Held Captive—Captive Insurance Companies
Mark L. Rosen, Esquire
Forming a captive insurance company (CIC) is at the highest level of financial planning and asset protection. Most simply, a CIC is an entity formed to insure the risks of its parent company. In the past, CICs were a last resort for businesses that could not purchase standard insurance policies. CICs also were a sensible option for companies large enough to justify the expense (e.g., Fortune 500 companies, international groups, etc.). Today, a CIC may well be your first resort. While at first glance it may seem like an enormous undertaking to form one, it is one of the most promising opportunities available for practice protection.
Basically, you open your own insurance company and sell yourself a policy to insure whatever risks you have. A CIC provides specific coverage based on the needs of the particular group—an advantage over standard policies offered by larger carriers.
In the case of physicians, it is common to issue malpractice policies to a practice with common ownership and/or for several medical practices and, thereby, combine efforts to form a captive insurance company. Because it’s your insurance company, policies can be issued at any limits you desire; however, the CIC must have sufficient assets in reserve in the event of liability. The “owners” of the CIC need to front the start-up capital to establish the reserves, which must comply with insurance regulations of the individual jurisdictions (e.g., some U.S. states and countries like Bermuda) that allow CICs.
By creating your own insurance company, you provide asset protection for your business while reaping the tax benefits associated with the business of insurance. Unlike a self-insurance program in which one places money aside in the case of liability, premiums paid to a CIC are deductible for tax purposes as a business expense. Moreover, if there are no claims, the reserves grow potentially tax-free, all within the insurance structure. With a CIC, returns are realized from the capital invested by the entity. When you retire and therefore no longer need malpractice insurance, you can close the CIC and withdraw the remaining reserves at a more favorable tax rate.