Earlier today the Captive Insurance Companies Association (CICA) released an Information Statement regarding the utilization of micro captives (831(b) captives). This document echoes our emphasis on the importance of best-practices implementation and the use of competent and qualified captive professionals. This document and the corresponding CICA's Best Practices Guidelines are highly recommended for any individual considering the opportunity of captive ownership and their strategic advisors.
This document outlines numerous characteristics that a legitimate captive should demonstrate including:
- Business Purpose - A captive insurance company must serve a risk management purpose. It cannot be formed solely for tax benefits.
- Service Providers - Regardless of size a captive insurance companies of all sizes must engage a qualified captive manager, risk manager and other service providers with appropriate insurance-related credentials.
- Insurance Coverages - Coverages provided by captive insurance companies must transfer applicable insurance risk appropriately via formal insurance policies and contracts.
- Premiums - Premium pricing must be actuarially determined and priced accordingly to the individual insureds exposures, loss histories and comparable to commercial market costs (if applicable).
- Risk Pools - Most legitimate micro captives and 831(b) captive insurance companies utilize risk pools in order to meet IRS safe harbors for risk sharing and risk distribution. As such, risk pools need to follow the same guidelines for premium determination as well as have all claims independently reviewed and approved.
- Corporate Governance - Micro captives and 831(b) captives are insurance companies and should be operated as such. Captive insurance companies need to follow the regulations and standards for governance as outlined by their respective domiciles.
- Investments - Micro captives and 831(b) captives (and all captive insurance companies) must issue and follow an Investment Policy Statement. This document is dictates the characteristics that guide the investment portfolio of the captive and is approved by insurance regulators. In general, the assets of a micro captive or 831(b) captive closely mirror those of traditional insurance companies and focus on: liquidity, preservation of capital, prudent returns and assets that match the captive's liabilities.
- Claims - Captive insurance companies of all sizes (micro captive and 831(b) captives) must set aside reserves to pay all claims on a timely basis. These reserves and associated losses should also be review on an annual basis by qualified actuaries.
If you would like a copy of this release or have any questions regarding any of the suggested best practices please contact me at 785-493-4303.
About Assurance Partners
As one of the largest providers of risk management services in the Midwest, we specialize in partnering with strategic advisors to help them guide their clients through the process of determining risks that are unique to their organizations. We then translate those risks into an acceptable insurance program allowing them to obtain the protection and financial benefits that are unavailable in the traditional insurance marketplace all while strengthening the advisors’ value and providing opportunities for additional revenue.
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