Your 6-Step Plan to Captive Optimization

Captives should adapt to their parent companies’ changing risk profiles. Following this plan helps risk managers identify and execute necessary changes.

You conducted a feasibility study before forming your captive, establishing long term goals and objectives, determining which risks to write, where to domicile, and how to finance it all.

But that was five years ago.

Since then, your company has made two acquisitions, expanded its workforce, implemented new technology, contracted with new suppliers, and been affected by a new federal regulation.  In short, the risk profile has changed considerably.

Is your captive keeping up?

As with all other business matters, your company’s captive needs and goals are likely to change over time, especially with new and emerging risks sprouting up frequently. We recommend a ‘refeasibility’ study at least every five years to reassess risk appetite and exposure.

A ‘refeasibility’ study ensures your captive insurance company is still serving your organization’s needs and furthering its mission, rather than holding it back. Unlike the initial feasibility study, this periodic checkup must consider your existing captive structure and financing strategies, and take into account how the captive has performed thus far.

To gain a holistic view of your captive’s performance and evaluate the need for change, captive owners should ask themselves these five questions:

  1. Do your captive’s goals align with your risk profile?

    Evaluating your captive’s goals in the first step of a refeasibility plan. And that begins with collection of data. Claims experience, reserve and surplus levels, loss ratios and other measures of efficiency indicate how successfully the captive has operated and where it has underperformed.

    This indicates whether it has met initial goals, and whether those goals should change. This decision is also largely dependent on changes in the insured organization’s risk profile and the subsequent impact on insurance needs.

    Moving employee benefits into a captive may be a more efficient way to provide coverage for a larger payroll. Greater reliance on automation or IoT technology may likewise increase the need for cyber coverage tailored to an organization’s specific needs. Emerging risks should be considered in this assessment. For example, new technologies like driverless cars and drones and increasing automation will create both risks and opportunities across various industries.

    Performance metrics can help risk managers identify areas where resources can be shifted to support the coverage needs demanded by organizational change and emerging risks.

  2. How will proposed changes impact other parts of the captive company?

    The second stage of the study considers how adjustments to long term goals affect other pieces of the captive puzzle, such risk financing and use of reinsurance.

    Adding new lines of coverage or expanding or reducing existing ones will necessitate an evaluation of risk financing strategies and could lead to changes in an organization’s investment mix or retention levels. This may also impact reliance on reinsurance as a component of the overall risk transfer strategy.

    The best way to pinpoint the extent to which these changes should be made is through stress-testing.

    Running through scenarios with reasonable adverse case outcomes highlight where more or less financing is needed to service claims and maintain favorable loss ratios.

  3. What specific implementation strategies will make your changes stick?

    As with any enterprise-wide change, a detailed roadmap lays the groundwork for successful outcomes and can gain the confidence of stakeholders.

    This stage identifies lines of insurance that could be moved into the captive or other coverages that would be more cost effective to insure through the traditional insurance market. Along with cyber and employee benefits, some of the most common risks to insure in captives include professional liability, auto liability, reputation, and business interruption.

    Capital management strategies should also specify how surplus will be used going forward.

    There are several considerations in appropriately managing the capital and surplus levels over the life of a captive, including average cost of capital, retention levels, reinsurance use and taxes, among others.  A team of actuaries and consultants could review and develop strategy to address these.

  4. Does your existing captive structure still work?

    Captives have taken on a number of different forms since their inception — single parent, group/association, rental captives, sponsored captives, non-controlled foreign corporations, etc. The primary differences between these structures center on the way risk is shared among the parties involved and how the captive is financed and regulated.

    Sponsored captives, for example, offer a way for companies to take advantage of the established infrastructure of a traditional insurer and avoid the upfront costs of forming a captive — though they are not accepted in all domiciles.  Group captives allow companies with unrelated risks to spread out their exposure and reduce their total cost of risk, but can present management challenges.

