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How Microcaptive 831(b) Arrangements Were Disrupted This Month

March 31, 2021 By JL Risk Management Consultants

One of the long-awaited captive decisions by the US Tax Court was issued this month.  The microcaptive 831(b) arrangements industry may need to look in the mirror very soon.  This makes four major US Tax Cases that could not have been worse for captives, specifically microcaptives. 

Pic ot Tax Sign microcaptive 831(b) arrangements

Public Use License – Wikimedia Commons

Ever since I attended a 2009 CICA Conference in Tucson, AZ, I had thought these arrangements were a way for smaller companies to use captives to insure their risks.  Many of the microcaptives centers were offshore entities such as the Cayman Islands, Bermuda, and St. Kitts amongst many others.  

From 2011 until 2017, I had written a business plan for establishing an offshore captive for Workers’ Compensation claims handling.  The IRS placed 831(b)s on its Dirty Dozen List. 

I thought I would wait to see if the IRS removed microcaptives from its Dirty Dozen list.  The Service removed it in 2019, but not for the reasons that I was expecting.  

The Caylor Case – Captives Go Zero For Four 

The case was Caylor Land & Development Inc. v. Commissioner of Internal Revenue.   Many proponents of the captive industry had been waiting on this decision for quite some time.  You can find the full decision here. 

The top of the decision’s third page shows two things:

  1. The US Tax Court will rely heavily on the cases already decided (Avrahami, Reserve Mechanical, and Syzygy).
  2. The last sentence below on not breaking new ground did not bode well for Caylor. 

[*3] In Avrahami v. Commissioner, 149 T.C. 144 (2017), we found that a microcaptive didn’t actually provide insurance because it failed to distribute risk and didn’t act as an insurer commonly would.

In Reserve Mech. Corp. v. Commissioner, T.C. Memo. 2018-86, 115 T.C.M. (CCH) 1475 (2018), appeal filed, No. 18-9011 (10th Cir. Dec. 20, 2018), we found that a microcaptive didn’t actually provide insurance because it failed to distribute risk and didn’t act as an insurer commonly would.

Then in Syzygy Ins. Co. v. Commissioner, T.C. Memo. 2019-34, 117 T.C.M. (CCH) 1165 (2019), we found that a microcaptive didn’t actually provide insurance because it failed to distribute risk and didn’t act as an insurer commonly would.

We will break no new ground today.

Microcaptive 831(b) Arrangements – Great Article to Read 

In Forbes Magazine, one of the most intelligent writers on captives (Jay Adkisson) brought up a very salient point.  You might want to read his whole article.  The analysis is spot-on. 

One of the chilling parts of the decision according to Mr. Adkisson was the decision on Caylor could expand outside of the microcaptive 831(b) arrangements:

…the opinion in Caylor Land may potentially extend in its application to far more types of captives than where the IRS has so-far limited its own focus, which is to risk-pooled 831(b) captives. Many captives thought to be very safe from a tax perspective may require introspection and reevaluation.. 

Yes, you may want to follow the link to Jay’s article.  It is one of the best articles on microcaptive 831(b) arrangements after the Caylor decision.  Take the time to read it if you have any interest in captives. 

Filed Under: 831(b) Tagged With: Caylor, Dirty Dozen, Forbes Magazine, microcaptives, US Tax Court

IRS Dirty Dozen List No Longer Includes Offshore Micro Captives – Really?

July 22, 2020 By JL Risk Management Consultants

Offshore Micro Captives Dropped Off IRS Dirty Dozen List – Why? 

Over the weekend, I was combing through my workers’ comp reading list.  I almost dropped my laptop when I saw the headline that Offshore Micro Captives were not named to the IRS Dirty Dozen list. 

Picture of IRS Dirty Dozen List Eggs

Wikimedia Commons – Ariel Palmon

For context, I had written these articles that I suggest you read now or in the future to see how bad the offshore micro captive situation has become in just three short years.   Follow the links in this article to see what occurred over the last 15 years in this little corner of insurance. 

The IRS Dirty Dozen originates with the US Treasury Department listing what they found to be the main vehicles of tax evasion that possessed fraud, abuse, etc.   

What Is A Micro Captive?

The IRS section 831(b) article shows that micro captives are/were a good vehicle to start a small insurance company.  I learned about them in the insurance press and from going to the CICA conference in Tucson, AZ in 2010.  No one mentioned the IRS Dirty Dozen list in 2011- at the CICA Conference.

A PDF file produced by the IRS in 2016 showed what constitutes a legal offshore micro captive.   The passage below is from that PDF file. 

The main advantage of an offshore micro captive or any captive is paying taxes only on the investment income. 

The Department of the Treasury (“Treasury Department”) and the Internal Revenue Service (the “IRS”) are aware of a type of transaction, described below, in which a taxpayer attempts to reduce the aggregate taxable income of the taxpayer, related persons, or both, using contracts that the parties treat as insurance contracts and a related company that the parties treat as a captive insurance company. Each entity that the parties treat as an insured entity under the contracts claims deductions for premiums for insurance coverage. The related company that the parties treat as a
captive insurance company elects under § 831(b) of the Internal Revenue Code (the “Code”) to be taxed only on investment income and therefore excludes the payments directly or indirectly received under the contracts from its taxable income. The manner in which the contracts are interpreted, administered, and applied is inconsistent with
arm’s length transactions and sound business practices.  

Check out the last sentence in italics.   The 16-page document may be a long read.  If you are an employer considering an attempt to start an offshore captive, the IRS spells out how to avoid any micro captive from becoming an IRS dirty dozen list company.   

The actual dozen can be found in the last section of this article.  

What Took Micro Captives Off the IRS Dirty Dozen List? 

Micro plants IRS Dirty Dozen with growing seeds

Wikimedia Commons – Sundeep Damirekula

I decided to check further into why micro captives were removed from the list.   The results of my search were amazing.   Micro captives were not arbitrarily removed from the list.   According to an article I read over the weekend, the IRS worked hard on making the micro captives pony-up back taxes. 

IRS Sends Out Settlement Letter to 80% of Micro Captives = Removal From IRS Dirty Dozen List 

The IRS decided to examine a large number of micro captives by:

  • Creating 12 (wow!) teams to end abusive (in their opinion) tax shelters 
  • Using the recent captive and micro captive adverse Federal Court decisions as a basis 
    • Three wins by IRS 
    • No wins for the captive industry
    • The last one of the three Federal Court decisions said that no losses were paid, well, so much for good risk management and safety practices. 

The IRS sent out over 200 letters recently offering settlements to micro captives being audited by the IRS.   Eighty percent accepted the settlements.

What Changed On The IRS Dirty Dozen List?

WASHINGTON — The Internal Revenue Service today announced its annual “Dirty Dozen” list of tax scams with a special emphasis on aggressive and evolving schemes related to coronavirus tax relief, including Economic Impact Payments.

This year, the Dirty Dozen focuses on scams that target taxpayers. The criminals behind these bogus schemes view everyone as potentially easy prey. The IRS urges everyone to be on guard all the time and look out for others in their lives.

Old Picture of IRS Dirty Dozen doing Tax

Wikimedia Commons – Underwood & Underwood

“Tax scams tend to rise during tax season or during times of crisis, and scam artists are using pandemic to try stealing money and information from honest taxpayers,” said IRS Commissioner Chuck Rettig. “The IRS provides the Dirty Dozen list to help raise awareness about common scams that fraudsters use to target people. We urge people to watch out for these scams. The IRS is doing its part to protect Americans. We will relentlessly pursue criminals trying to steal your money or sensitive personal financial information.”

Taxpayers are encouraged to review the list in a special section on IRS.gov and be on the lookout for these scams throughout the year. Taxpayers should also remember that they are legally responsible for what is on their tax return even if it is prepared by someone else. Consumers can help protect themselves by choosing a reputable tax preparer.

The IRS urges taxpayers to refrain from engaging potential scammers online or on the phone. The IRS plans to unveil a similar list of enforcement and compliance priorities this year as well.

An upcoming series of press releases will emphasize the illegal schemes and techniques businesses and individuals use to avoid paying their lawful tax liability. Topics will include such scams as abusive micro captives and fraudulent conservation easements.

 

 “IRS Dirty Dozen List” scams for 2020 – Abusive Tax Shelters Removed

Phishing:

Signage of Taxes office IRS Dirty Dozen at the side floor

Wikimedia Commons – MarkBuckawicki

Taxpayers should be alert to potential fake emails or websites looking to steal personal information. The IRS will never initiate contact with taxpayers via email about a tax bill, refund or Economic Impact Payments. Don’t click on links claiming to be from the IRS. Be wary of emails and websites − they may be nothing more than scams to steal personal information.

IRS Criminal Investigation has seen a tremendous increase in phishing schemes utilizing emails, letters, texts and links. These phishing schemes are using keywords such as “coronavirus,” “COVID-19” and “Stimulus” in various ways.

These schemes are blasted to large numbers of people in an effort to get personal identifying information or financial account information, including account numbers and passwords. Most of these new schemes are actively playing on the fear and unknown of the virus and the stimulus payments. (For more see IR-2020-115, IRS warns against COVID-19 fraud; other financial schemes.)

Fake Charities:

Criminals frequently exploit natural disasters and other situations such as the current COVID-19 pandemic by setting up fake charities to steal from well-intentioned people trying to help in times of need. Fake charity scams generally rise during times like these.

Fraudulent schemes normally start with unsolicited contact by telephone, text, social media, e-mail or in-person using a variety of tactics. Bogus websites use names similar to legitimate charities to trick people to send money or provide personal financial information. They may even claim to be working for or on behalf of the IRS to help victims file casualty loss claims and get tax refunds.

Taxpayers should be particularly wary of charities with names like nationally known organizations. Legitimate charities will provide their Employer Identification Number (EIN), if requested, which can be used to verify their legitimacy. Taxpayers can find legitimate and qualified charities with the search tool on IRS.gov.

