The Real Impact of Captives
Is a captive a viable alternative for single members of a self-insured fund such as CompTrustAGC? Possibly, but only under a specific set of circumstances. And it is not good for an entire group.
So said William L. Shores, a CPA with the firm of Shores, Tagman, Butler and Co., during the recent talk at the AGC/SIF Information Exchange in San Diego.
Shores said that captive insurance companies are becoming more popular, but they often are not a good fit for individual insureds and they are “not a viable alternative to replace a self-insured fund for the entire group.”
For the entire group he said “a captive would have all of the same costs that a self-inured fund would have, plus certain other costs. The most common additional cost would be fronting fees. These fronting fees would add 8 percent-12 percent of premium in additional costs.
“Assume a self-insured fund had $10 million of annual premiums with total costs of $8 million. A fronting fee of 10 percent would make the total cost of the program rise to $9 million. Would anyone do that?”
That leads to the question of a captive’s fitness for individual members.
Said Shores: “It depends on the facts and circumstances. Generally, the larger, better risks are the better candidates. If the losses are substantially lower than the average loss ratio in the self insured funds/carriers, even with the added costs, the insured can be potentially better off.”
And then there are the issues with captives, which may not be properly disclosed or considered, according to Shores:
· Improper use as a tax or estate planning vehicle
· Challenge of structure by the IRS
· Tax deductibility of premiums paid to the captive
· Risk transfer in insurance contracts
· What happens when losses and costs are greater than predicted
· What happens when the fronting carrier is no longer available
· Operational costs
· Joint and several versus no guaranty fund
· Costs and issues in examinations by the regulatory authorities