    A captive’s domicile, the scope of risk it seeks to cover, and the financial strength of its parent company all help to determine which structure will work best.

  5. Does your captive account for recent case law and regulations?

    The technology industry isn’t the only one that is always changing. Laws, regulations and court cases, especially lately, have an impact on captives and need to be considered asCaptive optimization you are taking a fresh look at your strategy.

    Firstly, there’s tax reform. The tax rate reduction under the Trump administration has had a direct impact on captives, and a consolidated tax return that includes a captive insurance company should have its tax sharing agreement reviewed.

    Further, payments to a foreign captive should be reviewed to determine if the Base Erosion Anti-Abuse Tax (BEAT) is applicable, and anyone in the U.S. with an owner’s interest in a foreign insurance company needs to review their holdings. IRS Notice 2016-66 with respect to microcaptives should also be considered, which leads us to our next point.

    In light of two recent court cases – Avrahami vs. Commissioner and Reserve Mech. Corp. v. Commissioner – we now have more insight into what the IRS believes to be the criteria for a bona fide insurance company. As a result, we recommend going through a checklist of sorts to ensure the following regarding your captive:

    • Is the captive created for a non-tax business reason?
    • Is comparable coverage available in the market?
    • Are the policies valid and binding?

    Domicile-related regulations are also changing. Is yours compliant with your current domicile, and have you looked at the new domiciles available? Lastly, it’s imperative to take a look at the Dodd Frank Act, specifically the self-procurement tax to ensure your captive is appropriately aligned.

  6. Are the changes having the effect they’re supposed to?

    You’ve identified new opportunities for your captive, supported proposed changes with data and stakeholder feedback, and developed detailed and holistic plans to move forward. But you’re not done.

    The final step of any refeasibility study is to measure outcomes. Collect data again to see if newly established goals are being met and how the rest of the captive organization has been impacted.

    A great deal of this stage relies on solid industry benchmarks against which to measure current and future captive performance. Furthermore, it’s important that the optimization team takes this data and edits their implementation plan accordingly to keep captive performance on track, making actionable recommendations for staff to follow.

    To execute your plan, turn to expert help.

    These findings should serve as a baseline for measurement going forward. But look for a team of experts ranging from employee benefits, risk management and actuarial services to walk you through the steps and, ultimately, implementation. This is especially important as new risks continue to emerge and evolve; routine maintenance on your captive is important, just like it is on your car!

Local Shakeup: What a Partners & Harvard Pilgrim Merger Could Mean For You

On Friday, May 4th, the local healthcare market was shocked by the news of a possible merger between Partners HealthCare and Harvard Pilgrim Health Care, two of the largest healthcare organizations in the Massachusetts and New England areas. From a regional standpoint, this would throw a large wrench in an already uncertain and increasingly unaffordable healthcare market, whether for good or for bad (which I will get into later).
Healthcare New England

For some background, Partners HealthCare is a Boston-based hospital and physicians network with over 23,000 employees. Partners already owns several large, New England-based healthcare institutions like Brigham and Women’s Hospital, Massachusetts General Hospital (MGH), Neighborhood Health Plan and Mass Eye and Ear. Harvard Pilgrim Health Care, on the other hand, is a leading national health insurance carrier. With over one million members, it has a large footprint in New England

While still merely a possibility, the unknown is causing a certain degree of uneasiness. There are a lot of questions around:

  • Will this survive the antitrust reviews, based on consumer impact and consistency of the two organizations’ missions?
  • Will this make healthcare in New England specifically more expensive?
  • What are the positives a merger could have from a consumer standpoint?
  • Beyond power, what would be the real reason behind the merger? Traditionally, a hospital system and an insurance carrier would have two different, often conflicting goals.
  • What would this mean for the local, independent health systems like Lahey Clinic?

Although it is not possible to know all of these answers, consolidation often means less competition and higher costs.  Whether you’re locally-based or not, you’ll want to stay tuned!