Threatening Impersonator Phone Calls:

Old Yellow Telephone IRS Dirty Dozen above to the Xerox machine

Wikimedia Commons – Billy Brown

IRS impersonation scams come in many forms. A common one remains bogus threatening phone calls from a criminal claiming to be with the IRS. The scammer attempts to instill fear and urgency in the potential victim. In fact, the IRS will never threaten a taxpayer or surprise him or her with a demand for immediate payment.

Phone scams or “vishing” (voice phishing) pose a major threat. Scam phone calls, including those threatening arrest, deportation or license revocation if the victim doesn’t pay a bogus tax bill, are reported year-round. These calls often take the form of a “robocall” (a text-to-speech recorded message with instructions for returning the call).

The IRS will never demand immediate payment, threaten, ask for financial information over the phone, or call about an unexpected refund or Economic Impact Payment. Taxpayers should contact the real IRS if they worry about having a tax problem.

Social Media Scams:

Taxpayers need to protect themselves against social media scams, which frequently use events like COVID-19 to try tricking people. Social media enables anyone to share information with anyone else on the Internet. Scammers use that information as ammunition for a wide variety of scams. These include emails where scammers impersonate someone’s family, friends or co-workers.

Social media scams have also led to tax-related identity theft. The basic element of social media scams is convincing a potential victim that he or she is dealing with a person close to them that they trust via email, text or social media messaging.

Using personal information, a scammer may email a potential victim and include a link to something of interest to the recipient which contains malware intended to commit more crimes. Scammers also infiltrate their victim’s emails and cell phones to go after their friends and family with fake emails that appear to be real and text messages soliciting, for example, small donations to fake charities that are appealing to the victims.

EIP or Refund Theft:

Face masks IRS Dirty Dozen in Green color

Wikimedia Commons – nursetogether.com

The IRS has made great strides against refund fraud and theft in recent years, but they remain an ongoing threat. Criminals this year also turned their attention to stealing Economic Impact Payments as provided by the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

Much of this stems from identity theft whereby criminals file false tax returns or supply other bogus information to the IRS to divert refunds to wrong addresses or bank accounts.

The IRS recently warned nursing homes and other care facilities that Economic Impact Payments generally belong to the recipients, not the organizations providing the care. This came following concerns that people and businesses may be taking advantage of vulnerable populations who received the payments. These payments do not count as a resource for determining eligibility for Medicaid and other federal programs They also do not count as income in determining eligibility for these programs. See IR-2020-121, IRS alert: Economic Impact Payments belong to recipient, not nursing homes or care facilities for more.

Taxpayers can consult the Coronavirus Tax Relief page of IRS.gov for assistance in getting their EIPs. Anyone who believes they may be a victim of identity theft should consult the Taxpayer Guide to Identity Theft on IRS.gov.

Senior Fraud:

Old couple IRS Dirty Dozen sitting on the outside chair

Wikimedia Commons – Candida Performa

Senior citizens and those who care about them need to be on alert for tax scams targeting older Americans. The IRS recognizes the pervasiveness of fraud targeting older Americans along with the Department of Justice and FBI, the Federal Trade Commission, the Consumer Financial Protection Bureau (CFPB), among others.

Seniors are more likely to be targeted and victimized by scammers than other segments of society. Financial abuse of seniors is a problem among personal and professional relationships. Anecdotal evidence across professional services indicates that elder fraud goes down substantially when the service provider knows a trusted friend or family member is taking an interest in the senior’s affairs.

Older Americans are becoming more comfortable with evolving technologies, such as social media. Unfortunately, that gives scammers another means of taking advantage. Phishing scams linked to Covid-19 have been a major threat this filing season. Seniors need to be alert for a continuing surge of fake emails, text messages, websites and social media attempts to steal personal information.

Scams targeting non-English speakers:

IRS impersonators and other scammers also target groups with limited English proficiency. These scams are often threatening in nature. Some scams also target those potentially receiving an Economic Impact Payment and request personal or financial information from the taxpayer.

Phone scams pose a major threat to people with limited access to information, including individuals not entirely comfortable with the English language. These calls frequently take the form of a “robocall” (a text-to-speech recorded message with instructions for returning the call), but in some cases may be made by a real person. These con artists may have some of the taxpayer’s information, including their address, the last four digits of their Social Security number or other personal details – making the phone calls seem more legitimate.

A common one remains the IRS impersonation scam where a taxpayer receives a telephone call threatening jail time, deportation or revocation of a driver’s license from someone claiming to be with the IRS. Taxpayers who are recent immigrants often are the most vulnerable and should ignore these threats and not engage the scammers.

Vector Icon of Tax IRS Dirty Dozen Sacks of Dollars

Wikimedia Commons – 401 (K) 2012

Unscrupulous Return Preparers:

Selecting the right return preparer is important. They are entrusted with a taxpayer’s sensitive personal data. Most tax professionals provide honest, high-quality service, but dishonest preparers pop up every filing season committing fraud, harming innocent taxpayers or talking taxpayers into doing illegal things they regret later.

Taxpayers should avoid so-called “ghost” preparers who expose their clients to potentially serious filing mistakes as well as possible tax fraud and risk of losing their refunds. With many tax professionals impacted by COVID-19 and their offices potentially closed, taxpayers should take particular care in selecting a credible tax preparer.

Ghost preparers don’t sign the tax returns they prepare. They may print the tax return and tell the taxpayer to sign and mail it to the IRS. For e-filed returns, the ghost preparer will prepare but not digitally sign as the paid preparer. By law, anyone who is paid to prepare or assists in preparing federal tax returns must have a Preparer Tax Identification Number (PTIN). Paid preparers must sign and include their PTIN on returns.

Unscrupulous preparers may also target those without a filing requirement and may or may not be due a refund. They promise inflated refunds by claiming fake tax credits, including education credits, the Earned Income Tax Credit (EITC) and others. Taxpayers should avoid preparers who ask them to sign a blank return, promise a big refund before looking at the taxpayer’s records or charge fees based on a percentage of the refund.

Taxpayers are ultimately responsible for the accuracy of their tax return, regardless of who prepares it. Taxpayers can go to a special page on IRS.gov for tips on choosing a preparer.

Offer in Compromise Mills:

Taxpayers need to wary of misleading tax debt resolution companies that can exaggerate chances to settle tax debts for “pennies on the dollar” through an Offer in Compromise (OIC). These offers are available for taxpayers who meet very specific criteria under law to qualify for reducing their tax bill. But unscrupulous companies oversell the program to unqualified candidates so they can collect a hefty fee from taxpayers already struggling with debt.

These scams are commonly called OIC “mills,” which cast a wide net for taxpayers, charge them pricey fees and churn out applications for a program they’re unlikely to qualify for. Although the OIC program helps thousands of taxpayers each year reduce their tax debt, not everyone qualifies for an OIC. In Fiscal Year 2019, there were 54,000 OICs submitted to the IRS. The agency accepted 18,000 of them.

Individual taxpayers can use the free online Offer in Compromise Pre-Qualifier tool to see if they qualify. The simple tool allows taxpayers to confirm eligibility and provides an estimated offer amount. Taxpayers can apply for an OIC without third-party representation; but the IRS reminds taxpayers that if they need help, they should be cautious about whom they hire.

Fake Payments with Repayment Demands:

Fake coins IRS Dirty Dozen forms in the rock

Wikimedia Commons – Chris 73

Criminals are always finding new ways to trick taxpayers into believing their scam including putting a bogus refund into the taxpayer’s actual bank account. Here’s how the scam works:

A con artist steals or obtains a taxpayer’s personal data including Social Security number or Individual Taxpayer Identification Number (ITIN) and bank account information. The scammer files a bogus tax return and has the refund deposited into the taxpayer’s checking or savings account. Once the direct deposit hits the taxpayer’s bank account, the fraudster places a call to them, posing as an IRS employee. The taxpayer is told that there’s been an error and that the IRS needs the money returned immediately or penalties and interest will result. The taxpayer is told to buy specific gift cards for the amount of the refund.

The IRS will never demand payment by a specific method. There are many payment options available to taxpayers and there’s also a process through which taxpayers have the right to question the amount of tax we say they owe. Anytime a taxpayer receives an unexpected refund and a call from us out of the blue demanding a refund repayment, they should reach out to their banking institution and to the IRS.

Payroll and HR Scams:

Tax professionals, employers and taxpayers need to be on guard against phishing designed to steal Form W-2s and other tax information. These are Business Email Compromise (BEC) or Business Email Spoofing (BES). This is particularly true with many businesses closed and their employees working from home due to COVID-19. Currently, two of the most common types of these scams are the gift card scam and the direct deposit scam.

In the gift card scam, a compromised email account is often used to send a request to purchase gift cards in various denominations. In the direct deposit scheme, the fraudster may have access to the victim’s email account (also known as an email account compromise or “EAC”). They may also impersonate the potential victim to have the organization change the employee’s direct deposit information to reroute their deposit to an account the fraudster controls.

BEC/BES scams have used a variety of ploys to include requests for wire transfers, payment of fake invoices as well as others. In recent years, the IRS has observed variations of these scams where fake IRS documents are used in to lend legitimacy to the bogus request. For example, a fraudster may attempt a fake invoice scheme and use what appears to be a legitimate IRS document to help convince the victim.

The Direct Deposit and other BEC/BES variations should be forwarded to the Federal Bureau of Investigation Internet Crime Complaint Center (IC3) where a complaint can be filed. The IRS requests that Form W-2 scams be reported to: [email protected] (Subject: W-2 Scam).

Ransomware:

One hand IRS Dirty Dozen typing on Computer Keyboard

Wikimedia Commons – MoD

This is a growing cybercrime. Ransomware is malware targeting human and technical weaknesses to infect a potential victim’s computer, network or server. Malware is a form of invasive software that is often frequently inadvertently downloaded by the user. Once downloaded, it tracks keystrokes and other computer activity. Once infected, ransomware looks for and locks critical or sensitive data with its own encryption. In some cases, entire computer networks can be adversely impacted.

