Using Captive Insurance Companies for Savings

Small companies have been copying a method to control insurance costs and reduce taxes that used to be the domain of large businesses: setting up their own insurance companies to provide coverage when they think that outside insurers are charging too much.

Often, they are starting what is called a “captive insurance company” – an insurer founded to write coverage for the company, companies or founders.

Here’s how captive insurers work.

The parent business (your company) creates a captive so that it has a self-funded option for buying insurance, whereby the parent provides the reserves to back the policies. The captive then either retains that risk or pays re-insures to take it. The price for coverage is set by the parent business; reinsurance costs, if any, are a factor.

In the event of a loss, the business pays claims from its captive, or the re-insurer pays the captive.

Captives are overseen by corporate boards and, to keep costs low, are often based in places where there is favorable tax treatment and less onerous regulation – such as Bermuda and the Cayman Islands, or U.S states like Vermont and South Carolina.

Captives have become very popular risk financing tools that provide maximum flexibility to any risk financing program. And the additional possibility of adding several types of employee benefits is of further strategic value to the owners of captives.

While the employee benefit aspects have not emerged as quickly as had been predicted, there is little doubt that widespread use of captives for employee benefits is just a matter of time. While coverage’s like long term disability and term life insurance typically require Department of Labor approval, other benefit-related coverage’s such as medical stop loss can utilize a captive without the department’s approval.

Additionally, some mid-sized corporate owners also view a captive as an integral part of their asset protection and wealth accumulation plans. The opportunities offered by a captive play a critical role in the strategic planning of many corporations.

A captive insurance company would be an insurance subsidiary that is owned by its parent business (es). There are now nearly 5,000 captive insurers worldwide. Over 80 percent of Fortune 500 Companies take advantage of some sort of captive insurance company arrangement. Now small companies can also.

By sharing a large captive, participants are insured under group policies, which provide for insurance coverage that recognizes superior claims experience in the form of experience-rated refunds of premiums, and other profit-sharing options made available to the insured.

A true captive insurance arrangement is where a parent company or some companies in the same economic family (related parties), pay a subsidiary or another member of the family, established as a licensed type of insurance company, premiums that cover the parent company.

In theory, underwriting profits from the subsidiary are retained by the parent. Single-parent captives allow an organization to cover any risk they wish to fund, and generally eliminate the commission-price component from the premiums. Jurisdictions in the U.S. and in certain parts of the world have adopted a series of laws and regulations that allow small non-life companies, taxed under IRC Section 831(b), or as 831(b) companies.

Try Sharing

There are a number of significant advantages that may be obtained through sharing a large captive with other companies. The most important is that you can significantly decrease the cost of insurance through this arrangement.

The second advantage is that sharing a captive does not require any capital commitment and has very low policy fees. The policy application process is similar to that of any commercial insurance company, is relatively straightforward, and aside from an independent actuarial and underwriting review, bears no additional charges.

By sharing a captive, you only pay a pro rate fee to cover all general and administrative expenses. The cost for administration is very low per insured (historically under 60 basis points annually). By sharing a large captive, loans to its insureds (your company) can be legally made. So you can make a tax deductible contribution, and then take back money tax free. Sharing a large captive requires little or no maintenance by the insured and can be implemented in a fraction of the time required for stand alone captives.

If done correctly, sharing a large captive can yield a small company significant tax and cost savings.

If done incorrectly, the results can be disastrous.

Buyer Beware

Stand alone captives are also likely to draw IRS attention. Another advantage of sharing a captive is that IRS problems are less likely if that path is followed, and they can be entirely eliminated as even a possibility by following the technique of renting a captive, which would involve no ownership interest in the captive on the part of the insured.

Legal Outsourcing: Another Billion Dollar Industry

Surging business

Virtually unheard 10 years ago, the term “outsourcing” has emerged as a phenomenon in the business of the present day world. It has become the backbone of Indian service sectors. In the last fiscal India earned $6.7 billion by providing services in software, technology and manufacturing outsourcing.

Now the BPO companies have turned their eyes on legal outsourcing. According to a study by the US-based Forester Research, the current annual value of legal outsourcing which is worth $80 million can rise up to $4 billion and can produce 79,000 jobs in India by 2015. National Association of Software and Service Companies (NASSCOM) also projected that Legal Processing Outsourcing providers (LPOs) in India will soon rise up to $3-4 billion. This heralds the opening of new vistas for law professionals whose number is increasing incessantly.

