Comparative Analysis of Captive Insurance Company Structures

  Domestic Captive Domestic B31(b) Foreign Captive  Foreign 953(d)  NCFC U.S. Premiums Treated as Tax Deductible for Policyholder 1  Y Y Y Y Y U.S. Federal Excise Tax Exemption Y  Y  N2  Y  N2 U.S. Corporate Tax Exemption on Underwriting Profits N Y3 N N Y4 U.S. Corporate Tax Exemption on Investment Income N N N N Y U.S. Tax Deferral on Deferred Dividends to U.S. Taxpayers N Y N N Y U.S. Tax Withholding Tax Exemption on Dividends  to Foreign Entitles N5 N5 Y N5 Y U.S. Tax Exemption on Catastrophe Reserves N N N N Y6 Wealth Management Planning Advantages N Y7 N N Y7 1 Risk Transfer and Risk Distribution requirements must be satisfied to qualify for tax deductability of premiums. 2 FET is 4% on property and casualty premiums for policies issued by the captive on a direct basis; 1% on health premiums for policies issued by the captive on a direct basis; and 1% on all reinsurance premiums assumed by the captive regardless of the line of business. 3 Subject to an Annual Gross Premium Limitation of $2,200,000. Indexed to consumer price index. 4 There is no Annual Gross Premium Limitation 5 The U.S. witholding tax on dividends to foreign entities is 30% 6 Since taxes on profits are deferred until they are distributed to the US taxpayer they can roll over and accumulate over time while earning investment income to provide funding for high limit catastrophe losses without incurring any tax liability. 7 If structured properly with real insurance risk,... Read More

What companies can benefit from an NCFC captive?

All for profit companies interested in managing their tax liabilities can benefit from a NCFC captive.  A full range of insurance risks such as Workers’ Compensation; General Liability; Commercial Auto; Medical Stop Loss; Professional Liability; Extended Warranty; Deductible Reimbursement; can all be funded through NCFC Captives. U.S. companies with foreign operations and foreign companies with U.S. operations frequently look to NCFC captives for the cash flow benefits they provide while minimizing double taxation issues.   Also NCFC captives have a distinct advantage for funding catastrophe exposures since profits and investment income can accumulate over time to provide a significant loss reserve built from tax free dollars. This can be achieved without the need for IBNR accounting which is typically not possible for high severity, low frequency exposures. Typical examples would be Earthquake; Windstorm; Products Recall; Cyber Liability; Commutation and Loss Portfolio Transfer business.

What is IBNR accounting?

Insurance accounting enables carriers, including Captives, to reserve for incurred but not reported (IBNR) losses. As a result, profits falling to the bottom line are net of expected losses even though such losses may not yet have been realized or reported. This means that loss reserves are established with pre-tax dollars. These IBNRs can be significant, particularly for long tail liability exposures and must be actuarially supported in order to qualify for accounting and regulatory purposes. However, many high severity, low frequency catastrophe exposures cannot be predicted with any actuarial confidence and do not qualify for IBNR accounting, thus leaving the balance sheet vulnerable to potentially severe volatility in the event of a catastrophic loss. Although there may be some relief for certain casualty exposures where there is a history of major losses giving limited credence to an actuarial IBNR reserve, typically catastrophe reserves can only be adequately funded with after tax dollars. This is particularly true for short tail property exposures such as windstorm or earthquake where there is little doubt as to whether or not a loss has been incurred during any particular policy period. In these circumstances, the absence of a known loss means that the premium associated with such risk is considered profits and is taxed before it can be added to surplus to fund possible future losses. A huge benefit derived from a NCFC captive is that regardless of IBNRs, catastrophe reserves can be established with tax free dollars. This is possible since taxes on profits are deferred until they are distributed... Read More

Haven’t heard of a NCFC Rent-A-Captive or Segregated Portfolio Company?

Since Non-Controlled Foreign Corporations are prohibited from conducting trade or business in the U.S. they are not permitted to advertise or solicit business in the U.S., nor are they able to have a U.S. Branch operation. It does not however, restrict them from insuring U.S. exposures either as direct placement on a non-admitted basis or through reinsurance with an admitted fronting carrier. In order to access a NCFC rent-a-captive you must independently procure their services by contacting them outside of the U.S. This can be achieved simply by a phone call or email expressing interest. Once you have made the initial contact, the NCFC may then communicate with you to explain their facility, work with you on a feasibility study and provide quotations. The challenge is knowing what options are available and who to contact. Of course the internet is a good tool as well as independent risk management consultants, who can at your request provide you with a list of offshore contacts who can work with you to overcome this barrier and open up direct communications. Although NCFCs can be domiciled anywhere outside of the U.S., one of the best known and well respected domiciles of choice is Grand Cayman, which offers a tax free corporate environment and has in place the infrastructure, expertise and legislation necessary for a successful alternative risk management solution to your insurance needs.

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