Victims generally aren’t aware of the attack until they try to access their data, or they receive a ransom request in the form of a pop-up window. These criminals don’t want to be traced so they frequently use anonymous messaging platforms and demand payment in virtual currency such as Bitcoin.

Cybercriminals might use a phishing email to trick a potential victim into opening a link or attachment containing the ransomware. These may include email solicitations to support a fake COVID-19 charity. Cybercriminals also look for system vulnerabilities where human error is not needed to deliver their malware.

The IRS and its Security Summit partners have advised tax professionals and taxpayers to use the free, multi-factor authentication feature being offered on tax preparation software products. Use of the multi-factor authentication feature is a free and easy way to protect clients and practitioners’ offices from data thefts. Tax software providers also offer free multi-factor authentication protections on their Do-It-Yourself products for taxpayers.

–I will update this article if the IRS Dirty Dozen list is updated.

 

©J&L Risk Management Inc Copyright Notice

Filed Under: IRS, micro-captive Tagged With: CICA, cybercrime, fraud, fraudster, Malware, offshore, relentlessly, Spoofing, Stimulus, Tucson

Captive Tax Advantages Recently Take Huge Hit In US Tax Court

July 18, 2018 By JL Risk Management Consultants

Captive Tax Advantages – Tax Court Ruling –  One To Read NOW

Some Captive tax advantages may have been eroded with a recent US Tax Court decision.  The case is   Reserve Mech. Corp. v. Commissioner, 2018 Tax Ct. Memo LEXIS 87.   

picture of Anguilla Captive Tax Advantages Island

Wikimedia Public Use Roy Googin

The three articles that started quite a buzz in the captive world are from: (LexisNexis full article behind paywall)

Captive Insurance Times 

Captive.Com 

LexisNexis

If you are interested in Captives, and you should be if you are involved with any facet of Workers Compensation, the articles are very much worth a read.    If you perform a Google search on  

Reserve Mech. Corp. v. Commissioner

one will find volumes of information.  

Many companies, captive administrators, attorneys, and other people involved with captives have issued statements and opinions on the Reserve Mechanical case.   

Captive Tax Advantage Case Document

The PDF of the entire 66 page US Tax Court decision is here.  You will need a PDF reader to read it.  This decision may be one to download and read for yourself.   The decision is a complicated one.   The bottom line is the owners of the captive could not avoid a 30% tax on the captive insurance agreement.  The captive tax advantages were not allowed.   

Many of the legal, captive, and insurance pundits pointed to the Conclusion Section III (page 62).   The first part of that section is below. 

________________

III. Taxability of Reserve’s Revenue

We concluded that Reserve did not issue insurance or reinsurance contracts during the tax years in issue and therefore it did not receive more than 50% of its gross receipts from insurance premiums. See secs. 501(c)(15), 816(a). 

  —————————–

One has to draw their own conclusions.  The 14 articles on Captives that I wrote can be found here.   The article on rent-a-captive turned out to be one of the most popular ones on this website.  

We shall see what the future holds for onshore and especially offshore captive tax advantages. 

 

©J&L Risk Management Inc Copyright Notice

Filed Under: Captives Taxed Tagged With: LexisNexis, pundits, Reserve Mechanical, US Tax Court

Micro-Captives (Offshore) Still on IRS Dirty Dozen List – At Bottom

May 23, 2018 By JL Risk Management Consultants

Offshore Financial Arrangements Including Micro-captives Still On Watch List

 Most micro-captives are a legitimate way to offshore the self-insurance of Workers Compensation benefits.  The IRS released its list of the Dirty Dozen for 2018 a few months ago.   Offshore financial arrangements filled the #12 of 12 spots. 

map micro-captives antartica

Public Use License – Library of Congress

Micro-captives, better known as 831(b) Captives were unfortunately heavily abused for many years.   In fact, some of the owners issued themselves debit cards to draw the money out tax-free.   Such tax abuses immediately caught the watchful eye of the IRS.    I learned of such abuses at a previous CICA Conference in Orlando. 

The maximum amount limit on 831 (b) Insurance Captives was lifted to $2.3 million for 2018.   Could an offshore micro-captive provide enough protected capital to finance the handling of a group of Workers Compensation claims?   Yes, the program would be viable.   However, $2.3 million can easily be expended with just a few claims. 

Aggregate reinsurance would be needed if the claim payouts reached the $2.3 million maximum.   Some micro-captives have even re-insured themselves with another micro-captive.   One has to be careful when stacking one captive on top of another to re-insure of the captives. 

Please see the list of the IRS’s Dirty Dozen for 2018 below:

  1. Phishing
  2. Phone Scams
  3. Identity Theft
  4. Return Preparer Fraud
  5. Fake Charities
  6. Inflated Refund Claims
  7. Excessive Claims for Business Credits
  8. Falsely Padding Deductions on Returns
  9. Falsifying Income to Claim Credits
  10. Frivolous Tax Arguments
  11. Abusive Tax Shelters
  12. Offshore Tax Avoidance: Successful enforcement actions against offshore cheating show it’s a bad bet to hide money and income offshore. People involved in offshore tax avoidance are best served by coming in voluntarily and getting caught up on their tax-filing responsibilities.     IR-2018-64)

An excerpt from the above link is below:

Hiding Income Offshore Using Micro-captives 

Bag Tax micro-captives With Money

commons.wikimedia.org BY-SA 2.0 Flicker.com

Over the years, numerous individuals have been identified as evading U.S. taxes by attempting to hide income in offshore banks, brokerage accounts or nominee entities. They then access the funds using debit cards, credit cards or wire transfers. Others have employed foreign trusts, employee leasing schemes, private annuities or insurance plans for the same purpose.

The IRS uses information gained from its investigations to pursue taxpayers with undeclared accounts, as well as bankers and others suspected of helping clients hide their assets overseas.

While there are legitimate reasons for maintaining financial accounts abroad, there are reporting requirements that need to be fulfilled. U.S. taxpayers who maintain such accounts and who do not comply with reporting requirements are breaking the law and risk significant fines, as well as the possibility of criminal prosecution.

Since 2009, tens of thousands of individuals have come forward to voluntarily disclose their foreign financial accounts, taking advantage of special opportunities to comply with the U.S. tax system and resolve their tax obligations.

———-

The above passages should not discourage any legitimate Workers Compensation Micro-captive from being formed and used to cover claims.  Recently, Congress even redefined some of the 831 (b) captive arrangement rules to remove any ambiguities.    

Most offshore domiciles/jurisdictions want you to input at least $250,000 upfront to begin a micro-captive.   One large differentiation among the domiciles is the expenses charged to set up an 831 (b) captive.  

Please note that I am not referring to onshore domiciles.  

I do not tout myself as a captive expert.   However, I have facilitated the runoff claims for two failed captives over the last few years.   From the claims end, I have learned what to and not to do with the financing and claims handling of micro-captives.

©J&L Risk Management Inc Copyright Notice 

 

Filed Under: 831(b), micro-captive Tagged With: CICA, Dirty Dozen, offshore captives, prosecution, tax free, voluntarily

Oklahoma Captive Program Grows 572% In Two Years

January 20, 2016 By JL Risk Management Consultants

Oklahoma Captive Program Grows

The Oklahoma Captive program added 63 captives in the last two years.   In 2013, Oklahoma had 11 captives.  The explosive growth of captives may be another way that the larger employers looked to reduce costs without going through the opt-out process.

Captive Insurance Division oklahoma captive program emblem from web

(c) oklahomainsurancedepartment

The Oklahoma Insurance Department  (OID) webpage for the Oklahoma Captive program indicates there are currently six kinds of captives allowed in the state-

  1. Association Captive Insurance Company
  2. Branch Captive Insurance Company
  3. Industrial Insured Captive Insurance Company
  4. Pure Captive Insurance Company
  5. Special Purpose Captive Insurance Company – A captive insurance company that is formed or licensed under the Oklahoma Captive Insurance Company Act that does not meet the definition of any other type of captive insurance company defined in this section and is designated as a special purpose captive insurance company by the Commissioner.
  6. Sponsored Captive (Protected Cell) Insurance Company

This spike in growth was attributed to Oklahoma’s captive insurance statutes and regulations having been updated during recent years to encompass the best of modern trends.

The state is now able to offer flexible options for the creation and capitalization of captive insurance companies with low tax rates and fees.   These attributes are similar to other states’ captive programs:

  • Premium Tax Cap of $100,000
  • Low application and licensure fees
  • No in-state annual board meeting requirement
  • No in-state board member requirement
  • No in-state manager requirement
  • 1st year paid in capital and surplus of $150,000 for
    pure captives
  • Optional Provisional Licensure
  • First Dollar and Excess Worker’s Compensation as
    authorized lines

As Oklahoma is an intensive oil-based economy, the oil companies may have and will become captives even with the downturn in the oil markets.

©J&L Risk Management Inc Copyright Notice

Filed Under: captive, Oklahoma Tagged With: association captive, branch captive, capitalization, oil-based

Captive RRG Legal and Regulatory Environment – CICA Conference

March 19, 2015 By JL Risk Management Consultants

Captive RRG Legal and Regulatory Environment

The Captive RRG Legal symbol

Wikimedia Commons – howtostartablogonline.net

Captive RRG Legal and Regulatory Environment – I actually attended five different sessions on Day Two of the conference.   There was a common theme to two of the sessions.  This article will be a combo article of that  theme.

Captives and RRG’s  have always drawn the attention of regulators and taxing authorities- (not always deservedly so).   These two sessions covered the recent and upcoming legal and tax changes

  • Legal and Regulatory Update for Risk Retention Groups (RRG’s)
    • Presenters-Sandra A. Bigglestone CPA, CFE, CPM Director of Captive Insurance State of Vermont;  Pamela E. Davis Founder and CEO Alliance of Nonprofits for Insurance, RRG;  Robert H. Myers, Jr. Partner Morris, Manning & Martin, LLP ; John Svoboda President National Home Insurance Company(RRG)
  • New Developments in State and Federal Income Taxes and how they may Impact Captive Strategies
    • Presenters-Rick Irvine PwC Bermuda,;Tom Jones, McDermott, Will & Emery LLP;        P. Bruce Wright, Sutherland,  Asbill & Brennan, LLP

Risk Retention Groups

Risk Retention Groups (RRGs) are alternative risk transfer entities created by the federal Liability Risk Retention Act (LRRA).  RRG’s are basically specialized insurance companies where the policyholders are also stockholders.

