You’re here because you’re interested in knowing more about captive insurers. They are a legitimate form of insuring your business that can work out very well in your favor. However, the challenge can be knowing exactly who you should talk to about captives.
You worry that you’re talking to the wrong person, not knowing you’ve been colorblind to the red flags they vigorously wave. And you don't want to get bad advice on how to best insure your business.
At ReNu Insurance Group, we’ve helped over 130 captive owners become successful in this long-term business strategy. Unfortunately for some of them, they came to us after talking to someone who didn’t know their backend from a hole in the ground. We have a deep understanding of captive insurers, how they work, and which businesses are an ideal fit for them.
In this article, you’ll learn to identify if you’re talking to the wrong person about captives. By the end, you’ll know who to talk to so you can determine whether your business is an ideal fit for this legitimate insurance model.
Table of Contents
- Know the difference between someone getting your business through the door vs. success as a captive owner.
- You should talk to someone with an insurance license about captives
- What are the red flags to look out for when talking to someone about captives?
- Are there questions I should ask the person I’m talking to about captives?
- Know the pros and cons of captive insurance before talking to an expert
Know the difference between someone getting your business through the door vs. success as a captive owner
Captives directly result from how well you run your business and how safe your business can be. If people want numbers on paper for a pro forma and nothing else, alarms should go off in your head. They should be talking about more than getting you into a captive, such as how to make your risk management and safety programs more effective to be a good captive owner.
The numbers are just to get through the door and into a captive. You must then show regulators, captive managers and/or risk committees that you can be a successful captive owner.
You need to answer the questions: “Are you lucky to have low claims? Or are you good at keeping your business safe?”
It’s not overly complicated. However, if the person you’re talking to isn’t asking these two simple questions, they might not know entirely what they’re talking about.
When you hear someone, including insurance brokers, say, “Oh, this is great. You gotta show this to get into a captive,” you need to understand that much more goes into being a captive owner. There is plenty else that goes into whether or not you’ll be a successful insurance company owner.
Are there people I should never talk to about captives?
Many of us in the industry heard stories about many Wealth Managers talking about captives. And they don’t have insurance licenses, which is a problem in our opinion.
How can you talk about captives if you haven’t been involved in the insurance industry? You don’t need a license to sell people on the idea of captives. Business owners already don’t know the insurance industry, let alone the sophistication of captive insurers. It would be beneficial for you to talk to someone who has worked in the insurance industry and understands the intricacies of captives.
However, the Wealth Manager career is not inherently the problem. Plenty of good wealth managers might have some knowledge of captive insurers. The real red flag to look for is when they lead with the words, “Captives are a good tax strategy.” The guys who do this are advocating for an 831b, which is a tax election, not an insurance formation.
If you go in with the tax strategy mindset, you’ll find yourself at the wrong end of the IRS when joining a captive. You will get crushed.
You should talk to someone with an insurance license about captives
Remember, you’re getting ready to own or be a partial owner of an insurance company. That company is going to generate a policy to insure your risks. You also have to see whether you’ll be a profitable captive owner.
We’re not saying you must talk to someone with an insurance license to determine if you’re a good fit for a captive. The person who manages your money isn’t the same person who manages your risk.
If you don’t have an internal risk manager (or someone who can fit this role), who will tell you that your return to work program has holes in it, that your loss control report highlights issues and how to fix them, etc.?
Accreditations on captives are a step toward seeing those green flags. For example, you can check if someone has a Certified Insurance Counselor (CIC) designation. Someone with this might still know little about captives, but it’s at least a start.
To find designations that are more captive-oriented, you can make sure the person you’re talking to has an Association of Captive Insurance (ACI) designation. An ACI is all captives and is given through a series of classes through the International Center for Captive Insurance Education (ICCIE).
What are the red flags to look out for when talking to someone about captives?
When putting yourself out there and taking on more risk, you better be sure you know what you’re doing. Do you know how you do that? Yes, by talking to someone who knows the ins and outs of captives. You can hurt your business financially if you aren’t a fit for captives.
- If someone is selling you hard that “captives are the greatest things ever,” they are probably not the best person.
- If they tell you an 831b is a great option, that might be a good time to walk out of the office or hang up the phone.
Note: don’t worry if you don’t know what an 831b tax election is. Read our article Does the IRS Hate Captives?–Breaking Down 831(b) and Micro Captives to better understand why alarms should go off in your brain when someone brings stuff like this up.
What’s great about captives is you have complete transparency and know where every dollar goes. If you’re looking at a captive and don’t know where every dollar is being spent, there’s a red flag waving in the air that would cause a bull to charge at it.
The main thing is to trust your gut. If someone is trying to hide something, your gut will tell you there’s a problem and to run away from the person you’re talking to.
Are there questions I should ask the person I’m talking to about captives?
Absolutely. Here are some questions you should be asking and we’ll show you why they’re conducive to you.
“How many times has your firm had a captive insurer that the IRS disallowed?”
Why this is important: If a firm has had even one captive disallowed by the IRS, that’s one too many.
Many times, captive promoters move businesses into captives for tax purposes, and they tend not to have insurance licenses. Anytime someone is trying to move you to captives for tax purposes, it's an automatic red flag.
A captive being disallowed by the IRS can be for one of three reasons:
- The captive didn’t have what is considered common notions of insurance.
- The distribution in the captive was by using a pool, which is where most recent court cases come from.
- It was a tax play and the IRS caught it.
“Do you only work on 831b elections?”
Why this is important: The IRS has deemed the micro captive, or 831b, a transaction of interest. This means anytime the IRS sees a captive taking that election, they’re watching closely. It’s like allowing them into your house the minute you check that box.
The IRS also thinks an enormous amount of fraud is taking place there. You could be looking at an 831b election for legitimate reasons. However, plenty of bad actors have tainted that industry, causing it to undergo incredible scrutiny.
Make sure the person you’re talking to knows the basics of captive insurers
If you want to ensure someone knows what they’re talking about, ask them, “What’s the difference between a cell captive and a group captive?” Or ask about the pros and cons of a single parent and a group captive.
Why this is important: See if the person you’re talking to knows what they’re talking about.
If the person you’re talking to isn’t giving you answers you’re comfortable with, keep digging.
Know the pros and cons of captive insurers before talking to an expert
You’ve learned about the red flags to look out for, certifications for the person to talk to about captives, and questions you should ask someone when considering captive insurers. Knowing who to talk to is already tricky, but not impossible.
When you find the best person to ask about captive insurers, you want to understand the pros and cons of this insurance model to make sure you can ask the best questions and get closer to understanding if it’s best for your business.
That’s why you need to read our article on the general pros and cons of captive ownership. When you talk to an expert on the subject, you want to learn the intricacies of captives to see if they’re suitable for your business. You cannot only follow the questions provided in the article but also come up with your own to get the answers you need.
If you want to talk to our experts in captive ownership, schedule a call with ReNu Insurance Group to speak to one of our insurance advisors.
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