Strategic Cost-Saving Opportunities Digital 2014 | Page 10

Looking at criteria
So how large is large enough
to consider setting up a captive
insurance company?
Fine says the answer depends
on a given company’s situation,

“If you can afford to fund your own risk,
why not be in your own pool and not pay
for somebody else’s problems?”

but there are a few rules of thumb.
“If a company has greater than

~ Bill Goddard, principal

$25 million in revenue, and if it has
about $2 million a year in profits
and positive cash flow, it’s at least
worth having a conversation,”

factors while keeping your current

that could put it out of business,”

Fine says. “It’s worth examining

plan that covers more common

Goddard says. “So you might set

the risks the company has in the

risk factors, such as property

up a captive insurance company if

marketplace to see if it might be a

damage or directors and officers

you’re located there and fund your

good candidate to set up a captive

liability coverage.

own earthquake insurance.”

insurance company.”

“In certain cases, insurance
companies have elected not to

Tax efficiencies

lines, but they aren’t written in

underwrite certain risk factors,

Another factor to consider when

stone. If your revenue falls below

such as specific types of malprac-

determining whether a captive

the $25 million threshold, that

tice coverage or terrorism cover-

insurance company is right for

doesn’t necessarily mean your

age,” Goddard says. “Some of

you is the tax advantages. Most

company is a poor candidate for a

those coverages are too specific

prominently, premiums paid to a

captive plan.

for an insurance provider to want

captive insurance company count

to deal with. When that hap-

as tax-deductible items.

The numbers are good guide-

“Companies with revenue under

“That’s a huge tax efficiency that

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owned by the successors (e.g.,

$25 million could still be good can-

pens, self insurance via a captive

didates,” Fine says. “And we’ve

insurance company might be your

you can’t get with an externally

grandchildren). For instance, a

seen companies well over that

only option. And, a captive insur-

funded insurance policy,” Fine

grandfather who started a captive

Structure the ultimate
captive insurance vehicle

threshold that, for various reasons,

ance company will enable you to

says. “So while it does take an

might pay $1 million for earthquake

If you decide that a captive insurance company is right for your

influx of funding to start a captive,

insurance. When no earthquake

company, you will need to partner with a service provider to set

you can experience significant

occurs that year, those dollars are

it up. The provider must have expertise in several areas, includ-

savings in addition to the possible

passed tax-free to a grandchild,

ing knowledge of accounting, tax and insurance as it pertains

fund surplus that can help you

who also owns the captive.

to captive insurance companies, as well as in-depth local, state

take on future risk.”

For a video overview of captive insurance companies, click here 4 .

and federal tax expertise.

aren’t good candidates. It really
comes down to each company’s
unique situation and risk factors.”
If your company faces uncommon or hard-to-insure risks, you
should consider looking at setting

smooth out the cost of insurance
over a longer period of time.”
Geography can also play a role
in when and how you weigh the viability of a captive insurance plan.
“For example, an insurance

There are also estate-planning

“That’s the most important piece of advice we could give,”

up a captive insurance company

company might not want to under-

advantages to a family business

Fine says. “Certainly, do your due diligence in analyzing the

specifically to self-fund the insur-

write policies for earthquake insur-

setting up a captive insurance

feasibility of a captive for your business, but make sure you’re

ance for those risk factors. Doing

ance in the San Fernando Valley,

company. In this situation, a cap-

committing as much time to researching the service providers

so allows you to insure unique risk

because if an earthquake hits,

tive insurance company could be

who will help you set it up.”
For a more detailed video look at captives, click here.

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Strategic Cost-Saving Opportunities • Digital 2014

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