The upcoming, new, and changes to existing RRG accreditation requirements can be found at this NAIC webpage.   The NAIC seems to be stepping up their regulation of RRG’s.

There is a concerted effort to amend the LRRA to include modernizing the Act.

Many State Insurance Commissioners have actually fought against RRG’s and even took the opposing views in lawsuits against RRG’s.

A.M. Best study showed that RRG’s have better loss ratios than traditional commercial insurance.

Only four RRG’s have $100+ million in capital.  Most RRG’s are actually smaller than the perception of these huge pools of money.

 New Developments- State/Federal Income Taxes

Picture of Captive RRG Legal man playing jenga

(c) 123rf.com

This was a very heavily attended session even though it was the last one of the conference.    The IRS included 831 (b) Captive designations as on their list of the “dirty dozen” for tax abuse.

IR 2015-19-(one can see why the IRS became concerned with 831 (b) captives)

  • Poorly drafted insurance binders and policies to cover ordinary business risks or esoteric, implausible risks for exorbitant premiums while maintaining their economical commercial coverage with traditional insurers  – (double dipping?)
  • Underwriting or actuarial support for insurance premiums either missing or insufficient  (no documentation?)

The new proposed legislation enacted a cap of 2.2 million on 831(b) captives which was a great turn of events.  However, no one policyholder can have more than 20% of the direct written premium.   The one very odd requirement is that none of the risks can be insured with reinsurance.

There is a new draft of proposed legislation that leaves the $2.2 million cap in place and removes the 20%  limit along with the no reinsurance requirement.

The Rent-A-Center and Securitas Holding cases were hallmark cases for captives which prevailed in court against the IRS.

©J&L Risk Management Inc Copyright Notice

Filed Under: captive, IRS Tagged With: esoteric, RRG, stockholders, Taxes

CICA Your Actuarial Report – Understanding/Getting Most Out of It

March 18, 2015 By JL Risk Management Consultants

CICA Your Actuarial Report – Maximizing The Findings

The CICA Your Actuarial Report covered much ground very quickly for captives.  The exact title of the presentation was How to Understand and Get the Most Out of Your Actuarial Report. 

Businesswoman Actuarial Report Presentation

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The very adept presenters were Michael J. Bemi, CPCU, ARM, ARe – The National Catholic Risk Retention Group, Inc. and  Matthew G. Killough, PhD, FCAS, MAAA – Milliman, Inc.

The first area covered was determining how you wish to use your actuarial services.   There are three choices:

  • Basic actuarial services
  • Business planning and strategy – seemed to fit captives the best
  • Communications and education

The actuary you choose needs good accurate data such as your:

  • Business model
  • Coverage elements and triggers
  • Deductibles
  • Reinsurance program

Informing the actuary of any changes in your insurance programs is critical – GIGO.

Before diving right into with a huge (yet expensive) actuarial project, you may want to just have a preliminary analyses performed to save much angst later in the process.

An actuarial report should be read like an insurance policy.  Read the actuarial report detail including footnotes and appendices.  Ask questions if you do not understand something.

The Ultimate Value is determined by past loss history, any future anticipated and  IBNR reserves.

The basic actuarial methods are:

  • Expected Loss Rate (ELR) –
    • Purely exposure-based
    • Never incorporates new information
    • Can’t be distorted by data issues
  • Loss Development – creating Loss Development Factors (LDF’s)
    • Utilizes the most recent data
    • Updates in response to new information
    • Subject to distortion by data issues

The CICA Your Actuarial Report session contained good basic info for captives.  

©J&L Risk Management Inc Copyright Notice

Filed Under: Actuary, CICA Captive Conference Tagged With: actuarial report, adept, GIGO, National Catholic

Using Reinsurance to Make Captive Structure – CICA Conference

March 18, 2015 By JL Risk Management Consultants

CICA Conference – Using Reinsurance to Make Strategic Decisions

Presenters – David Sullivan (AON Benfield), Paul McKeon (TransRe) and Brian Alvers (AON Benfield)

Graphic Of Insurance Make Strategic Decisions using reinsurance Icon

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(Re)Insurance Market Overview

The worldwide total supply of insurance services has grown to $4.2 trillion in 2014.   There has been a steady growth in supply since a sharp reduction of 29% in 2007 – 2008.

The supply has grown steadily to $575 billion in 2014.   Reinsurance supply experienced a 17% reduction in 2007 – 2008.

The US market now totals $72 billion.

The total property excess insurance demand has grown steadily for the last 20 years.  The total casualty reinsurance demand has been very flat or decreased for the same period.   In 2006, the property excess insurance demand equaled the casualty excess insurance demand.  Property reinsurance demand presently outpaces casualty by $10 billion.

Reinsurance Fundamentals

One of the more interesting points brought out in this session was thinking of reinsurance as just insurance for insurance companies.   It can also be thought of as a cost-efficient, renewable, financially secure source of capital that compares favorably versus other forms of capital. 

This is a great concise article on using reinsurance as a source of capital.

Insurers buy it for sleep at night coverage as it protects against catastrophic loss.   The insurers can fund more predictable layers.

How Can a Captive make an evaluation?

Excess insurance reduces volatility unlike using debt or equity for capital.  Measuring the capital requirements involves heavy use of financial formulas including leverage ratios and modeling.  

An actuarial study of this insurance layer is critical.  The flipside of reducing volatility is the essence of excess insurance itself.  

©J&L Risk Management Inc Copyright Notice

Filed Under: CICA Captive Conference, reinsurance Tagged With: fundamentals, structure, volatility

Are Micro Captives For Workers Comp New Frontier?

February 24, 2015 By JL Risk Management Consultants

 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.

©J&L Risk Management Inc Copyright Notice

Filed Under: captive Tagged With: complex, eye-opener, micro captives, tax break

Top 10 Challenge Areas – Expanded Part I

June 19, 2014 By JL Risk Management Consultants

Top 10 Challenge Areas – The First Five

The article on the Top 10 Challenges for Workers Compensation received a large amount of inter-buzz.

Picture of Man Top 10 Challenge Graphic

(c) 123RF

 Two readers suggested an expansion (better explanation) of my list.   I will split the Top 10 into two articles.

The first five of  My Top 10 areas of challenge are:

  1. Harder market – without investment returns, WC cannot sustain lowering price pressures
  2. Captives/Alternative Insurance – every company wants out of the current WC system 
  3. States that have legalized marijuana – now what does that do for the workplace?
  4. Employers need to monitor next year’s premium
  5. Affordable Care Act- the elephant in the room for any healthcare discussion


Harder Market vs. Hard Market

I rarely disagree with NCCI.  However,  a few weeks ago, the published an article on the underwriting cycle that I did not agree with overall.   Investment returns besides a minuscule rate of rate on interest bearing accounts drive the insurance markets.   To NCCI’s credit, the current situation with a low rate of return (interest) is not enough to sustain a market.  The stock markets have been doing very well.  Other than bonds, carriers can produce a great rate of return on premium dollars invested in the stock market in the long term.

If the stock markets take a hard downturn and the interest rates stay low deflation would rule the day. Carriers have nowhere to go for a decent rate of return.  They will have to look to their policyholders which would equate to a hard market.

Captives/Alternate Insurance

As companies grow, there now seems to be a large push to examine other methods to find WC coverage such as captives, PEO‘s, and small/large deductibles.   Alternative insuring arrangements does carry a large risk especially if a company is going to retain a large amount of the premiums.   The alternative market must be examined with caution.

 States That Have Legalized Marijuana

Gavel top 10 challenge with court paper

Wikipedia – Jonathunder

Two recent New Mexico court decisions have shined a bright light on the problem of marijuana in the workplace.  California issued a similar decision a few years ago.  If marijuana is prescribed medication by a physician, will it be considered the same as any employee that happens to be taking a prescription while on-the-job?   Will an employee file a “drug discrimination” grievance in that instance?

Employers Overpaying Premiums At Policy Inception

 There are many articles in this blog concerning the level of payroll decreasing for certain employers.   If your company has a 20% reduction in workforce, why would you pay the same premium base as last year?

Affordable Health Care Act

As I have written so much on this subject, I will refer to this article (click on the heading) on how the changes in healthcare will affect WC.

©J&L Risk Management Inc Copyright Notice

Filed Under: captive, hard market, marijuana, Obamacare Tagged With: alternative insurance, investment, legalized, overpaying

Offshore Captives Are Examined Again By IRS – Audit Guide

August 15, 2013 By JL Risk Management Consultants

IRS Takes Another Look at Offshore Captives

A few years ago, I warned that the IRS was beginning to examine captive more closely – mainly offshore captives.  At approximately, the same time, the IRS decided that offshore captive arrangements were just fine.  There was no need to make any new rules at that time.

Picture Of Internal Revenue Service Offshore Captives Place

Wikimedia Commons – Joshua Doubek

I was astounded that offshore captives were left virtually untouched in reference to taxes.  I had always thought there was a very large pool of funds for the US Government to just leave alone and not devise a method of taxation.

According to a recent Business Insurance article, the IRS is beginning to examine the very small captives under the 831(b) tax election.   One of the hallmarks of any captives is they must have some insurance purpose with elements of risk management.   

Hand Emphasizing Offshore Captives Risk Management

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The IRS has now said that without the elements of insurance and risk management, the captives are basically tax shelters.  According to Business Insurance article, terrorism insurance is being viewed by the IRS as often abusive tax shelters.   