Boston Healthcare Merger

What 831(b) Captive Owners Need to Know About IRS Notice 2016-66

IRS Notice 2016-66On Tuesday, November 1 the US Internal Revenue Service (IRS) and Treasury Department issued a November surprise to the Captive Insurance industry in the form of Notice 2016-66.

What is Notice 2016-66?

Notice 2016-66 relates to captive insurance companies set up under U.S. code 831(b), also known as micro-captives. Stories of 831(b) captive abuse have been widely reported in recent times and have caught the eye of a number of U.S. agencies and lawmakers. There is a general understanding that there is an element of the micro-captive industry that improperly uses the tax exemption to shield taxable income. The IRS and Department of Treasury acknowledge this practice of tax avoidance and evasion, but as they point out in the early sections of 2016-66, there isn’t enough information currently gathered to properly target the offenders.

To combat this abuse, and to begin to gain a better understanding of the overall scope and use of 831(b)s, the two government agencies have teamed up on 2016-66. This new notice now defines certain 831(b) transactions as “transactions of interest” and now makes them subject to additional reporting of the transaction and imposes penalties for non-compliance.

Who does Notice 2016-66 Impact?

It is important here to understand exactly what the IRS is now terming a transaction of interest. Here is their definition (from IRS website):

  • A, a person, directly or indirectly owns an interest in an entity (or entities) (“Insured”) conducting a trade or business;
  • An entity (or entities) directly or indirectly owned by A, Insured, or persons related to A or Insured (“Captive”) enters into a contract (or contracts) (the “Contracts”) with Insured that Captive and Insured treat as insurance, or reinsures risks that Insured has initially insured with an intermediary, Company C;
  • Captive makes an election under § 831(b) to be taxed only on taxable investment income;
  • A, Insured, or one or more persons related (within the meaning of § 267(b) or 707(b)) to A or Insured directly or indirectly own at least 20 percent of the voting power or value of the outstanding stock of Captive; and
  • One or both of the following apply:
    • the amount of the liabilities incurred by Captive for insured losses and claim administration expenses during the Computation Period (defined in section 2.02 of this notice) is less than 70 percent of the following:
      • premiums earned by Captive during the Computation Period, less
      • policyholder dividends paid by Captive during the Computation Period; or
    • Captive has at any time during the Computation Period directly or indirectly made available as financing or otherwise conveyed or agreed to make available or convey to A, Insured, or a person related (within the meaning of § 267(b) or 707(b)) to A 10 or Insured (collectively, the “Recipient”) in a transaction that did not result in taxable income or gain to Recipient, any portion of the payments under the Contract, such as through a guarantee, a loan, or other transfer of Captive’s capital.

Benefits Exemption:

It should be noted here that any captive arrangement that has secured a Prohibited Transaction Exemption (PTE) from the US Department of Labor (DOL) to provide insurance for employee compensation or benefits covered by ERISA is not considered a Transaction of Interest under these new rules. This may have broad and deep implications on the employee benefit captive industry.

What are the Reporting Requirements?

Reporting of a transaction of interest must be done using Form 8886, which is the Reportable Transaction Disclosure Statement. The Form 8886 filing must describe the transaction in question enough so that the IRS understands how the transaction is structured and who is involved in it. There are additional Form 8886 filing requirements of the taxpayer and captive. These are described in detail here.

What are the Penalties?

Parties that do not comply with this new rule are subject to penalties under U.S. Code 6707A which states:

Subject to the maximum and minimum limits, the amount of the penalty is “75 percent of the decrease in tax shown on the return” as a result of the reportable transaction (or which would have resulted from such transaction if such transaction were respected for federal tax purposes).

