New opportunities in managing risk for the middle market.
Enterprise Risk Captives (ERCs) made it onto the scene several years ago to provide small and mid-sized closely held, profitable companies with the ability to transfer uninsured business enterprise risks while gaining the benefits that a captive offers. All industries, including real estate, builders, manufacturers, distribution chains, medical and retail, can be served by an ERC. As a pioneer in this segment of captive insurance, Artex is well positioned to provide small and middle-market companies a better way of managing risk, minimizing associated costs and optimizing their return.
Inside an Enterprise Risk Captive
ERCs are used to insure a variety of risks such as first-party exposures, deductible reimbursements, policy exclusions, specialized coverage that is unavailable or excessively priced in the conventional market, or other risks that are retained by the business. Business interruption, directors and officers, warranties, employment practices, management liability, certain kinds of credit risk, pollution liability and punitive damages liability are coverages in which captives excel.
Good candidates for an ERC have at least one of the following criteria: $25 million or more in annual revenue, significant uninsured risk; 50 or more employees; uninsured losses of $100,000 or more annually; $200,000 or more spend annually on Property/Casualty insurance premiums; or sale of warranties or service contracts to customers.
Benefits of Enterprise Risk Captives
- Obtain funding for risks otherwise uninsurable or not economically viable to insure
- Improve risk management
- Reduce dependence on commercial insurance
- Create new profitable business
- Customize insurance coverage
- Allow key employees to participate in captive ownership
An ERC can be structured to potentially build up underwriting profits on a tax-deferred basis. Known as a Micro-Captive, under IRS tax code section 831(b), captives with $2.3 million or less in premiums pay federal income taxes only on investment income. Premiums paid to the captive by the company are typically tax deductible and since no federal income taxes are paid on underwriting income, a captive with low losses relative to premiums can generate significant tax advantages for its owner. It is essential that the captive be created to meet real insurance needs for the client, and that any potential tax benefits are simply a by-product of a solid alternative risk management approach. Risk transfer must be the primary purpose of the structure, which must follow the same risk management principles and is subject to the same regulations as its larger counterparts.