Captive Insurance – Beginners Guide For Small or Medium Size Business Owners (You Can Save Money!)

Captive insurance companies used to only be for large, multi-billion corporations. Times have changed, and as business owners’ risk management needs have become more complex, more and more mid-size companies are taking the captive plunge. Read more to see if a captive insurance company is right for you.

Why Use a Captive Insurance Company?
You may be considering setting up a captive insurance company and it’s very likely you may be saying to yourself, “why should I be doing this?” There are lots of good reasons – and you have probably heard most of them – but the main reason for setting up a captive is… To make money.

How can a captive make me money?
A captive gives you the ability to share in underwriting profit and investment income which can lower your company’s insurance cost. A captive can provide income tax benefits because premium ceded to a captive is tax-deductible, while underwriting profits and investment income are tax-deferred. Assets placed into a captive are shielded from creditors other than claimants if set up properly. A captive can be an invaluable estate planning tool. Assets put into a trust can be excluded from your taxable estate.

A captive is not for everyone.

Who is a captive for?

  • You need to take a long term view toward risk management.
  • You strongly believe in loss prevention.
  • You have a willingness to share risk.
  • You need at least $1,000,000 of annual insurance premiums.
  • You should have $500,000 or more of pre-tax corporate profits.

Who is a captive not for?

  • You buy insurance to “win” against your insurer.
  • You are not interested in loss control or prevention.
  • You are risk averse.
  • Your insurance premiums are not big enough.
  • Your assets are not sufficient to provide the necessary collateral.

How do I set one up?

First you need to choose a jurisdiction where your captive will be domiciled. It can be onshore in one of the many states that have favorable regulations, or it can offshore in such places as Bermuda, Cayman Islands or Barbados. These are the components of a captive start-up:

  • Feasibility study
  • Business plan
  • Actuarial study
  • Application fees
  • Capital investment
  • Collateral
  • Captive manager

The Rent-a-Captive Option

If you want an easier, less expensive way to get into the captive business, you might want to consider using a rent-a-captive. A rent-a-captive is a specific type of captive set up to provide all of the benefits of an owned captive insurance company, without the upfront costs, capital investment and annual maintenance costs. You “rent” a protected/segregated cell, working capital, and licenses from an insurance company set up for this purpose. There is no pooling of risk between cells – each cell, and its assets, are legally separated from the others.

What is the 831(b) Election?

The Internal Revenue Codes section 831 applies to the taxation of insurance companies other than life insurance companies. Subsection (b) applies to the tax treatment of small insurance companies, which are defined as writing $1,200,000 or less in annual written premium. This tax election exempts underwriting profits from tax, and the captive pays tax only on investment income. This tax election can be used for an offshore captive as long as you elect to pay U.S. Tax. You should consult your tax advisor if you think this could work for you.

What is Collateral?

Collateral is needed if the captive insurance company is used as a reinsurer of an admitted insurance company, and is needed so the insurance company can take credit for the reinsurance in their financial statements. The collateral protects the insurance company from any credit risk of the captive’s performance. Five types of collateral are acceptable: Letters of Credit; parental guarantee; pledged assets; performance bond and insurance trust.

Is There an Exit Strategy?

Risk management strategies evolve over time and at some stage, the owners of a captive insurance company may look for an exit strategy. Here are three options for exiting from a captive insurance arrangement:

  • Commutation. The fronting insurance company agrees to assume all outstanding liabilities of the captive. This may allow the release of collateral.
  • Novation. A reinsurer agrees to step in the place of the captive and assume the remaining outstanding liabilities of the captive.
  • Reinsurance. The captive enters into a contract with a new reinsurer to assume the remaining outstanding liabilities of the captive. This option works for insurance that was fronted by an admitted insurer as well as for insurance policies issued directly by the captive.

7 Sure Fire Ways For Your Legal Marketing to Fail – The Essential Lawyers Marketing Guide

1. Failing To Define What You Want Your Marketing To Achieve For You

This is the number one pitfall of nearly all campaigns. You are guaranteed to fail if you don’t decide up front what you want your campaign to achieve for you. Without formulating your critical success factors for the marketing initiative you will never be able to measure success or failure, and if you cannot do that how will you know if your limited legal marketing budget has been well spent?

Practical tip: This is guaranteed to happen if you say yes to a speculative call from a newspaper which has some “last minute advertising space” but you must agree to advertise “today” or the firm of solicitors next door to you will be offered the slot. Let them have it and you can have the last laugh!

2. Trying To Please Everyone

Marketing obtains the best possible results when you have clearly defined your target audience and you speak to them in a language that they clearly understand. In business law, you might find that you work best with certain sectors of business, or in private law that families are your best audience. When you know this all of your marketing materials can be amended to reflect this knowledge and provide you with a much better return on your investment.

Practical tip: Review your current client lists for different legal sectors and see if there are any trends appearing.

3. Communicate Too Little Or Too Much

With solicitors it is always normally the first one which causes the problem. If you have a client database you must do what every hugely successful business does; that is to communicate with it and sell it more of your services. Look at Amazon or Tesco, they email their clients at least once a week, normally twice. I know that one of the concerns that lawyers have is that this will scare off their customers. This is simply not true. If customers do not want to read your emails or mailed marketing message, they will choose not to. It does not stop them using your service again but it will put your name front of mind when they need legal assistance.

