Captives offer Insurance Broker an Updated Approach to Risk Management

Sullivan Curtis Monroe Insurance Services, LLC, (SCM), is an insurance and risk management broker in Southern California. With several hundred employees, and three offices, SCM is a regional firm offering a just-right approach to companies that feel they are too big for a local broker, but still want personalized attention that they couldn’t get from a mega-broker. SCM has practice groups that service clients in real estate, construction, auto dealerships, the food and beverage industry, environmental chemical and engineering, manufacturing, and distribution.

Steve Paulin is a senior vice president at SCM who has been in the business for 35 years as a risk management and insurance expert. Paulin had been familiar with captives, but when he saw that they had been restructured to be more cost-effective for middle-market clients – the base he currently works with at SCM – he decided to learn more about them.

Discovering the benefits of enterprise risk captives

SCM Insurance “I was introduced about four years ago to the enterprise risk captive concept. I saw it was a wonderful opportunity for me to bring additional value to my clients, and differentiate myself from the competition. This led me to learn more about captives and gain the necessary knowledge and competency to introduce and educate my clients and prospects.”

Paulin spent a year vetting and understanding how captives could benefit his clients. “I went to conferences, clinics, and attended webinars. I had some introductory conversations with clients and the positive response was gratifying.” He spent additional time studying and having deeper conversations, which developed opportunities for feasibility studies and captive formations.

Timing was on Paulin’s side.  As he’s been learning more and more about captives, his clients have been climbing out of the recession – now, as clients are making more profits, Paulin is ready with answers about captives.

“The captives we’ve put together so far have been primarily for manufacturing clients,” says Paulin, who is planning to expand the captive offering to more practice areas in his firm shortly.

Working with clients on captives

Paulin finds that his competition hasn’t really caught on to the benefits of enterprise risk captives yet, so he is generally the first one to introduce this topic to his clients. “Being the first to do this, along with periodic follow-ups has positioned me to get the call for further discussion. I walk clients through a short presentation that incorporates many of the points I’ve gleaned from working with Intuitive,” he says. “I talk with the client about captive benefits that are relevant to their operation, such as the ability to cover risks that are excluded or they decided not to buy. Then, I tie in the tax advantages and wealth management benefits through creating a captive.”

“I explain to clients that the work I do involves assessing and evaluating their programs, which has been a core competency of mine, and that we partner with Intuitive who handles the management aspects of the captive.” This usually leads to a more detailed presentation by Intuitive.

A new way for clients to look at risk management

Paulin credits captives with enhancing his practice. It offers the opportunity to have a different conversation with business owners about how they can better manage risks and gain profit in the process. “Captives have helped me feel very confident that I’m offering new alternatives to help structure effective risk management programs for my clients,” he says.

Future growth

Even after four years, Paulin finds it’s more of a pull than a push. “There isn’t a lot of awareness yet about captives,” says Paulin. “There are business owners who have a perception of a captive for certain types of coverage, like workers’ compensation, but they don’t have a working knowledge or a deep understanding of it. It’s an opportunity to educate business owners.”

Paulin has spent so much time reading and learning about captives, he’s accumulated an archive, and has written a whitepaper. “I find I get to a plateau and I think I know all the info about captives,” he muses, “But then I’ll read an article and I’ll think, ‘Oh, here’s something I haven’t thought of about a particular use of the captive.’ There’s a need for ongoing education, and this is an opportunity to structure a program in a new way.”

To handle the interest in captives, SCM recently hired a marketing specialist to build a program around captives. “We plan to formalize a marketing program using Salesforce, and Benchmark emails distribute white papers, Executive Briefings and other information including webinar invitations. The ability to touch a lot of people with relevant information once a month will help increase awareness,” he says.

Captive Case Study – Auto Dealerships | Intuitive Captive Solutions

 

The Situation

Our client is an auto dealership group with multiple brand dealerships. Their operations have expanded steadily due to successful operations over the past 30 years.

The Challenges

The group’s expansion has magnified risks in a number of ways. They’re now exposed to risks that are not currently insured in the third-party marketplace. The commercial insurance market is experiencing price increases and tightening capacity for perils such as directors & officers liability and environmental liability. Increased annual revenues have made the exposure to non-insured risks – like financial guarantees for floor plan – more pronounced. At the same time, new threats emerge regularly that require more coverage, including cyber liability and employment practices issues.

The Solution

The auto dealership group engaged Intuitive Captive Solutions to prepare a feasibility study to review their organizational structure, insurance program, loan documents, and personal guarantees. The study resulted in the identification and quantification of several new personal liability risks and adjustments to the existing commercial insurance program that offset the tightening insurance market conditions. Upon review of the study, the group instructed Intuitive Captive Solutions to form three new 831(b) captives – domestic private insurance companies – to insure selected property, casualty, and personal liability risks.

