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Are Micro Captives For Workers Comp New Frontier?

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 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.

Clip Art of Insurance Micro Captives For Workers Comp
(c) 123rf

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.

Graphic Micro Captives Chip on Circuit Board
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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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James Moore

Raleigh, NC, United States

About The Author...

James founded a Workers’ Compensation consulting firm, J&L Risk Mgmt Consultants, Inc. in 1996. J&L’s mission is to reduce our clients’ Workers Compensation premiums by using time-tested techniques. J&L’s claims, premium, reserve and Experience Mod reviews have saved employers over $9.8 million in earned premiums over the last three years. J&L has saved numerous companies from bankruptcy proceedings as a result of insurance overpayments.

James has over 27 years of experience in insurance claims, audit, and underwriting, specializing in Workers’ Compensation. He has supervised, and managed the administration of Workers’ Compensation claims, and underwriting in over 45 states. His professional experience includes being the Director of Risk Management for the North Carolina School Boards Association. He created a very successful Workers’ Compensation Injury Rehabilitation Unit for school personnel.

James’s educational background, which centered on computer technology, culminated in earning a Masters of Business Administration (MBA); an Associate in Claims designation (AIC); and an Associate in Risk Management designation (ARM). He is a Chartered Financial Consultant (ChFC) and a licensed financial advisor. The NC Department of Insurance has certified him as an insurance instructor. He also possesses a Bachelors’ Degree in Actuarial Science.

LexisNexis has twice recognized his blog as one of the Top 25 Blogs on Workers’ Compensation. J&L has been listed in AM Best’s Preferred Providers Directory for Insurance Experts – Workers Compensation for over eight years. He recently won the prestigious Baucom Shine Lifetime Achievement Award for his volunteer contributions to the area of risk management and safety. James was recently named as an instructor for the prestigious Insurance Academy.

James is on the Board of Directors and Treasurer of the North Carolina Mid-State Safety Council. He has published two manuals on Workers’ Compensation and three different claims processing manuals. He has also written and has been quoted in numerous articles on reducing Workers’ Compensation costs for public and private employers. James publishes a weekly newsletter with 7,000 readers.

He currently possess press credentials and am invited to various national Workers Compensation conferences as a reporter.

James’s articles or interviews on Workers’ Compensation have appeared in the following publications or websites:

  • Risk and Insurance Management Society (RIMS)
  • Entrepreneur Magazine
  • Bloomberg Business News
  • WorkCompCentral.com
  • Claims Magazine
  • Risk & Insurance Magazine
  • Insurance Journal
  • Workers Compensation.com
  • LinkedIn, Twitter, Facebook and other social media sites
  • Various trade publications

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