Friday, November 16, 2012

What Delaware Captive Managers Should Do To Help Your Company Save Money

By Shaylee V. Tillman

A parent company (or owner) typically establishes a Delaware captive insurance company to insure its risks and those of its affiliated groups and businesses. These are referred to as "captive companies" because they are controlled by a company that is both the owner and a policyholder, which provides a variety of tax benefits to the parent company since recent U.S. tax provisions allow it to claim deductions for premiums accrued throughout the tax year. Since it can be a somewhat complex process to establish and maintain a small insurance company to take advantage of these benefits, hiring a financial management company is generally recommended. These management advisors handle services connected to evaluating, forming, and managing a captive insurance company for the client.

Evaluating involves doing a feasibility study to analyze various aspects of establishing a captive insurance company. This study determines a variety of factors including identifying insurance risks, drawing up financial projections, deciding how to allocate funds, what premium levels ought to be, how to best form and manage a captive, what capital is available, and other related details.

The following step is forming the captive, and this requires that the management team takes care of fronting any funds needed in the process, or any accounting, tax, or other related issues that may come up. They will also take care of anything required to obtain licensing, like filling out and filing paperwork, supervising incorporating the company, contacting and setting up service providers, paying any fees required in the process, communicating with insurance regulators and providing documentation they require, and other similar tasks.

Managing a Delaware captive would include handling accounting, taxes, underwriting policies, regulatory compliance, and similar services. This ends up being the long term work and bulk of the total workload, which saves the parent company hours of manpower and headaches.

Handling accounting means explaining what filing under a section 831b captive insurance tax break would mean for a company, preparing balance sheets, and drawing up a separate business plan with detailed financial statements. Tax details like preparing tax returns, extensions, National Association of Insurance Commissioners (NAIC) filings, customized management reports, arranging a annual audits, and retaining tax professionals are handled by them as well. Any policy underwriting and policy issuance would also be handled by them when needed. That means they also prepare premium payment bills, insurance binders and packages, policy forms, confirmation of coverage letters, declaration pages, applications, coordinate with a ratings professional, underwrite any insurance risks when necessary, and determine premium levels and coverage options. Regulatory compliance involves reviewing and monitoring brokerage, banking and financial statements, quarterly financial reviews, annual reviews of insurance and corporate legal requirements, intermittent reviews of solvency, meet capital adequacy and asset allocation requirements, and preparing yearly financial compliance reports.

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