In the not so distant past insurance captives required a ton of capital and were out of reach for many business owners. The cost required to start a captive, coupled with the overhead and expertise needed to manage it, made it impossible for most business owners.
Segregated portfolio companies (SPC) and cell captives have changed the game.
A cell captive placed underneath a segregated portfolio company makes it more affordable and feasible for companies with premiums less than 1 million dollars annually to reap financial rewards from underwriting profits.
An SPC is a parent captive company specifically designed to manage cell captives underneath it. Each cell is a separate portfolio with complete asset and liability protection from the results or creditors of other cell members. The major advantages of the SPC arrangement is that it is more cost-effective and takes less time and expertise to operate and manage. In most cases the SPC handles all of the administration including underwriting, claims, reinsurance, audits, and banking. It’s a turn-key solution with customization to owner risk and return.
The cell owners benefit financially when (and if) there is enough reserve funds to convert some of the funds to owner equity. This process typically takes several years to accomplish depending on how the cell arrangement is formed. It can be either a tool to build wealth for captive cell owners or to reduce the cost of premium as claim reserve builds.
A hidden benefit of a cell captive is that wealth may grow in a tax deferred manner, but that’s a subject for captive owners’ tax advisors. Many captive owners have historically used their captives to transfer wealth.
Business owners who pay annual premiums of 500,000 or more annually may be a good candidate for a cell captive, especially if their loss history has been reasonable or favorable. The obvious downside to any captive arrangement is that there is a financial risk when claim/reserve costs continue to surpass premium.
Why pay an insurance company premium when you can pay yourself?
WorkersCompensationShop.com has owned an agency cell captive since 2006. The captive has earned an underwriting profit since inception and the outlook is good. Contact us for more information about captive insurance.