I decided to see what the IRS says about captives.  The first entry when searching on the IRS website for captives is The Foreign Insurance Excise Tax Auditors Manual.  I found this to be interestingly the first search result.    Chapter 6 is the part of the audit manual that covers captives. 

Tax Form Offshore Captives Paper

Wikimedia Commons – US Federal Government

Below is a great summary for the IRS captive auditor when auditing captives.  The scenarios give a very stark view of how the IRS views many types of captives.  This does speak to the 831(b) tax election for captives.  

 One can easily derive what types of captives would cause an unnecessary tax burden from the IRS. As the Federal Government searches for funds, we will all surely see more cases and rules in the headlines.   

Chart of Cases and Rulings for Offshore Captives Issues

The chart below summarizes the revenue rulings and court cases discussed in this chapter.

Scenario

Result

Reference

1. All premiums paid directly from the parent to a captive.

Income Tax-No insurance expense
Excise Tax-Potential adj. if captive reinsures with a taxable foreign reinsurer.

Rev. Rul. 2001-31
(Facts & circumstances of case to be considered as guided by case law)

2. All premiums paid from parent to unrelated agent then ceded to captive.

Income Tax-No insurance expense
Excise Tax-Potential adj. if captive reinsures with a taxable foreign reinsurer.

Rev. Rul. 2001-31
(Facts & circumstances of case to be considered as guided by case law)
Carnation Co.

3. Premiums paid from parent to captive along with brother/sister premiums.

Income Tax- No insurance for parent but may be insurance for relateds.
Excise- Potential adj. if captive reinsures.

Humana
Harper Group

4. Premiums paid from parent to captive along with unrelated third party premiums.

Income Tax- Possible insurance if percentage of third party premium is significant.
Excise Tax-Tax due on foreign premiums if determined to be insurance.

Sears Roebuck
AMERCO
Ocean Drilling
Harper Group

5. Captive is owned by multiple owners.

Income Tax- Insurance
Excise Tax- Tax due on foreign premiums.

Rev. Rul. 78-338
(No economic family theory position)

6. Captive owned by multiple owners with separate accounts for each owner.

Income Tax- No Insurance
Excise Tax- Potential adj. if captive reinsures.

Black Hills Corp.

©J&L Risk Management Inc Copyright Notice

Filed Under: captive Tagged With: offshore captives, taxation, US Government

NY Says Captives Are Shadow Insurance; NAIC Moodys Others Disagree

June 18, 2013 By JL Risk Management Consultants

NY Says Captives Are Shadow Insurance

Captives for Workers Compensation and other types of Shadow Insurance have long drawn scrutiny – sometimes undeservedly.  This week, the Superintendent of the New York State Department of Financial Services.said that captives were nothing more than shell games and all state insurance departments should stop allowing them.  

 

Picture Of Dollar Shadow Insurance In Gray Color

Wikimedia commons – Svilen.milev

The report called Shining A Light on Shadow Insurance, A Little-known Loophole That Puts Insurance Policyholders and Taxpayers at Greater Risk” violates one of the rules of financial studies.   The title should never speak for the results in the financial study.   The numbers should speak for themselves and then a conclusion should be drawn from those numbers. (If you follow the link, please note that it is a PDF file. )


One of the first sentences in the study was  “The use of shadow insurance emerged in great part due to a desire from insurers to do an end-run around higher reserve requirements that states established for certain term and universal life insurance policies.”  


Other comments included ” State insurance commissioners should consider an immediate national moratorium on approving additional shadow insurance transactions until those investigations are complete and a fuller picture emerges.”    


Investment Shadow Insurance illustration

Wikimedia Commons – 401(K) 2012

Using the term Captive Insurance would have been much better than Shadow Insurance.  Using such terms makes the study seem too one-sided.  There may be a few legitimate concerns in the study.  NY was the bunker for AIG’s failure.  Geography can be a great influence. 


The response from the insurance world was more surprising than the study itself.  Many called the report sensationalism.  The rating agency Moody’s totally disagreed with Captives being branded as  shadow insurance.  


Most of these comments and articles concern life insurance captives.  Captives for Workers Compensation coverage has been alive and well for years.  The NAIC questioned the need for a moratorium nationwide on captives.   


Donelson, the head of the National Association of Insurance Commissioners (NAIC) said that the NAIC weighs standards rather than imposing regulations and that “one of those standards could be to implement what I consider a knee-jerk position of issuance of moratorium before the house is on fire.” 


Graphic Shadow Insurance Medical Logo

Wikipedia – Rama

One of the common themes throughout the responses to the NY report was that onshore and even offshore captives are scrutinized by state regulators.    All this hubbub did not  mention Workers Comp.  The study was life-insurance based.   Captive insurance for Workers Comp will likely be the next captive subject ran up the proverbial flagpole.  

Many times I have often asked – “Did anyone consult with a (whatever line of insurance) expert or group of experts before we got to where we are today?”   I usually receive blank stares or phone silence when I ask that question.  


There are thousands of insurance prognosticators on LinkedIn.  What if the question on Captives had been posted there?  All sides of the question would have likely been covered with differing opinions possibly.  


Donelson of the NAIC put it best when he said that If they would give me a holler and tell me what regulator they think is not doing its job, I’d be happy to reach out to that regulator and express to them New York’s concerns.”     


There are many articles on captives in this blog written since 2007.  Use the search box and type in captive.  

©J&L Risk Management Inc Copyright Notice

Filed Under: captive, New York Tagged With: Donelson, Geography, Moodys, moratorium, scrutinized, Shadow

Do The Great Premium Deals Really Save Money?

October 24, 2012 By JL Risk Management Consultants

The Great Premium Deals May Not Be Deals After All 

Do the great workers comp premium  deals really save money? With prices rising (at least for the short-term) in California and other states, the “we can save you a ton of dough on premiums” vendors  are now appearing again on the Workers Comp radar screen.  Are they such a good deal or not?   Let us cover a few of them.

Picture Of Two Businessman Great Premium Deals Shake Hands

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Self Insurance – this is the old “we will take ourselves out of the Workers Comp system” method.  There are many hurdles to cross to even qualify.  One of the most important things to remember is that your company has to qualify for each state, not in the aggregate.  You can have a billion dollars of payroll in one state but may not qualify in the others.  The other considerations are:

  • Liquid assets in a certain state – most states want $500,000 at a minimum (per state)
  • Bond – harder to find a performance bond in the market.  These are used in case your company goes bankrupt to pay the claims
  • Licensed Third Party Administrator (TPA) to handle claims or you can hire your own licensed adjuster
  • Approval by Insurance Commissioner – obvious one.  The Commissioners are more picky than in the past due to the economy.
  • Actuary or reserve specialist must assign your company a Loss Development Factor (or LDF) to assess your level of risk.

    Graphic of diagram Great Premium Deals Large Deductible

    123RF

  • Your company must file a pile of forms for each state including audited financial statements
  • Reinsurance is a must and usually required by each state in case your company experiences a spate of very bad claims, or one large one.
  • Your company may have to pay for temporary WC coverage until the Insurance Commissioner approves your application.  This is the one that seems to get employers into a bind. 

Large Deductible – this type of insurance for WC has really started to become more popular, at least in webinars.  Your company will pay a lower premium than regular Workers Compensation insurance in most cases.

  • Your company must be large enough for the carrier to take on part of the risk
  • Your insurance carrier will provide reinsurance in most cases, or broker it to another company

    Graphic Businessman and Woman Shaking Hand Great Premium Deals Save Money

    StockUnlimited

  • E-Mods are still reported to NCCI and other state rating bureaus 
  • Your company will pay the funds for the first $250,000 of each claim or some type of aggregate of claims payouts.  Once $250,000 has been paid out on a claim or you “bust” your aggregate the insurance carrier will pay the claim or group of claims when it exceeds these numbers
  • The ability to call the shots on most claims will still rest with the carrier.  That statement will usually be included in the contract.
  • Your company is still in the WC system
  • Your company has taken on more risk than using a regular carrier and paying premium, but not as taking on as much risk as being self insured.

Self Insurance and large deductibles are not available to smaller employers.   The three that are available to smaller employers are:

Professional Employer Organizations (PEO’s) – these are for companies that have a:

Vector Graphic of Hands Carrying piggy bank Great Premium Deals Really Save Money

(c) 123rf.com

  • High E-Mod – above 1.1 at a minimum
  • Uninsurable companies – trucking and employment agencies were not able to find coverages over the years.  PEO’s became very popular with these market segments.
  • In Risk Pool or will be renewed in the Risk Pool.  The Risk Pools are basically forced coverage by each state.  The carrier is required to cover certain employers that cannot find coverage and charges very high rates (up to 500%) more than the regular marketplace

You should heavily consider and consult with a Workers Comp expert if you are not in one of the three types of listed companies as noted above.   You could be paying much more than some of the alternative programs or even a regular WC policy.   Great premium deals exist if your company fits into that insurance model.

Captive Insurance Arrangements –  these used to be designed for larger companies.  However, with the advent of protected cell and rent-a-captives even small companies may find these applicable.

Captives require a full analysis by a WC expert before WC coverage in placed in them.  They are not self insurance.  The question to ask is “Where does the funding come for the Captive?”  It comes out of the employer’s budgeted funds, so everything is on the line as in self insurance.

Rent-a-captives require less upfront money.  I have written on them in the past in detail.

Picture Woman Handshake Great Premium Deals Gesture

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These two types of alternative insurance may be more suitable for small business.  However,  your company must go into the transactions as informed as if you were going to be a self insured.  Many companies have been burned in what looked like a great way to have WC coverage, but ended up paying more than expected.

There are other alternative insurance arrangements for Workers Comp.  I wanted to cover the current major supposed great premium deals the marketplace.

©J&L Risk Management Inc Copyright Notice

Filed Under: captive, Large Deductible, PEO, self insurance Tagged With: aggregate, car insurance, premium deals, vendor

Split Points – Largest Workers Comp Concern Presently

October 8, 2012 By JL Risk Management Consultants

Largest Workers Comp Concern Today Seen As Split Points

The Split Points became the Largest Workers Comp concern presently.   I am presenting at the North Carolina Mid State Safety Council conference tomorrow.  A few weeks ago I was contemplating what would be the largest concern for safety, human resource, and risk management personnel.

