Captive Audience

In determining which strategy you will use to address each risk, you must undertake a cost benefit analysis. Can insurance be purchased? Is it economic to purchase insurance? Is that risk better financed with a captive? These are just a few of the questions that need to be answered for you to decide whether a captive is beneficial for your company.

If the risk is already being self-insured by the business, then structuring a captive enables that business to transfer that risk off its balance sheet and get a tax benefit. For example, a manufacturer that does not have coverage for a product recall can now transfer that risk to a captive via an insurance premium. Thanks to unique insurance company taxation rules, captives rarely pay tax on income in the year in which it is received. What this means for the manufacturer is that a product recall can now be financed on a pretax basis.

Once you have completed an analysis, it is critical to engage a qualified captive management company to conduct a feasibility study. But how do you determine if the management company you have selected is qualified?

Finding A Qualified Provider

Some captive management companies have little experience; others have much. Some have little understanding of taxation; others are experts. It can be confusing and even overwhelming when choosing a firm with which to work. Ill-advised captive transactions can expose owners to significant tax liabilities, penalties and interest.

Additionally, guidance by qualified experts can be costly. A business considering a captive should expect to invest time, resources and money when evaluating the feasibility of such a program.

When determining if a captive is appropriate, it is important to choose your service provider by examining the following aspects:

Client references: Check with a provider's other clients to find out if they are satisfied.
Experience and track record: Successful captive management takes a combination of accounting and insurance skills. A captive manager's staff should include people who are qualified in both areas. In addition, one should learn about the manager's history. How long has the captive manager been in business? How many clients have been audited and what were those results?
Multiple domiciles: A company should ask if the management team is experienced with multiple domiciles, which can give you more flexibility.
Ingenuity and creativity: The captive manager should have the ability to develop creative approaches for new programs or to even restructure an existing program.
Actuarial services: If the captive insurer has an in-house actuary, it may have conflicts of interest. In addition, certification by an independent actuary often has more credibility with insurance and tax regulators.
Cost: Fees should reflect the value of the services provided. If you want a basic bookkeeping service, the price should be low. Other services will cost more.

Developing and initiating a captive program may not be suitable for all companies, but by employing the tactics outlined in this article, you can make the decision that best suits your company's needs.