Captives for Workers Comp is one of the most “what was simple is now complex” areas in insurance. However, and that is a big, however, the very prudent use of micro captives may still be seen as one of the new frontiers for Workers Compensation.
Please see the list of articles that I have written on Captives for Workers Comp at the end of this article. Correction- there are over 15 articles on Captives, please use the search box on the right side of the page and use captive for the search term.
Workers Comp is and has always been seen as one of the laggard insurance areas for updates, technology, risk financing, and many other concerns.
This type of risk financing for Workers Comp can still be seen as a frontier. There are many old, but then again new arrangements. For example, Captives also known as micro captives may be an interesting alternative.
One BIG caveat – 831 (b) is not a section on captives- it applies to certain captives, those being micro captives. Setting up an agreement under Section 831 (b) will not work. That would draw a large amount of attention from the IRS and rightly so. A Google search for IRS scrutiny of 831 (b) tax consideration is an eye-opener.
The micro captive can qualify for 831 (b), but cannot be set up just to qualify for that section. 831 (b) basically gives a tax break for any underwriting profits. As with all Captives, there has to be a risk of losing everything – if there is not any risk, then it is not an insurance captive.
The main threshold is that micro captives premiums cannot exceed $1.2 million each year. Also, and this is a very critical point, you cannot carry a loss from year to year. If you have a $2 million underwriting loss, then the micro captive eats $800,000. This would require a heavy dose of Risk Management. Many of these micro captives have failed due to not considering and managing the upfront risk.
There are many great advantages to micro captives. With great advantages, there is always an equal amount of associated risk.
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