Picture Of Hand Touching Largest Workers Comp Concern Question Icon

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After speaking with a few of my peers and our clients, the subject of the upcoming NCCI and State Rating Bureaus (other than CA, OH, and NJ) split points came up as the most popular topic of concern.   My question to my peers was “Why are split points the topic that is causing the greatest concern presently?”

I received many different answers.  The top one was the way our Workers Comp is calculated will now change very quickly at our next renewal.

The other concerns were:

  • A new variable that may cause an increase to our E-Mod that is beyond our control
  • We cannot budget for the unknown increase, if there is going to be one
  • There is a 100% increase in the Primary Loss the first year
  • There are subsequent increases in the Primary Loss for the next two years
  • If we go over 1.0 on our E-mod, we cannot bid on government contracts
  • We are confused as to whether or not our next policy renewal will be affected
Business Strategy Concept Largest Workers Comp Concern Vector

123RF

When I looked over all of the concerns I had received and went back to the responses to my previous posts on this subject, I think the main area of concern can be summed up by saying there is now an unknown variable thrown into the mix that a company cannot prepare for in the future.

My response to that concern would be:

  • NCCI said only 18% of the companies would be affected.  I analyzed one of the reports that came up with this %.   I had thought it would be at least 25%
  • If your E-Mod is .9 or lower, you may actually see a decrease in your E-Mod if your Workers Comp claims status is not worse than in the past
  • If you have many smaller claims (less than 10,000), your E-mod will likely increase heavily no matter your current E-Mod.  The new rating system is going to very heavily penalize employers with multiple injuries.
  • Your safety and risk management departments are now going to become more of a critical component to your business.  If your company has considered WC just a cost of doing business, you may want to get out the checkbook and make sure you have plenty of checks.

    Graphic of Four Black Arrows Largest Workers Comp Concern Split Points

    (c) 123rf.com

  • If your company has an E-Mod of 1.2 or higher, you need to take drastic steps to reduce your injury rate.
  • The reserves on all of your Workers Comp claims will now be even more important.  If you do not have online access, it may be good to check with your carrier to see if online access is available.  When choosing among carriers at renewal, online access to your WC claims is now even more important
  • Alternative insurance  arrangements such as large deductibles, PEO’s, self insurance, loss groups, risk retention groups, and captives may now be more attractive and cost effective
  • If your company is in the Assigned Risk Pool because you cannot find coverage in the voluntary marketplace, you need to immediately institute or increase the efforts of your safety program.  You may also want to begin considering viable alternative insurance arrangements.

If you are not in a state that is going to be affected by the split point changes, then now is a good time to start preparing for the change.  Most states eventually follow NCCI’s lead.

©J&L Risk Management Inc Copyright Notice

Filed Under: Assigned Risk Pool, captive, E-Mod X-Mod, NC Mid State Safety Council, NCCI, PEO, Split Point Tagged With: multiple injuries, new variable, summed up

Captive Reserve Question From Our Readers – How To Calculate Mod

May 25, 2011 By JL Risk Management Consultants

Captive Reserve Question Concerning LDF’s

A good question about Captive reserve from readers. I am responding to a question from Wayne on this post. I will paraphrase the question. How do I calculate the reserves required if I have had a workers comp captive since 2005? This is a very good question.

Picture of Open Book with Question Mark Captive Reserve LDF

123RF

 The easiest way to calculate the reserves required is by calculating a Loss Development Factor. The definition of an LDF is here along with my last article on LDF’s. There are two schools of thought – one that says use the triangulation method and my school of thought that says use the triangulation method and a regression model.

 The LDF will analyze the reserves and especially the IBNR (Incurred But Not Reported) part of your required reserves. We often calculate hybrid LDF’s for our clients. LDF’s are usually based on the claims experience you will have for the next 10 years. It is not the most accurate statistic, but it is what you have to work with in reference to Captive Workers Compensation claims.

Graphics Of Central Processing Unit Captive Reserve With Software Icon

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 ONE DANGER on using software to calculate LDF’s is that data cannot just be plugged into the LDF software and then have the numbers produced in a report. The data has to be extrapolated and altered to make all of the claim data fit into the LDF formula. We do LDF’s very often. LDF’s are very often calculated by actuaries.

 As with most things involving Workers Compensation, the LDF is not necessarily a 100% accurate projection. It is not the same as an E-Mod, even though some of the conclusions are the same as LDF’s.

Captives can be great risk management tools in cutting Workers Comp costs. Projecting your company’s upcoming claim payouts is beyond critical.

We will soon open up a website called Synthnods where you can calculate an E-Mod or X-Mod to simulate what your risk factor is if you had a regular voluntary workers compensation policy.  

©J&L Risk Management Inc Copyright Notice

Filed Under: captive, Loss Development Factor Tagged With: regression model, Synthnods, triangulation

Workers Compensation Captives – Are They Worth Exploring?

March 25, 2011 By JL Risk Management Consultants

Workers Compensation Captives – A Legitimate Yet Complex Alternative

Workers Compensation Captives have come to the forefront as a possibly viable alternative for Workers Compensation coverage.  Last week, I decided to explore Captives further by attending the CICA conference in Tucson, AZ.x

Picture Of Pointing Finger Workers Compensation Captives On Insurance Text

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After attending many of the sessions, I came away with a few thoughts and questions. I thought I would briefly cover them.

Are captives for every company? No, as it is a form of modified self-insurance, a small company could not survive the impact of a very large claim or a number of claims over a short amount of time.

What companies would find it the most advantageous to use captives? For Workers Compensation, I would say a very large company that does not have enough assets in a certain state to qualify for self-insurance. A great example is a very large trucking firm that has a large home office complex with terminal in multiple states.

Is there one domicile that is better for captives than the others? No, I do not think there is one domicile that is superior to another in every instance. I do like the offshore domiciles. As I have said very often, a stroke of the President’s pen, a ruling by the IRS, or a bill passed by Congress could change the onshore domiciles overnight. That would not happen with an offshore domicile.

 

 

Renting Workers Compensation Captives resort

Wikimedia Commons – Venturalofts

Are rent-a-captives still a viable option? I think this is the forefront of future Workers Comp insurance arrangements. Renting a cell from a captive allows the same right and tax advantages as owning a regular captive. The fixed or overhead costs would be much smaller than starting a captive.

What is the one main disadvantage to captives? I think it is a very simple concept that has been complicated as a profit motive for companies. The more complicated it seems, the more pseudo-knowledge is produced. Captives are not that complicated.

Where can someone learn about captives quickly? Google Workers Compensation Captives, there are hundreds of websites with a large amount of free information.

©J&L Risk Management Inc Copyright Notice

Filed Under: captive Tagged With: Captives Domiciles, CICA, trucking

CICA Captive Conference 2011 Interesting Alternative Insurance

March 17, 2011 By JL Risk Management Consultants

CICA 2011 Conference – Tucson AZ was a learning experience

I attended the CICA Conference this week in Tucson AZ. The conference provided a large amount of information that I will have to sift through and post some of the important info on this blog next week.

Graphic of Green Increase Arrow CICA With Dollar Sign Under

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One thing I quickly learned was how fast domestic captives are growing, overall. There are many states that are now domiciles for captives, including Missouri. There were many offshore captives represented at the conference including Bermuda, USVI, and the Cayman Islands.

Captive insurance arrangements can be complicated. I do think this is where insurance markets are headed if the current economical woes persist. Captives are a valid alternative to the traditional insurance markets. I would not have said that five years ago.

A quick definition of Captives –

Captive insurance refers to insurance that provides coverage for the group that established business. It is a type of insurance that provides to its parent company. Captive insurance company is a corporation whose stock is owned by one or a small number of companies and which handles all or a part of the insurance needs of its shareholders or their affiliates. Generally, under captive insurance, the parent company can deduct the premiums set aside as loss reserves. Captive insurance draws a dichotomy between true insurance and arrangements

which have been found to constitute, in substance, self-insurance.

©J&L Risk Management Inc Copyright Notice

Filed Under: CICA Captive Conference Tagged With: Captives Definition CICA 2011, domestic, insurance market, Tucson AZ

Who Is CICA?

March 11, 2011 By JL Risk Management Consultants

Term Of The Day – CICA

CICA or Captive Insurance Companies Association is an association of risk managers formed to educate, inform, support and provide valuable networking opportunities to members and interested parties about captives, regardless of domicile or structure. CICA has no jurisdictional or commercial ties. Members come from a wide range of industries with almost half the membership domiciled in Bermuda, with another quarter domiciled in Vermont.

Picture Of Hand Holding Blackboard CICA With Risk Management Info

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CICA has joined forces with other state captive and risk management organizations to create a legislative affairs organization known as the Coalition of Alternative Risk Funding Mechanisms (CARFM).

I have been to three of their conferences.  While they are not the largest Captive Conference, the access to the international and domestic regulators is superior to many of the conferences.  

The organization’s main webpage can be found here.    Their upcoming conference is March 12-14, 20q6  in San Diego.   The conference is a great alternative to the State of Vermont captive conference.   I have not been to the one in Vermont, so I will not comment on which conference is the better one to attend each year. 

©J&L Risk Management Inc Copyright Notice

Filed Under: captive Tagged With: Educate, jurisdiction, Term Of The Day - CICA

Captives for Workers Comp – One Overlooked Area

January 26, 2011 By JL Risk Management Consultants

Captives for Workers Comp – Who Adjusts Your Claims

Most Captives for Workers Comp should not overlook the claims administrator which will handle your claims.

Picture of Captives for Workers Comp Businesspeople Standing

123RF

Over the last four years, captive insurance arrangements have become more prevalent in our business. That is not to say that captives have not existed in Workers Compensation markets for very long. I had come across them in the early 1990s. They were known as offshore insurance.