  1. The maximum penalty in the case of a listed transaction is $100,000 for a natural person and $200,000 for all other taxpayers. In the case of a non-listed reportable transaction, the maximum penalty is $10,000 for a natural person and $50,000 for all other taxpayers.
  2. The minimum penalty for each reportable transaction (listed or non-listed) is $5,000 for a natural person and $10,000 for all other taxpayers.

It is pointed out in Notice 2016-66 that these rules may be revisited and transactions of interest may be redefined once the IRS and Treasury Department have a better grasp on the situation and better understand the abuse they are looking to eliminate. Further notices from the agencies will likely address this.

So, you own an 831(b) captive; what should you do next???

If you own an 831(b) micro-captive and are unsure of you need to fill out a Form 8886, contact our award-winning team of captive consultants, accountants and attorneys for an unbiased, independent review of your situation.

Alternatively, if you have been looking to write ERISA-covered employee benefits or compensation insurance into a micro-captive, now may be a great time to move forward. There are so many advantages to underwriting employee benefits and this ruling gives us yet another. Spring is the industry leader in employee benefit captive funding solutions and can help you evaluate your current situation and subsequently develop your plan and secure DOL approval. Contact us today!

Image credit: Isaac Bowen via flickr

Your Captive is Riding High. Now What?

captive refeasibility studyYou’ve had your P&C captive for years and it has continued to perform well throughout. So what is next? How do you capitalize on this success and build on your captive or rebuild an underperforming aspect of it?

Enter refeasibility.

Much like your family car, a captive should have a check up on a periodic basis. Are you writing the right lines in your captive? Are you in the right domicile? Would a different structure be more profitable? Would other service providers make a difference? Have your claims changed significantly? Have regulations changed over the years? All this and more can be answered with a good review of your captive by a professional consultant.

Related Case Study: Captive Refeasibility Study for Fortune 500 Organization

Here are a few things to consider as you ponder a refeasibility study:

Domicile:

The Dodd Frank Act changed the landscape for a lot of captives.  Rather than incur a self-procurement tax for risk out of state, some captive owners are redomesticating their captive back to their corporate home states or establishing a fronting captive in that domicile to lessen the premium taxes due.  An additional dimension in captive domicile selection is the enormous growth in U.S. domiciles. Countless states have recently set up new domiciles and there are still many quality offshore options. You’re pretty sure you are in the right spot, but a “refeasibility” might show you otherwise.  For example, some states have created innovative cell legislation that might work for you or your clients. Some assets held in the captive maybe more liberal, so depending on what you are using for collateral, states need to be studied for the best match.

P&C Programs:

Ten years ago there were pretty much only large P&C captives writing pretty much only property, general liability and workers compensation and occasionally a rouge auto or warranty program. Captives stuck to high deductible programs and some small quota share coverages to fill out a line slip.

Today, you can write almost anything that is an insurable risk and makes good business sense.  You still can’t write lines of coverage that just don’t make sense (like tidal wave coverage in Kansas), but you have a great deal more flexibility and room to be creative in how you define and insure your risk.

Contingent business interruption is sometimes an uninsurable or underinsured risk, and a good candidate for the captive.  Some use their captive to front their global or international property program, selling off pieces out the back and taking a nice fronting commission for themselves: the market would have gotten this if they didn’t.   Others write business specific coverage like lost in hole drill coverage for oil companies.

Cyber Risk:

Cyber risk is another good candidate for a captive. Cyber insurance in a captive insulates an organization from the market becoming less competitive in the future. It also gives a captive owner a great opportunity to diversify their existing captive portfolio. The captive can also be used to provide coverage that might not be really available in the market, such as future lost revenue of first-party loss of inventory due to technology failure.

Benefit Programs:

Now we have benefit programs that are really taking off as captive programs.  Prefunding retiree medical, group term life, medical stop-loss coverage, foreign coverage are just a few of the programs that make sense to add to the captive portfolio. And with some of these programs, the premiums qualify as third-party business and may boost your captive returns with a positive tax affect.

