Chances are, you are already familiar with the term Reinsurance (sometimes call a "captive" or “micro-captive”). If you’re not familiar with this increasingly popular, powerful and flexible captive structure, you should see if this strategic risk management tool is right for your business. Read on.
REINSURANCE: An exceptional risk management tool
What Is It?
Reinsurance is a fundamental concept in the insurance industry that helps business leaders manage risk and protect financial losses. It involves forming their own insurance company and transferring a portion of their insurance liabilities (risk) to their own structure (a c-corp).
Through reinsurance, an business leader (insured) can carry (keep) a policy with their commercial P&C insurance company (e.g. Progressive, State Farm, Geico...) to limit their exposure to large and catastrophic losses -- while also self-insuring additional risks through their own Reinsurance Company. Importantly, coverages between these two entities are not duplicated. The self-insured entity typically covers uninsured and under-insured risks of the business owner. Through this strategy, reinsurance provides an additional layer of protection and financial stability to the primary insured (business owner), enabling them to diversify risks, mitigate claims, enjoy underwriting profits and protect assets.
Reinsurance dates back to President Ronald Reagan's signature legislation in his second term (1986): the Tax Reform Act. Reagan/Congress specifically passed legislation within the tax code allowing business leaders (insureds) to self-insure a portion of their risk profile.
Unlike 'Direct Write' or 'Group Captive' insurance (more on that later...), Producer Owned Reinsurance Company (PORC) is a derivative of captive insurance and an excellent choice for business leaders. The IRS states the definition of a PORC is: an insurance company that re-insures the risks of its owner, affiliated businesses, or a group of companies. A PORC always involves an unrelated third-party Insurance Company. See below:
What’s Covered?
Often, a business leader's reinsurance company reflects business risks which are uninsured or under-insured not currently covered by business owner's commercial P&C provider). Examples can include:
Business Interruption (domestic terrorism or pandemic)
Gap fillers
Deductible layers
Cyber risks
Directors & Officers
Intellectual property
Errors and Omissions
Warranties
Malpractice
Legislative risks
Reputational risks
Keyman
Loss of Key Client/Customer
Loss of Key Vendor
Legal Risks
Regulatory risks
What Industries?
While 90% of franchise automobile dealers have successfully used reinsurance since the 1970s, ANY business which has risks (which is all of them) should explore this powerful and flexible business tool signed into law by congress and President Ronald Reagan in 1986. There is a reason 92% of Fortune 500 companies use some sort of captive and more than 70,000 middle-market business have adopted a resinurance strategy. Industries which typically participate include:
Agriculture and Agribusiness
Automobile
Aviation and Aerospace
Construction
Law Firms
Health/Medicine
Hospitality & Restaurants
Manufacturing
Medical and Dentistry
Oil & Gas/Energy
Real Estate and Development
Retail and e-Commerce
Technology
Transportation
...many more
What Are Next Steps?
If you can meet the above requirements, Reinsurance might be a good choice for you. If you do your research, you will find that due to their popularity and the subsequent abuse, this structure came under scrutiny by the IRS due to some non-compliant structures (notable cases were prevalent in 2016). Since associated tax-advantaged benefits and asset protections are significant, it’s been oversold by select accountants, wealth managers, financial planners and the like, often without meeting the requirements listed above (e.g., not using a licensed, third-party actuarial assessment to correctly identify valid risk exposures).
It’s vital that you reach out to a seasoned resource and subject-matter-expert representing a legitimate service provider - preferably one with a team of experienced professionals, hundreds of established clients and decades of IRS approval letters/positive testimonials within the industry. These proven and compliant providers will help determine your eligibility and discuss how to proceed.
To learn more about setting up a reinsurance company, contact us today. At Reinsurance Specialties™, we help business leaders mitigate business risks, adjudicate claims, protect assets and build wealth through tax-advantaged insurance products.
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