Study & Develop Strong Incident Reporting Systems

“There are ‘known known’s.’ There are things we know that we know.  There are known unknowns.  That is to say there are things that we now know we don’t know.  But there are also unknown unknowns.  There are things we do not know we don’t know.” Donald Rumsfeld, former United States Secretary of Defense.  June 6, 2002

Have you ever asked yourself, how are we supposed to manage the things we don’t know or have never experienced? Or, how do you assess the exposures that present no sign at all of being known?

Unknown unknowns involve us being aware of what relevant information is needed to guide us to decision.  Common sense tells us, if you don’t know what you need you tend not to seek it.  This concept is known as the relevance paradox.  You don’t know what is relevant until it becomes relevant.

Many people live there entire life without ever experience an unknown that presents itself to them each & every day.  Do they ever think to themselves, I would not know what I don’t know?  I would guess not.

This paradox takes center stage when you think of what happened on 9-11.  No one could of ever imagined such a horrendous event and by default, it was impossible to  prevent.  As you think about this, your safety team must remember, even if the information your team is gathering is limited to collectiveness and knowledge of your team members, try not to worry too much about what you don’t know.  Focus your efforts on building strong sustainable incident and reporting management systems with proper communication and problem solving protocols.  When the unknown happens, then you will know what to do.

Stay safe.

Why Not Consider a Captive Insurance Arrangement? Part Two

Is your business a stand alone Captive candidate?

Captives will not work for every business. However, good candidates generally meet two or more criteria:

• Profitable operations, with taxable income ranging from $1.5 million to $100 million.
• $250,000 self-insured/uninsured business risk.
• 100 or more employees.
• $500,000 or more traditional third-party insurance expense.

The reason for these stringent qualifications is that a captive can be expensive to form and manage. In order for it to be a cost-effective option, actuaries and underwriters must be able to quantify $500,000 or more in risk premiums from the parent company's business operations. Hence, the parent company must be large enough and in a risky enough industry to qualify.

The owners, shareholders and executives must diligently study a captive's potential benefits and burdens. Such an analysis should extend considerably beyond the cost of existing insurance, and focus on net dollars to shareholders.

Traditional insurance has become extremely expensive for some types of coverage.  As a result, many middle-market companies have chosen to actively manage their insurance portfolios by taking on large deductibles and/or self-insuring areas where they are exposed.

Is your business a rent-a-captive candidate?

Where a business does not have enough of its own capital to start a captive, or where a license to sell a particular type of insurance is required, the business may enter into an arrangement with an existing and licensed captive to borrow the captive's facility so that the business can enter into a captive-like arrangement.

In a rent-a-captive arrangement, the captive usually issues a new class of preferred shares to the business owner. The business then purchases insurance from the captive and the business makes payments to the captive. The business owner may also be required to issue a letter of credit to the captive to protect the captive against any underwriting losses.

At the end of the policy period, any excess cash above underwriting losses is distributed to the business owner by way of dividends paid to the preferred stock shares, less of course whatever fee was charged by the captive to rent it. Thus, the business owner was able to realize the benefits of a captive in terms of the deduction within the business and to share in underwriting profits, but without having to bear the expense of creating a new captive. The trade-off is, of course, the fee paid to rent the captive.

Looking forward

Fortunately, the trend has been positive for captives, and the IRS has demonstrated the willingness to work with taxpayers by clarifying rules rather than by reversing them.  If you have not completed at the very least a captive feasibility study for your company, you should consier doing so sooner than later.

Why Not Consider a Captive Insurance Arrangement? Part One

A business that does not have a captive insurance program or has not completed a feasibilty study to implement a captive insurance program may soon be in the minority: Insurance industry trends indicate that most businesses are looking at implementing a captive insurance program.

Captives have been used by Fortune 500 risk managers as a way to capture commercial insurance premiums. Large multinational companies self-insure several lines of coverage via a captive – general liability, workers' compensation, employee benefits and property insurance. With favorable claims experience, self-insurance and/or a captive can become a profit center.

Recent changes to Internal Revenue Service policies are allowing middle-market businesses to utilizing captives as another profit center. More than 10,000 businesses – representing industries ranging from finance to construction – have begun to accumulate vast amounts of pre-tax wealth through captive insurance programs, which use insurance subsidiaries formed to insure or reinsure their risks.

How does a captive work?

A captive writes policies at the business owner's discretion with negotiated terms and conditions. If the business has years of good claims experiences, the premiums that have been successfully deducted can later be taken as dividends or as liquidated capital at the capital gains tax rate.  A typical commercial business with taxable income of $10 million will pay 45 percent in federal and state income taxes, leaving it with 55 percent, or $5.5 million for claims or for distribution to shareholders. Instead of paying premiums to an insurance company the business funds $4 million in premiums to its wholly owned captive insurance company. It now has an additional $1.5 million available for expenses, claims or additional distributions to shareholders.

Captive insurance enables business owners to better manage insurance needs including cost, coverage, service and capacity. Additional benefits include:

• Pre-tax wealth accumulation. Insurance premiums are an expense to the parent company and flow tax-free to the insurance company, where they collect on a pre-tax basis in anticipation of future claims.
• Favorable distribution rules. In the event that claims do not materialize, underwriting profits can be distributed to shareholders as dividends.
• Asset protection. Because the captive is an independent corporate entity, creditors of the parent company may find it difficult to seize the captive's assets.
• Estate planning. A family trust or other entity can own the captive.
• Retention of key employees. Giving key employees restricted ownership in the captive can provide a foundation for retention.

The captive transaction is a powerful yearend planning tool because insurance premiums are deductible to the parent and flow tax-free to a captive qualifying under §831(b)of the Internal Revenue Code. At year end, a captive can provide nearly twice as much capital to the business as would have otherwise been paid in taxes. This makes the formation of a captive an attractive and viable option for middle-market companies.