The captives – controlled by the owners – issued three supplemental commercial insurance policies to the company in exchange for combined fully tax deductible annual premiums in excess of $2,100,000. Though this is in addition to the annual third-party insurance premium expenses the company currently pays, it accomplished several goals:

  • Created a profit center to cover previously unfunded self-insured risk.
  • Gave the owners peace of mind by broadening their insurance coverage.
  • Offset premium dollars going to third-party insurers.
  • Reduced current income tax obligations and created potential additional wealth for the owners and their families.

The Benefits

Three new businesses with additional net profits were formed. The captives resulted in a reduction in current income taxes to the owners of more than $825,000, and also provide an anticipated distribution of the captives’ profits to owners at more favorable tax rates. The auto dealership group is already in receipt of a reinsurance payment on a loss that otherwise would have been totally self-insured.

If we can help you with similar coverages through an 831(b) captive, please contact us.

longboat key

Captive Case Study – Real Estate

The Situation

Our client is a real estate investment and property management company serving self-managed private equity funds and investment partners.  Following a decade of no or minimal revenue growth, the multifamily industry appears to be in a healthy recovery phase.

The Challenges

While they recover, the company is still impacted by capitalization rates that are being driven to historically low levels resulting from unsustainably low interest rates.The commercial insurance market is seeing price increases and tightening capacity for perils such as wind damage. Additionally, multifamily loan documents introduced in 2011 by Fannie Mae materially expand the risk of recourse exposure to borrowers and loan guarantors. The company is also exposed to additional personal liability risks, which have increased substantially.

One Solution

The client engaged Intuitive Captive Solutions (Intuitive) to prepare a feasibility study to review their organizational structure, insurance program, loan documents, and personal guarantees. The study resulted in the identification and quantification of several new personal liability risks and adjustments to the existing commercial insurance program that offset the tightening insurance market conditions. Upon review of the study, they instructed Intuitive to form a new 831(b) captive – a domestic private insurance company – to insure selected property, casualty, and personal liability risks.

The captive – controlled by the owners of the real estate investment company – issued a supplemental commercial insurance policy to the company in exchange for a fully tax deductible annual premium of $1,190,000. Though this is in addition to the company’s annual third-party insurance premium expense, it accomplished several goals:

  • Created a profit center to cover previously unfunded self-insured risk.
  • Gave the owners peace of mind by broadening their insurance coverage.
  • Offset premium dollars going to third-party insurers.
  • Reduced current income tax obligations and created potential additional wealth for the owners and their families.

The Benefits

Now, the company has a new business with additional net profit budgeted to exceed $3 million over six years. Forming the captive created a reduction in current income taxes to the owners of nearly $475,000 and there is an anticipated distribution of the captive’s profits to its owners at more favorable tax rates. The company may also be a recipient of reinsurance payments on losses that otherwise would have been totally self-insured.

Find out more about how we can help you restructure your risk in this changing market. Contact us.

1099 or 12 image Lowe's

W-2 or 1099 – You’d Better Have your Answer Handy

Many employers have trouble understanding the difference between a contract employee and a payroll employee. The definitions are outlined in this article, Form 1099-MISC & Independent Contractors published by the IRS, which opens by admitting how complex the issue is. Many employers think a 1099 employee is a part-time employee, or an employee who works occasionally or seasonally. In reality, the central difference between a 1099 and payroll employee is who controls how the worker performs his or her services. At stake for the employer is a good deal of savings on payroll fees and taxes if the employee can be classified as a contractor.At stake for the worker are important benefits and employment perks – such as worker’s compensation coverage.

Compensating for high’s and Lowe’s

A class action lawsuit brought by roughly 4,029 installers and 949 installation companies argues that Lowe’s supplied the materials and the place of work for the installers, and that Lowe’s “had the right to control the performance of the installers’ work.”  The workers who contract with Lowe’s charge that they are being miscategorized as contractors under California law – the suit was filed in U.S. District Court in Oakland. While Lowe’s strongly denies the allegations, they have offered a $6.5 million settlement.

The letter of the law

The IRS’s definition of contractors is, indeed, a head-scratcher, leaving all kinds of companies open to interpretation of their employment policies, and potentially to the type of suit that Lowe’s faced. This is not just a question for the contracting industry. Tech companies and big corporations have 1099 employees seated in assigned desks, working hours dictated by the company, in clear violation of the spirit of the IRS’s definition. On the other hand, there are plenty of companies who diligently establish corporate policies about the differences between payroll and contract employees who may be just as vulnerable.

Companies that get stuck in a regulatory defense suit in an area this murky and grey might be forced to settle. Consider what might be at stake – legal fees, a class action settlement, and a fundamental shift in how your workforce is structured – and work with your legal team now to do the best possible job of achieving compliance, but back up your decisions with enough coverage to be able to withstand a suit if it were filed. Captive insurance was designed to meet challenges like this one. If we can help you structure a Captive, please contact us.