The company was a very large South Carolina lumber operation. They were moving their Workers Compensation from the carrier where I was adjusting claims, to this new kind of insurance. My question to them, as it is today – By, the way who will be handling your claims? I kept in contact with the insured to see how things were going and there were a few residual claims.

The lumber processing company had no answer to that question. I was told at the time – and I still hear the same thing today – That is not a major concern.

Without covering the operations of a captive, I wanted to issue one caveat. You are now more like a self-insured. The claims adjusting company is really spending right out of your bank account. The quality of the claims adjusting company should be a major consideration.

Woman Wrapping Man Hand Captives for Workers Comp Injured

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Why I pointed out the South Carolina lumber company is that over the next year when I had to contact them on a few claims issues, they would vehemently complain about the claims adjusting.

Injured employees were not getting paid, and medical providers were lighting up the switchboard with calls on very late bills. The lumber company was paying fines and fees due to late payments. Even the attorneys that represented the Workers Comp claims adjusting company were being paid very late.

The bottom line is that captives are just about the last forefront for smaller employers to be able to cut Workers Comp costs. I think there will be an explosion of captive insurance over the next 20 years unless the IRS creates rules that may affect their operation.

However, investigating who will be handling your captive Workers Comp claims will become even more critical. Asking that one question will save many headaches and time later as there is claims development.

©J&L Risk Management Inc Copyright Notice

Filed Under: captive Tagged With: claims adjusting, insurance arrangement, lumber operation

Protected Cell Captives for Workers Comp

November 3, 2010 By JL Risk Management Consultants

Protected Cell Captives

In my last blog post, I covered Protected Cell Captives under the Rent-A- Captive heading. I used to think this type of arrangement was complicated and expensive to administrate. I have found Protected Cell Captives to be neither complicated nor expensive when compared with paying regular Workers Comp premiums. Protected cell arrangements do not need to be a rent-a-captive only. They can be structured within any type of captive arrangement.

Picture Of Files Protected Cell Captives Document

Wikimedia Commons – Tony Webster

The two main benefits are that if any one cell files for bankruptcy, the other cells are not affected and can conduct business as usual. I had found the term “bankruptcy remote” to describe this type of capital safety. The other benefit is that if the capitalization of the cell is less expensive than without the cell, a profit-type motive exists.

 
I had actually been called in as an expert witness in a very complicated Workers Comp case where bad faith was an issue. The protected cell that covered the claim filed for bankruptcy and the attorney could not pursue any of the other cells due to the “bankruptcy remote” provision. This did not bode well for a very large Workers Comp file and the bad faith suit that was being pursued at the time.
 
Picture of Protected Cell Captives Organized Shelves

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In 2007, I became heavily involved with captives, but then did not pursue due to the fact that I had thought the IRS would strike down most captive arrangements for Workers Comp or any other type of coverage. The tax avoidance was something I thought would not be allowed. However, the IRS strikingly took the stance of the complete allowance of captives with a few caveats.

 
I will cover the IRS’s most recent view of captives from the Enforcement Division. It is very interesting and does agree with the preservation of the tax benefits of captives.
 
©J&L Risk Management Inc Copyright Notice

Filed Under: Protected Cell Captives Tagged With: capitalization, Captive heading, Enforcement Division

Rent-A-Captives For Workers Compensation

November 2, 2010 By JL Risk Management Consultants

Rent-A-Captives Types

Rent-A-Captives are becoming more popular in Workers Comp as a method of risk transfer. Rent-A-Captives used to be viewed as hybrid arrangements that were too complicated to be considered by most employers. That landscape has changed in the current economy.

Paying Rent-A-Captives credits

Wikimedia Commons – Hloom Templates

Individual Accounts
Rent-a-captives can benefit individual corporate accounts currently paying as little as $750,000 annually in casualty premiums. The rent-a-captive may serve as a reinsurer of the policy-issuing carrier or issue policies directly to the insured. The fronted structure can be guarantee cost or a retrospective rating plan. Some additional structures for a corporate rent-a-captive program include: Large Deductible Plans Coupled with a Deductible Reimbursement Policy. The insurance company issues a policy in which the insured takes a sizable deductible and the rent-a-captive issues a policy directly to the insured for the deductible layer. The insured then funds the deductible layer with a combination of premium and collateral.

Fully-Funded Arrangements
A company may encounter difficulty in obtaining coverage for a particular insurance exposure or may only be able to obtain coverage at an exorbitant premium that is out of line with the exposure. In such cases, the company may seek to fund the aggregate limit of its policy with a combination of cash and letter of credit. A rent-a-captive often serves as the funding mechanism for this. This product is well suited for an insured who is required to demonstrate evidence of insurance.

Self-Insurance Wraparounds
A company may be unable to qualify as a self-insurer in all states in which it has exposure. A rent-a-captive enables the company to remain self-insured in those states in which it qualifies, while consolidating its exposure in other states into a coordinated, seamless overall insurance program. Of course there are groups of individuals and brokers who find rent-a-captive structures appealing for similar reasons to the corporate buyer.

Graphic Picture Hardworking Businessman Rent-A-Captives Concept

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Associations or Industry Groups
Associations, industries or groups of buyers with similar risk management styles can share risk in a rent-a-captive program to achieve economies of scale or solve an insurance problem. The actual structures, coverages, risk sharing, ownership, and management can differ depending on the need of the group. A strong business plan and a clear understanding of the legal ramifications by each member is critical in this structure. A limited group of small companies that don’t meet the premium threshold on an individual basis can get together, pool their assets and liabilities and structure a rent-a-captive. This enables companies that are too small for their own rent-a-captive to realize the benefits enjoyed by larger companies.

Insurance Agencies and Brokers
An agency-rent-a captive can be formed in which the agent or broker shares in the insurance risk of their clients insurance programs. A portion of the insurance risk is typically reinsured to the captive in which the agent has contractual ownership of the results.

Picture House with Hand Rent-A-Captives Gesture

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Protected Cell (Segregated Account) Structure
Before the development of cell companies, multiple entities operating within one rent-a-captive had separate accounting for their assets and liabilities but no legal separation. Therefore, if one entity had losses exceeding its assets, the other entities made up the difference. While many captives still operate this way today, and very successfully so, the advent of the cell company has piqued the interest of many potential captive participants due to the brick walls that are created between the owners’ assets by the cell structure.

I will add more tomorrow on the Protected Cell Structures. This post is long and boring enough for now.

 

©J&L Risk Management Inc Copyright Notice

Filed Under: Rent-A-Captives Tagged With: exorbitant, retrospective

Captive Insurance Arrangements For Workers Compensation -Still Viable?

November 2, 2010 By JL Risk Management Consultants

Captive Insurance Arrangements

I have not posted on captive insurance arrangements for many months. The last time I posted was when the IRS surprised me by basically leaving captives in place. I had thought the IRS would not let captives keep their tax-free status overall.

Business People Captive Insurance Arrangements At Conference Table

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In this tough economy, companies and governmental entities are searching heavily for the most economical risk transfer strategies possible. Captives may be the answer to some but not all insurance situations. I used to think that employers had to be large enough to be self-insured before even initiating a captive analysis.

The rent-a-captive option now even allows companies that are not large enough to be self-insured under Workers Comp to possibly use captives as a very economical method to handle your Workers Comp risk and claims. I thought that I would examine rent-a-captives a little further. After reading the information on the IRS website on captives, my head was spinning.

In a rent-a-captive’s simplest form, a corporation will purchase insurance from a traditional insured and reinsure a portion of the risk and loss fund to a rent-a-captive structure. The corporation will typically have a contractual agreement with the captive that will provide the insured with the underwriting and investment profits on the program via some form of a dividend. The claims are paid by the fronting carrier and reimbursed by the rent-a-captive.

2021 Update – Rent-A-Captives remain very viable even with the risk of micro-captive audits by the IRS.  Rent-a-captives are not standalone Captive arrangements.  The arrangements should always be made at arms-length even though part of the insurance agreement is with a carrier.  

Captives do contain a level of risk that should be considered when looking at alternative insurance arrangements. 

I will cover the different types of rent-a-captives in my next few posts.

©J&L Risk Management Inc Copyright Notice

Filed Under: Rent-A-Captives Tagged With: tax free

Fronting Agreement Can Be Used For Captives and Non-Captives

July 22, 2010 By JL Risk Management Consultants

 Fronting Agreement Popular With Captives

A fronting Agreement covers two types of “foreign” companies and insurers. In general terms, and usually for Workers Comp purposes, one insurer produces a policy for a third party, but all of the losses are the responsibility of a second insurer. This is, of course, a fee based arrangement.

Picture Of Hand Draw Fronting Agreement Shake Hand

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This agreement provides a solution when a employer’s provider is not “admitted” to do business in a certain state, but the employer needs coverage there. The employer’s insurer enters into a Fronting Agreement with an “admitted” insurer to write the policy, again for a fee. If there are any claims against the policy, the employers original insurer bears all liability.

Most states have very specific rules on these financial arrangements. 

Captive insurers often use these Fronting Agreements when they are not “admitted” in all states. Self-insureds often use Fronting Agreements to satisfy financial or statutory requirements.

As we all know, the business of Workers’ Compensation is complex at best. Fronting policies are, to say the least, complicated and should be examined thoroughly. Even though they can take on any number of forms, the one common denominator is that the claims are still paid by the insured.

©J&L Risk Management Inc Copyright Notice

Filed Under: Fronting Agreement Tagged With: fee based, financial arrangement

Workers Comp Captive Insurance Arrangements Question

January 19, 2009 By JL Risk Management Consultants

Workers Comp Captive Insurance

A question from one (and I love to hear from our blog readers) of our readers on Workers Comp Captive Insurance arrangements –

We are a smaller employer with less than 100 employees. Our E-Mod/X-Mod sharply increased from .8 to 1.3 over the last two years. Would our small size and high E-Mod keep us from exploring a captive for Workers Comp?

