Captive industry spawns an entire class of specialists

DBTsupplementbannerCaptives

While captives are self-insurance products, their initiation and maintenance are far from do-it-yourself projects. Service providers include everyone from actuaries and captive managers who facilitate the formation process, to auditors, attorneys, and wealth- management professionals who lend guidance over the life of the captive.

Domicile selection is one of the first tasks at hand. Not all states offer captive insurance – neighboring Pennsylvania and Maryland are among them. A state’s insurance regulations, its tax laws, and availability of knowledgeable service professionals all are important criteria when it comes to domicile selection. Delaware’s growth in captives is unparalleled, and recognitions include Captive Review magazine’s 2013 Domicile of the Year and a Highly Commended award this past August from the same publication. Moreover, its Chancery Court system has a strong reputation when it comes to jurisdiction over the state’s corporate interests.

Once a domicile is selected, a feasibility study and a business plan follow. As with any new start-up, a business plan is, and will continue to be, an essential operating tool. Here, an actuary and a captive manager work together in justifying whether a captive structure makes sense – regardless of whether the captive under consideration is a pure captive, association captive, or sponsored captive, surplus capital, projected premiums, and property and casualty risks are scrutinized. The captive manager becomes an important ally during the formative stages of the feasibility study and when it comes time to seek approval.

Once the preliminaries are taken care of, the application is filed with the secretary of state. It receives state regulator and insurance commissioner review prior to approval, which in Delaware is typically 30 days.

Eric Williams
Eric Williams,
Captive Audit Group at Cover & Rossiter

“The captive manager has relationships with the many accounting firms, attorneys, and actuaries,” said CPA Eric Williams, a principal in charge of the Captive Audit Group at Cover & Rossiter in Wilmington. Cover & Rossiter was the first Delaware-based accounting firm authorized by the state’s insurance department to provide audit and tax services for captive insurance companies. The firm works with approximately 45 risk-retention and captive clients. Clients include small and midsized pure-captive companies, some of which may take advantage of the premium deduction allowable through IRS code 831b.

“These are executives that have a lot of feet in the fire with their own business. And in starting a captive insurance company, they need to rely on service providers to navigate this niche industry,” Williams said.

Collaboration throughout the year between the captive’s manager, accountant and attorney are key to the captive’s success.

Jeff Simpson
Jeff Simpson, director at Gordon, Fourmaris & Mammarella.

“A lawyer helps hold together the whole structure. Regulations, tax [compliance], corporate governance are issues that all have to be connected. [An attorney offers a] perspective that’s different from all other professionals,” said Jeff Simpson, a director at Gordon, Fourmaris & Mammarella. One’s attorney may also provide regular counsel by reviewing policies, contracts and claims, and may have a role in the captive’s annual meeting.

Cover & Rossiter’s office, as well as those of its peers, stayyyyy involved with the captive by conducting audits and, come tax season, working on tax preparation. The audit season at Cover & Rossiter – January through the end of June – requires more hands on deck. Two full-time employees assist during these busy months.

“Overall, there is a lot of collaboration between all service providers for audit engagement,” said Williams, adding that Delaware’s Series LLC captives have an added layer of complexity, as each individual series business unit is examined.

Finally, over the life of the captive – as with any business operation – a wealth management plan will help guarantee sound investment of revenues. Decisions over distributions to participants and payout of claims likewise are best managed with a team approach.

Share This Post

Post Comment