This article will simplify the captive insurance arena into a few broad categories to better help middle-market business owners understand the potential advantages of these risk financing arrangements.

1. I D E A S T O H E L P
G R O W Y O U R
B U S I N E S S
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O
ver 28% of all commercial insurance premiums
today are paid to captive insurance companies. Yet,
there still exists a sense of mystery and confusion
amongst middle-market commercial insurance buyers as
to what benefits this arrangement can provide. The goal of
this article is to simplify the captive insurance arena into a
few broad categories to better help middle-market business
owners understand the potential advantages of these risk
financing arrangements.
Definition
A captive insurance company is a privately-owned
insurance company whose owners are also its insureds.
These insureds are then the principal beneficiaries of
all underwriting profits and corresponding investment
income generated from premiums paid into the captive.
Captives have been utilized by business owners for more
than 100 years, with over 6,000 captives operating today.
Let’s look at the potential benefits for middle-market
companies, using a few different scenarios.
Group Captives
Privately-held or smaller public companies usually
do not have the size or legal/taxable diversity to
qualify for insurance company status on their own in
the eyes of the IRS. These companies typically have
an annual commercial insurance spend of between
$150,000 and $2 million. For certain portions of their
commercial insurance program (General Liability, Workers
Compensation and Automobile) they can participate in
a group captive arrangement whereby up to 65% of their
premiums are available for them to retain if not used for
claims. Companies in this space currently utilizing high
deductibles or retrospectively-rated programs will find
captives less expensive and more financially efficient over
the long term. Additionally, most privately-held companies
own their captive stock outside their personal estate,
thus allowing captive profits to be held in a vehicle not
subject to estate taxes.
Balance Sheet (Micro) Captives
Higher pre-tax profit companies can set aside these
pre-tax profits, on a tax deductible basis, into a captive to
insure business risks for which they currently do not buy
insurance or for which they do not buy enough insurance.
As long as premiums are less than $1.2 million per year,
profits are retained inside the captive on a tax-exempt basis.
Profits distributed from the captive are in the form of a
dividend and are taxed as such.
Stop Loss Health Insurance Captives
One of the hottest trends in the health insurance
industry is the group stop loss health insurance captive.
This vehicle gives current fully-insured employers with as few
as 25 employees the ability to achieve qualified self-insured
status, along with all the advantages of being “self insured”
and without the economic volatility of being self insured on
their own. Additionally, current self-insured employers in
these vehicles have access to profits normally only available
to their current stop loss insurance provider.
Insurance is the purest form of socialism; the “haves”
subsidize the “have nots”. Captive insurance companies
are designed to reward those companies that, through
their risk management discipline, consistently pay far
more in premiums than in claims. With a limited amount
of “risk” attached to captives and with the client’s ability
to keep the underwriting profits and investment income,
it’s no wonder the captive marketplace has grown at over
200 times the rate of the traditional market in the past
15 years.
our business is growing yours
Article reprinted from Summer 2013GROWTHBIZS T R A T E G I E S
COURTNEY W. CLAFLIN
CBIZ Insurance Services, Inc. • Minneapolis, MN
612.436.4614 • cclaflin@cbiz.com
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