Graphic Of Workers Comp Captive Insurance Icon

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Being a smaller employer or having an increasing E-Mod/X-Mod would not prevent you from exploring a captive.
There are three areas that may help in your search

  • Rent-A -Captive
  • Association Captive
  • Similar Employer Group Captive

A Rent-A-Captive is also known as a Protected Cell captive facility. It is basically a captive that is broken down into unlimited mini-captives (Cells). Each cell within the Rent-A-Captive facility can be rented for a fee. Each cell stands on its own within the overall captive. The main thing to watch out here for is the co-mingling/breaching of the assets of one cell with another cell within the captive. This protects each insured’s assets from each other, and makes sure that the failure of one cell does not effect other cells within the Rent-A-Captive. This is usually regulated by law.

The Association Captive and the Similar Employer Captive are both just renamed versions of the Rent-A-Captive. A few of the associations and employer groups such as construction have sponsored great captives. Rent-A-Captives have been in existence since the 1970’s.

The bottom line is that Rent-A-Captives for Workers Compensation make even the smallest employers have an alternative to the regular insurance markets.

©J&L Risk Management Inc Copyright Notice

Filed Under: Rent-A-Captives Tagged With: cell stands, co-mingling, insured's assets

Offshore Captives Could Be Last Haven In Hard Market

January 13, 2009 By JL Risk Management Consultants

Most Offshore Captives Look Much Better In Workers Comp Hard Market

Most offshore Captives look great in a Workers Comp Hard Market. For many years, I did not catch on to the concept of captives in the Workers Compensation market. As insurance and reinsurance markets start to harden quickly, I am of the opinion that all employers should take a look at this “hybrid” insurance.  

Vector Graphic of Insurance Hard Market Captives On Shield Icon

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Captives are so named as the policyholder owns the insurance company.  This makes the insurance company “captive” to the policyholder.   

There are several types of captives – I will not define all of them here.  If you need a definition or have questions about any of these terms, please email me. 

  • Single Parent Captive
  • Association Captive
  • Group Captive
  • Agency Captive 
  • Rent-a-Captive 

The only one from the list above that I wanted to comment on is the Rent-a- Captive.  These are designed for smaller companies that could not afford a captive on their own.  This makes the captive market appealing to almost any company that is searching for an alternative to their regular insurance policies. 

There are quite a few reasons that captives will become more appealing for Workers Compensation coverage. They are: 

  • Heavy and increasing premium costs in almost every line of insurance coverage.
    Picture Hand Presenting Business Finance Captives Concept

    StockUnlimited

     

  • Difficulties in obtaining coverage for certain types of risk.
  • Inflexible credit rating structures which reflect market trends rather than individual loss experience.
  • Insufficient credit for deductibles and/or loss control efforts.

As you may notice, these are the four concerns that almost all employers now have to deal with on at least a yearly basis. Captives are not the cure-all for what ails companies presently.  They do offer a great alternative 

Interestingly enough, the three top domiciles areRisk Management technique for shifting portfolios of loss. Bermuda, Cayman Islands, and Vermont. Vermont was the first state to involve itself with captives. Those three domiciles represent 47% of all captive domiciles.  The captives’ domiciles is basically its primary jurisdiction. The captives are subject to a yearly audit by a consulting actuary.   

The two best benefits of an offshore captive are cost and flexibility.  I have some reservations about the TPA’s that are used by some of the captives.  They were somewhat lacking in a few areas whenever we audited the TPA’s claims handling and reserving.  The file reserves are more important with a captive than with a regular insurer.  As I commented earlier this week, the captives have to be large enough or well-reserved enough to not violate the Law of Large Numbers.  A captive is a much smaller entity than a regular insurance company.  That is why the file reserves are beyond critical and the actuary must be very accurate on his/her reserve projections for the next 10 years.  Choosing a TPA and actuary are very important to the survival of the captive and its member(s). 

Hand Drawing Captives Upward Arrows With Dollar Sign

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The most surprising development occurred in 2007 – 2008.  I had thought the IRS was not going to allow the tax-advantaged basis on the reserves in a captive.  The IRS did almost a compete reversal and ruled that captives should retain their tax deductibility.  I think they realized they could crash the whole insurance market if they all of a sudden ruled that captives were to be fully taxed. 

This is much more to captive insurance arrangements.  I tried to provide a quick summary.  If you have any questions, please email us. 

©J&L Risk Management Inc Copyright Notice

Filed Under: Captives Taxed Tagged With: hybrid, insurance coverage

Captive Taxes Decision – IRS Recently Shocks With Recent Ruling

February 25, 2008 By JL Risk Management Consultants

IRS Decided No Captive Taxes For Now

IRS shocks with no captive taxes decision.

One of the most hotly debated and controversial topics since the bid-rigging accusations have hit the Workers Compensation world. 

Vector Graphic of Captive Taxes and Calculator and Coins

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The Internal Revenue Service has performed a complete U-turn on attempting to tax captives upfront, or actually not allow the upfront tax write-off.

As I said in my last blog from a few weeks ago on this situation, I felt that the IRS was going to completely tax captives on the funds that were set aside to pay claims and not allow the taxes to be written off on the reserves set aside to pay claims when the claims were paid. The IRS had always said that a taxable event happens when the money is set aside for any type of financial arrangement. However, now captives are an exception to the rule.

Ever since September 2007, the IRS had said they were going to have public hearings on them taxing captives. I was 99.9% sure they were going to tax captives upfront when the money is set aside for paying claims – or in reality – were not going to allow a tax write-off, which is one of the main benefits for a large employer to create a captive for their insurance, especially for Workers Comp.

The IRS Captive taxes decision makes for a more hands-off approach to captive taxes.  One has to wonder what the future holds for captives as a tax-reduction vehicle.

Calendar Captive Taxes September

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Captives may now spread very quickly as an alternative risk financing arrangement. That is, until the IRS takes another crack at trying to disallow the reserve write off for taxes.

Captives are not the answer for all insurance situations, but they are now much more appealing with the advantage of an upfront tax write-off for reserves.

Next Up – The Woes of North Dakota’s Workers Compensation Program

©J&L Risk Management Inc Copyright Notice

Filed Under: captive Tagged With: controversial, risk financing

Captives Tax Deductions Getting Closer Look From IRS This Month

January 31, 2008 By JL Risk Management Consultants

News Is On Captives and The IRS

I was a little slow to understand how captives worked when they first were written a few years ago. I do not want this post to sound like “I told you so.” Check the prior posts on captives. Has the day of atonement arrived for this type of insuring agreement?

Vector of Man Balancing Coins Words Tax Captives Graphic

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The IRS – as I said in a prior post – is not going to let what they consider an immediate tax deduction for Workers Comp reserves established for future losses of an affiliated company. This never had really sounded quite right to me. How could a tax deduction be earned for money that HAS NOT been paid for Work Comp losses? The IRS is never going to let a tax deduction occur for a FUTURE event such as a captive making a claim payment.

The IRS passed the rule in September 2007. They are holding hearings on this rule on Feb 29th in Washington, DC. Some of the captive managers have quit writing captives. Will there be some type of retro-tax? Who would be responsible for the retro-tax payments?

Workers Compensation has become a complicated insurance product. The post-Feb 29th ruling by the IRS could make this even more complicated.

Update – The IRS gave a pass to Captives for now.    The IRS still asserts that many of the 831 (b) micro-captives abuse the tax system.   They have been listed as one of the Dirty Dozen tax dodges. 

Next Up – What number should a safety person be the most concerned with for WC?

©J&L Risk Management Inc Copyright Notice

Filed Under: captive Tagged With: Dirty Dozen, retro-tax, tax deduction

Workers Comp Captives – Viable Alternative Unless IRS Changes

October 22, 2007 By JL Risk Management Consultants

Workers Comp Captives – IRS Mulling Changes

Picture of Workers Comp Captives Man Drawing Ladder Into Man On screen

123RF

The Workers Comp Captives are the IRS news today. The blog post today was supposed to be about Searching for Workers Comp terms in Google and the mistakes that are made in the Work Comp searches.

We will get back to that tomorrow as there was a bit of interesting news today from the IRS about the use of Captives. I have been through a few Captive training courses that left me asking the question – How can a captive count as Workers Compensation insurance? The IRS is back to contemplating about insureds not paying a tax on the reserves that are held for Workers Compensation expenditures.

For quite some time, companies that were insured through captives did not pay any tax on the reserve amounts. The IRS may one day rule that the reserves are taxable. In fact, there is an article out now saying that this may be the case. The situation will need to be monitored very closely in the next few years.

My understanding is that offshore captives would still not be taxable, as the IRS would have no jurisdiction over any offshore Work Comp captives. This would be very harmful to the domestic captive business, as the reserves remaining non-taxable is one of the greatest benefits of being in a captive. Vermont would be heavily affected.

31 States Workers Comp Captives USA Map Line

Public Domain – SPUI

The following 28 31 states allow Workers Comp captives:

  • Alabama
  • Arizona
  • Arkansas
  • Colorado
  • Connecticut
  • Delaware
  • District of Columbia
  • Florida
  • Georgia
  • Hawaii
  • Illinois
  • Kansas
  • Kentucky
  • Maine
  • Missouri
  • Montana
  • Nevada
  • New York
  • North Carolina 
  • Ohio
  • Oklahoma
  • Puerto Rico
  • Rhode Island
  • South Carolina
  • South Dakota
  • Tennessee
  • Texas
  • Utah
  • Vermont
  • Virginia
  • West Virginia

Not all of the 31 states have Work Comp captives operating in them yet.

Next up – Searching for Workers Comp terms in Google and the mistakes that are made in the Work Comp searches

©J&L Risk Management Inc Copyright Notice

Filed Under: captive, IRS Tagged With: Arizona, District of Columbia, Maine, Montana, Puerto Rico, Rhode Island, South Dakota, Tennessee Texas, Utah, Workers Comp Insurance

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James J Moore
Raleigh, NC, United States

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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Recent Posts

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