According to Forrester Research report, “The benefit of the outsourcing companies in the US would translate into a cost saving of about 10-12 per cent. The potential of the Indian resources to absorb the increasing demand in legal outsourcing is because India enjoys the economic advantages of the wage difference and less perks and overheads.”

Nature of work

In the beginning the works which are being outsourced to India are “of secretarial nature and includes patent drafting, legal research, contract review and monitoring,” says Mr. Ravi Shankar S. of 21 st Century Law Firm. But it is set to expand with the enlarging knowledge of Indians regarding the foreign laws. Experts are hoping to receive high-end sophisticated contracts, which require a strong legal base of international standards.

Challenge ahead

The most important challenge to the newly-born sector is the need for Indian lawyers to pass US Bar exams, conflict of interest rules and data security. According to Mr. Ravi Shankar, “As far as qualifications of Indian lawyers regarding handling of foreign legal jobs are concerned, it should be pointed out that the nature of jobs at the lower level is almost the same. So no special qualification is needed to handle them.”

But notwithstanding the optimism prevalent in the legal business, there are a plenty of hurdles which can hamper the growth of this sector. For example the Indian Advocates Act, which deals with the professional conduct of lawyers, does not support work for other countries. Even, in specific laws governing companies and trade in securities, which hugely differ from one country to another, may constrain LPOs to paralegal and secretarial work.

But on the bright side, certain branches of law, which are of a global nature, like Intellectual Property laws (patents and trademarks) can give Legal Process Outsourcing Providers (LPOs) a fillip in their endeavour.

An Indian lawyer can be as good as his American counterpart in US Federal laws if properly trained in US law. What is required of an attorney, either Indian or American, is not that he should be aware of all laws and regulations but that he should be ready to acquire that knowledge.

Rush to grab the opportunity

It is the effect of this optimism that not only established BPO companies but also several legal firms have thrown themselves open to this lucrative opportunity. In fact, American conglomerate, General Electric, was one of the first to set up its captive BPO Gecis in India, which included LPO. Other technology companies, too, farmed out work to their Indian captive units.

Khaitan & Co, a leading law firm from Kolkata has already started an LPO by floating a new company ‘Neoworth’ and engaged 10 US-enrolled lawyers.

There is a strong political opposition in the US against outsourcing as it may affect the livelihood of US attorneys and may also serve as a roadblock. Despite of that feeling, legal firms are more than willing to outsource their jobs to India. That’s because like other BPO activities, Indian lawyers come cheap. An associate lawyer in the US comes with a $225 per hour tag in the first year. By the eighth year, it goes up to $450 an hour. In India, the rates are barely 10 per cent to 15 per cent of that. Moreover, with the time lag between India and the US and the UK, the turnaround time is 24 hours.

Animals in Captivity May Not Take Learned Skills Back to the Wild

Many believe and some have documented instances when wild animals are taken from the wild and taught a new skill, that they do not necessarily use those skills once out of captivity. Why is this? Well many reasons one, is that it may not be a practical skill to use or there is no real need. Perhaps it might jeopardize their social status to do something that the others felt out of place? Maybe they cannot teach the skill to their offspring or the others in the group are not interested in learning what they have to show them.

Recently this subject came up in an online think tank when a fellow thinker stated: “However when the same specimen is returned to its place of origin the acquired responses will not succeed within its classification. The adaptation would then be considered residual.”

Indeed this hits the nail on the head. The adaptation would be residual to the normal life of the social group or individual animal in the wild. Humans are able to adapt very quickly and often take their skills to new levels with them. That is to say that this is one thing mankind is extremely good at, very well suited and the large brain makes it very easy for him. Indeed this has helped in the “luck” phases of cataclysmic evolution after his branch off from Chimpanzees. Able to adapt no matter where or what is presented.

This is to mankind’s plus side of the “T” chart on the large legal pad of classification and abilities of the species; humans rank high there indeed. Some individual cultures rank really high, perhaps this is the explorer gene or something. These are all very interesting topics to think about indeed. So, perhaps you will consider all of this in 2006.