Additionally, for U.S. employers, the regulatory hurdles to funding ERISA-covered benefits in a captive have never been lower with the renewal of the expedited process for securing a prohibited transaction exemption. Couple that with the growing costs (and concerns) surrounding the Affordable Care Act in the U.S. and now is clearly the time to at least be considering funding benefits in your captive.

Find out more about funding benefits in a captive here.

Conclusion:

Regardless of how old or new your captive is, there are a number of internal and external factors that have changed since it was created. Now is a great time to have a professional come in and not only take a snapshot of how your captive is currently performing, but also help you project and strategize where your captive should be in the future. Now is a great time for a captive refeasibility study.

If you agree that it is time to re-evaluate your captive, Spring is poised to step in and help out. Our team of captive consultants, actuaries, underwriters, strategists, accountants and lawyers have decades of experience helping companies similar to yours not only set up their captives, but also conduct through and thoughtful refeasibility studies, which have helped our clients realize continued success with their captive.

Find out more about Spring’s Spring CARE captive optimization product and related services here.

Please contact us using the form below if you’d like to chat with a member of our team about your captive’s current and future performance.

Webcast: Why Fund Employee Benefits in a Captive and How to Gain Approval to Do It

Karin Landry Spring Consulting Group

Recently, Spring Managing Partner, Karin Landry, presented a web session on the benefits of employee benefit captives and the process for gaining a prohibited transaction exemption from the US Department of Labor to fund employee benefits in a captive.

As you may know, the Exemption Process (EXPRO) has been on something of a hiatus for a couple of years, but recently, Intel was approved to fund their life and accidental death and dismemberment in their existing captive. This approval, coupled with Coca-Cola’s exemption approval, seems to indicate that EXPRO may be on the way back.

In this session, Landry explained employee benefit captives, the EXPRO process and offered further detail about the recent developments with Intel and Coca-Cola and what other employers seeking exemptions can expect.

See also: IRS Revenue Ruling 2014-15: More Opportunity to Fund in a Captive 

Of course, if there is a member of your team that might be interested in this presentation, please share this post with them. The content presented will benefit risk, finance and human resource team members at most large businesses.

If you have questions about employee benefit captives or the EXPRO process, please let us know by filling out the form below the video.

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Congress Moves to Exempt Expatriates From ACA Requirements

UN member flagsAnother day, another Affordable Care Act (ACA) exemption…

This week, Congress passed legislation that exempts expatriate health plans from the health care coverage mandated in the ACA. H.R.4414 ensures that U.S. nationals working abroad, and the companies that employ them, are now exempt from the requirements and penalties of the ACA providing they do provide an expatriate health insurance plan.

The exemption was made to ensure domestic insurers offering coverage to these companies and employees were able to compete with foreign insurers that do not have to comply with ACA regulations.  Some of these insurers had been considering moving the divisions and employees that write these expatriate plans overseas.

Expatriate health insurance is an excellent fit for captives and this exemption is great news for employers that have expatriate workers and are considering writing their employee benefits into a captive.

Of course, this is just another reminder that the ACA is very much a work in progress and there are many wrinkles and nuances still to be ironed out. You can be sure that we will stay on top of the ACA developments that matter most to employers and bring you summaries like this one as things develops. For ACA updates in your inbox, as they happen, please sign up for our email updates in the box to the left of this article.

Image credit: WorldIslandInfo.com via flickr

Captives Quickly Becoming the Accepted Means of Offsetting Rising Employee Benefit Costs (Study)

employee benefit captiveEarlier this month, the Captive Insurance Companies Association (CICA) released their Annual Captive Insurance Market Study at their annual conference in Scottsdale, Arizona. This is the 14th consecutive year that CICA has released this survey, which is widely accepted as a barometer for the captive industry.

It is always interesting to see what direction the captive owner community is moving in. These are professionals on the front lines of risk financing who often see, and react, to the coming forces before some employers do.