Gary Warrn, Valley Forge Captive Advisors, photo

A Risk Management Solution to Believe In

Valley Forge Captive Advisors is a subsidiary of McConkey Insurance & Benefits. Specializing in group domestic captive products, Valley Forge is focused on group captives for mid-to large-sized businesses.  Gary W. Warren, CPCU, ARM, is the President and Principal at Valley Forge Captive Advisors.

valley-forge-captive-advisorsWarren is a proponent of domestic captives as a risk management tool for businesses. “One of the nice things about a captive is that it can offer coverage that clients cannot buy in the regular market – or have chosen not to buy in the market,” says Warren. “We have clients that have risk management needs that regular insurance can’t meet. Rather than having to turn them down, I can work with them to create a captive.”

It’s not just about the tax advantage

Warren finds that captives are a new idea to some clients. “When people first hear about captives, they sometimes focus on the tax advantages,” says Warren, “But it’s important that they understand that captives provide coverage and a solution for risk.”

While he’s been working with enterprise risk management captives for the last few years, it’s only recently that his clients have been able to take advantage of them. “People were interested, but couldn’t take advantage of captives because their businesses weren’t profitable enough these last few years. But now that the economy has improved, businesses are starting to have the kind of profits it takes to create a captive.”

Enterprise risk captives are such a specific market, Warren believes that there are only a few really good sources for education on them. “A captive manager like Intuitive provides excellent education,” he notes, adding with a laugh, “You had better learn about them – if you don’t, someone else will sell one to your clients.”

New lines of business

Warren enjoys having another inroad for new business. “Working with Intuitive has helped me to see that there are a lot of different captive models. I like the way Intuitive does it – they have enough risk sharing to really make sure that, if the client is ever audited, Intuitive has done a good job of demonstrating that they’re a risk transfer mechanism, not just a way to avoid taxes.”

“There are still a lot of companies out there that don’t know enough about captives. It’s a great differentiator for a firm like ours. When you come to the table with a product like a captive, it’s a financial mechanism to reduce costs – it’s something I definitely enjoy explaining to clients. I’ve been doing this for almost 20 years, and it’s definitely a way of handling insurance that I believe in.”

james gleaves wortham hinsurance head shot

Adding Value for Clients

Wortham Insurance is one of the top 10 privately held insurance brokers in the U.S., and the largest broker headquartered in Texas. Wortham clientele represent a cross-section of business in Texas and beyond.

The Wortham philosophy is to bring value-added ideas to clients. As managing director of Wortham, James L Gleaves is tasked with making sure the Wortham philosophy is carried out in all areas of the firm’s practice.

Creating captives that work for clients

“We represent a number of clients whose insurable risks can be very effectively managed through a captive insurance company,” says Gleaves. “The captive insurance company structure developed by Intuitive fits well with many of our client’s overall risk management needs. We believe that the captive structure and reinsurance arrangement developed by Intuitive is very beneficial to a client who fits the necessary parameters.”

Experience counts

wortham risk management logoWortham began their partnership with Intuitive due in large part to the experience that Intuitive professionals have in risk management, overall insurance coverage, and captive insurance company structuring. “We felt that the very careful approach to underwriting captive risks was crucial to our clients,” says Gleaves. “We were also very comfortable with the overall approach to managing captives demonstrated by Intuitive.”

Since the partnership between Wortham and Gleaves began, there has been a great deal of growth in captives. “The growth in captives that select the enterprise risk captive treatment is a testament to the potential economics of such an arrangement, but it takes the expertise of a manager such as Intuitive to make these arrangements successful in the long term.”

 

 

spencer RIMS Risk Management Challenge logo

What do kids know about risk?

If you spend any time at all around kids, you’ve probably scratched your head, as I have, asking yourself, “what can these kids possibly understand about risk?” Watching little ones ski down a hill at terrifying speeds or eavesdropping on teenagers as they talk about their weekend antics, the idea of risk must seem very remote and implausible to them.

That’s why we were so glad to hear about the Spencer-RIMS Risk Management Challenge. Sponsored by the Risk & Insurance Management Society, Inc., along with the Spencer Educational Foundation, Inc., the competition challenges college students to work in teams to develop a program that addresses issues laid out in a risk management case study. This year, their challenge was focused around Snap-on Inc.

Risky business

Fifteen teams competed, and the best and the brightest teams were invited to the RIMS conference in our home town of Denver, Colorado, to present their case this past spring. The teams presented in front of an audience of 100 risk management professionals, and also had an opportunity to meet and mingle with risk management professionals during the conference.

The team from Temple University’s Fox School of Business took first prize — $4,000 – for the second year in a row.  Teams from Florida State and Virginia Commonwealth were awarded second and third place, respectively.