Admittedly solicitors would find it hard to communicate with their clients once or twice a week, but once a month should be very easy.

Practical tip: It is 10 times easier to sell more services to existing clients than it is to recruit new ones. Start talking to your client database now before Tesco Law or Halifax Law does.

4. Not Making Use Of Your Free Marketing Space

When a client attends your premises they are a captive audience. What are you doing to communicate with them now?

Your clients should have a choice of marketing materials to read (see below), some educational information sheets about your various areas of law, and advertising messages in your office windows and on internal walls. Is this happening?

Practical Tip: Remove any materials that do not relate to your practice. Whilst it is good to support charities, do this from the extra profits your practice makes from selling more of your services to existing clients as opposed to displaying charity literature in reception (as a lot of solicitors do).

5. Not Having Brochures To Support Your Marketing Communications

Many solicitors seem to believe that brochures are now an expense that they can do without. This is a fatal mistake. Do Banks produce brochures for every service they offer? Do insurance companies produce brochures for their car and household insurance policies? Will they produce them for legal services when they enter the markets en masse? Yes of course they will.

If you are competing against an insurance company in the future and a client visits the insurance company’s amazing website and requests their brochure, when they then pop into their local solicitor to see how they can help them will they feel something is missing when no “sales materials” are provided to help them to make their “informed decision” of which legal service provider to use?

Practical Tip: If you do not have any brochures, obtain at least one practice brochure now and then add one more type of brochure per month until you have at least two types of brochure for every legal service that you offer.

6. Not Having A Website, Or Having One That Is Badly Out Of Date

Many solicitors still do not understand the power of the website. Please let me help you: If you are not receiving at least 20 new enquiries from your website every month you are doing it wrong! It is that straightforward, there are solicitors winning more business than they can handle online. If you are not doing so your website is not working.

Practical Tip: Ask a website professional to audit your website and explain why it is not working.

7. No Time To Market – Too Busy Helping Clients

This is the one area that is a huge problem for solicitors with their legal marketing. In most cases if there is a marketing deadline to be met and a legal matter deadline, the marketing will always fall by the wayside. The trouble with this is that marketing needs momentum to really flourish and provide you with outstanding results. You must commit to spend time growing your business as you do when working on the business you have already generated. Failure to do so could be fatal in a more competitive arena.

Practical Tip: Set aside at least one hour per week to ensure that your marketing builds momentum.

Outsourcing Legal Processes

Legal Process Outsourcing (LPO) firms have evolved and moved up the value chain in the last few years, overcoming initial skepticism around data security and privacy. Most LPO firms successfully addressed privacy concerns by obtaining International Organization for Standardization (ISO) and Information Security Management System certifications. This measure has positively impacted the industry – a trend substantiated with findings from an ORBYS survey in 2011 of in-house counsel heads, which revealed that the majority of respondents used or would consider outsourcing legal processes.

Global spending on LPO continues to increase within the financial services industry as many legal departments have resorted to downsizing and tightening of budgets amid volatile markets and cost pressures. According to a Forrester Research report, the global market for LPO was approximately 250 billion USD in 2012 and is predicted to grow an average of 30 percent for the next three years. The North American market, consisting of U.S. companies and law firms, accounts for more than two-thirds of this market share.

Drivers and Benefits of LPO

Cost savings is the key driver for LPO and one of the most important benefits of outsourcing legal work. Other drivers/benefits for outsourcing legal services are:

Economic Environment: As a result of the global financial catastrophe and ongoing regulatory scrutiny, the financial services industry has witnessed growing numbers of bankruptcy cases, regulatory filings, and other legal proceedings. These events, coupled with severe cost pressures, have fueled demand for legal services and are one of the key drivers for LPO in the industry.

Scalability: LPO is a great tool that has helped law firms and corporate legal departments shift costs from non-value added functions to more strategic objectives. It provides firms with increased capacity without the need for additional headcounts. Thus, firms can do more with fewer resources.

Flexibility: LPO firms can be utilized on a need basis.

Efficiency and Technology: LPO providers are equipped with the latest technologies that can help their clients enhance their operations and business processes. Financial firms in turn can expand their offerings by delivering end-to-end solutions to their clients.

Legal Services Outsourced

Some of the services typically outsourced by financial firms include marketing material review, compliance and transaction support for trading desks, drafting agreements, SEC and other regulatory filings, litigation support, legal research, due diligence, contract review, and M&A.

Reforms in regulations such as Dodd-Frank, GIPS and Basel III have increased compliance and reporting pressures of financial firms, making it challenging for firms to operate independently. Hence, consolidation via mergers and acquisitions is rising especially among small banks, thrifts, and broker-dealers firms, intensifying the demand for legal support and expertise. Many industry players are thus looking for service providers that can offer complete solutions to meet many of their legal and compliance needs.

The LPO model, which uses both legal and non-legal staff, can provide hugely efficient and flexible legal solutions for financial firms by leveraging offshore captives where appropriate and leveraging innovative technologies. Moreover, operating within an environment characterized by cost-pressures and stringent regulations, it makes sense for firms to outsource non-value adding legal work to service providers so that in-house staff can focus on strategic business objectives.