This year, CICA polled 133 pure and group captive owners on a number of topics. There is plenty of insightful information that can be gleaned from the results, most notably to us was the rapidly growing interest in placing employee benefit in captives.

According to the survey, only 13% of pure captive owners and 8% of group captive owners currently wrote employee benefits in their captive.  These figures reflect coverage for medical (stop-loss), which is the most widely accepted employee benefits coverage for captives according to the respondents.  Another 9% and 6% respectfully of pure and group owners polled were likely to write medical stop loss  in their captive during the next three years.   Probably more telling of the reality of the market is that 41% of all pure captive owners surveyed will either be placing medial stop-loss or looking at placing it in their captive, with 31% of group captives saying the same thing.

Drilling down deeper, the report also highlighted additional areas where pure captive owners will be considering employee benefits program for their captives: 30% will consider Disability Insurance; 29% – Life Insurance; 26% – Accident & Health; 21% Foreign employee benefits; and about 7% will look at Retiree Medical.  For group captive owners, they are also considering funding their member’s employee benefit programs: 27% will look at group Accident & Health coverage; 21% – Disability; 17% Life Insurance; 11.5% Retiree Medical; and 6% will review foreign programs.

Unsurprisingly, according to CICA, Affordable Care Act (ACA) changes and delays are a driving force for the growing interest in seeking an alternative method of funding employee benefits.

The results of this survey are not surprising to our Captive Consulting Team. Over the past few years, we have seen a dramatic increase in client interest in alternative funding solutions for employee benefits. To meet this growing need, we have been working with insurers and service providers alike for years to help prepare them for this growing demand and to help create competition in the market place for our clients.  It is a win-win.

At Spring, we pride ourselves at staying ahead of the curve. By analyzing a number of factors, including external and political forces, our consultants are able to envision the direction of the industry and provide clients with the most innovative and beneficial solutions before everyone else.

Helping employers become more efficient fund their employee benefits in captives is not just another example of how Spring stays one step ahead of industry trends, it is how we drive industry trends through innovation and execution. We have been developing innovative employee benefit captive solutions for years; going so far as to develop patented funding methods for saving employer’s money.

See also: eBook: Funding Employee Benefits Through a Captive

If you are an employer that is feeling the crunch of rapidly increasing employee benefit costs and regulations and are seeking a way to fund your benefits in a more cost-effective and efficient way, you would likely benefit from speaking to our experienced consultants. Spring’s Employee Benefits, Risk Management, Captive Insurance and Actuarial Consultants can help you evaluate your business’ needs and determine if a captive is your best solution.

Contact us today and start putting the techniques used by more and more of those “in the know” in the captive industry to work for you.

 

Image credit: Chris Potter via flickr

Intel Gains Approval from DOL to Fund Benefits in their Captive

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Spring creates innovative funding strategy in landmark case

Congratulations to Intel Corp, who recently received approval by the U.S. Department of Labor (DOL) of their application to fund their employee benefits in their captive.  Our team had submitted the application to the DOL on behalf of Intel.

Intel was seeking to reinsure their life and accidental death and dismemberment coverage through their existing Hawaii-based captive. They had received preliminary approval back on November 6, 2013.

More information about this development can be found in the April 10th Federal Register in Application No. L-11760.

Funding a corporation’s benefit risks though a captive is an innovative financial strategy that has become increasingly important for organizations facing accelerating benefits costs. There are a number of employers that have been waiting for a ruling on this case before they can proceed with their own benefit captive strategies.

“We are delighted that Intel’s request was approved and to see all of the hard work that our combined teams put into the project pay off,” said Karin Landry who heads the Intel team at Spring. “This case is a landmark ruling that is sure to be cited in the future as other employers look to create new fast track processes and to have Spring play a role in it is very exciting.”

You can find out more about our captive solutions and services here.

 

Image credit: Pacific Northwest Agricultural Safety and Health Center via flickr