An updated approach to teaching risk management

It’s interesting to see how business schools are approaching the idea of risk management. They’re building specific curriculums to help guide college students directly into the marketplace when they receive their undergraduate degrees. For example, the team from Temple were studying in the Risk, Insurance and Healthcare Management department in the business school. The RIMS Risk Management Challenge was a great way for the teams to apply what they’re learning in an academic setting to a real-world situation. Exactly the kind of experience you hope a recent college graduate will have as they launch out into the job market.

We look forward to next year’s competition, and hope we can get involved on some level to help kids get a better idea about risk.

 

 

 

Logo image of the seal of the Supreme Court of Delaware

Delaware Quietly sets New Standard for Intra-corporate Litigation

On May 8th. 2014 the Delaware Supreme Court upheld a corporate bylaw that placed the burden of paying attorney’s fees and costs in intra-corporate litigation on the losing party. The case, ATP Tour, Inc. v Deutscher Tennis Bund, et al., revolved around a bylaw set by the ATP’s board in 2006 which stipulated that if a member should assert a claim against the ATP, and the member loses, the member is obligated to reimburse the league for fees associated with the suit.

In 2007, the bylaw was tested when the German Tennis Federation and the Qatar Tennis Federation – both members of the ATP – sued the ATP after it was downgraded to a lower tier and its season was changed from spring to less desirable summer play. When the federations lost their plea in court, the ATP sought damages according to the bylaws, and the resulting case in May upheld the bylaw.

Read a thorough synopsis of the case on the Jones-Day website.

Far-reaching implications for business

It’s clear to see that this volley between a few tennis associations could have far-reaching implications for corporations across the U.S.

According to the State of Delaware, more than one million companies have incorporated there. In fact, more than half of publically traded corporations listed on U.S. stock exchanges and fully 64 percent of Fortune 500 companies are incorporated in Delaware, according to the Delaware Division of Corporation’s 2012 Annual Report.  If these companies begin adopting “loser pays” bylaws of their own in an effort to deter shareholder lawsuits, it could change the nature of business in America.

Shareholder law suits have been on the rise over the last few years. According to Cornerstone Research, in 2007, investors challenged 44 percent of corporate mergers. In 2013, investors challenged 94 percent of corporate mergers.

In future, the risk of filing such lawsuits could be much higher, and shareholders may think twice before initiating a suit, even if the only objective of the suit is to gain better information about potential mergers. On the other hand, shareholders moving forward with cases will have more motivation to build a stronger case, which could be bad news for directors and officers who could become the “losers” in more effectively-structured lawsuits.

Cover your risks

Directors and officers may want to consider how the ruling in Delaware might put them at additional risk in the future, and take a look at obtaining additional coverage to insure against unanticipated legal fees. If we can help you determine what kind of coverage you may need, please contact us for more information.

H& R Block

When Technology Fails Us – Product Errors and Omissions for Technology

During the 2013 tax season, H&R Block had to make a public apology to students whose refunds were delayed. A glitch in e-filing software meant that some 600,000 people who had filed a Form 8863 for a higher education tax credit saw a delay in getting their refunds. Though H&R Block wasn’t the only company impacted by this product error and omission, they certainly paid the highest price. Social media channels lit up with negative chatter about H&R Block, and all the affected returns had to be reviewed. Since the glitch occurred between February 14th and 22nd that meant tax season got perceptibly busier for the company.

Imagine a little software glitch creating a massive problem for your company. In addition to implementing your crisis management team and suffering the loss at hand, you also have to make good on the problem, and deal with the impact it will have on the current workload at your company.

Product errors and omissions in Tech

At some point, a technology glitch is likely to impact your company. It may be a software problem created in-house, or an issue caused by a third-party vendor. Even companies with exemplary quality control processes in place – like H&R Block – can suffer from this kind of problem. Think of how quickly Blackberry went from tech darling to tech nobody after a series of issues  or consider the loss Delta Airlines suffered when a tech glitch on the day after Christmas, 2013, mistakenly advertised and processed fares as low as $47 for a New York to L.A. flight. Delta had to honor the fares and suffer the loss.

 

Insuring against electronic disaster

How do you buy an insurance policy for “unknown, indeterminate electronic glitch that could bring our company down in a matter of seconds?” OK, that may be a bit over-the-top, but businesses face a wide range of unforeseeable problems that are difficult to insure.

One way to purchase a bit of security is to create a captive. With a captive, companies that rely heavily on technology can write an insurance policy to protect their company from potential disaster. A captive gives a bit more legroom than traditional insurance policies are able to so that companies can develop a policy that works specifically for their industry and their business.

If you’re worried about a potential glitch, make sure you’re covered. Talk with your insurance broker to see if they have a policy for you, and if you want to explore how a captive might be able to help you, please contact us.