1. A Captive Primer: What they are and how they work
Presented by
Jerry D. Messick
CEO
Elevate Captives, LLC
1103 Sovereign Row, Ste. D
Oklahoma City, OK 73108
Direct:
Mobile:
Educate – Evaluate – Elevate 1

2. Presentation Objectives
History of captives & what they are
How captives are used & what makes a good prospect
The Captive Wrap Program™
Risk Management & TCOR
Key Ingredients of an Insurance Company
Reinsurance
Various captive structures & expense with a focus on Delaware
Single Captive Platform
Multi-Captive Platform
Start-up vs. Annual Expense
Summary of the captive process
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3. History of Captives Captives first used in 1700’s in Europe
Three main markets:
Europe (Isle of Man, Guernsey, etc.)
Offshore (Bermuda, Cayman, Nevis, etc.)
USA (Delaware, Vermont, Oklahoma, etc.)
30+ states currently have captive legislation
Why captives now for the small-mid sized companies?
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4. The Captive Wrap Program™
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5. Continuum of Risk Unfunded Self Insurance Deductible Plan/Stop
Captive
Deductible
Plan/Stop
Loss or Excess
Retro Plan/
Experience
Rated
Guaranteed
Cost/
Fully Insured
P&C
Benefits Equivalent Term
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6. What is a Captive?
An insurance company you (the insured) own and control
Can be domiciled on or offshore
Ownership typically defined by the captive structure
NOT intended to totally replace a commercial insurance program
Various captive structures include:
Risk Retention Groups
Associations or trade groups
Groups of homogenous risk
Pure (Single Parent)
Reinsurance of another insurance carrier (captive or commercial)
Enterprise Risk Captive (most elect 831(b))
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7. What Makes for a Good Captive?
Clear understanding of your own risks & loss history
A belief (based on facts) that the program would be profitable over time
Sufficient risk to support the captive premium – rule of thumb is 10:1 sales to premium – captive cannot create NOL
Good analytics for quality underwriting standards & pricing
Expert captive design, management & efficient operations
Owners committed to paying appropriate premiums for multiple years – Captives are NOT short-term options
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8. Key Ingredients What is a Captive Insurance Company?
Legitimate Business Reason (Real Risk)
Must Have Distribution
CANNOT be just for Tax Benefit!!
Must Have Transfer
Legitimate Asset Investment
Pay Claims
Legitimate Governance
Quality Reinsurance
Credible Service Providers
Conservative Parental Guarantees or Loan backs
Adequate Capital
Domicile Credibility
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9. How is a Captive Used?
Deductible reimbursement & Difference in Conditions (DIC)
Raise deductibles and retentions to retain more profit and cut commercial insurance premiums
DIC - covers exclusions and deductibles in your commercial policies, as well as excess verdicts above your commercial limits
Risk that is too expensive in the commercial market & uninsured exposure
Key Contract/Key Employee
Business Litigation
Product Recall
Employee Related Practice Liability/D&O
Supply Chain Risk
Business Interruption
Provide efficient and effective asset management
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10. Enterprise Risk Management (ERM): Total Cost of Risk (TCOR)
Overview: TCOR is the in-depth evaluation of exposure, loss, underwriting and use of capital to reduce risk.
The idea of TCOR has been around since the 1940’s. Traditionally defined:
Cost of insurance
Cost of the losses that are retained instead of transferring out, or as part of your organization—for example, risks the policy doesn't cover, or a company's deductible
Cost for administration of the risk management department (whether you think you have one or not)
TCOR goes beyond just insurance…it’s hiring and retaining the best internal resource, cost of third party service providers (attorneys, CPA’s, etc), payroll perpetuation planning, reputational risk, supply chain risk, and technology or social media risk
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11. Key Factors to Determine Insurance Transfer & Distribution
Adequate Capital
Statutory capital vs. risk capital
By end of year, 3:1 premium to surplus ratio
Risk Transfer
Must involve shifting of risk (not just a bank account)
Must involve significant chance of a significant economic loss (use of independent, outside actuary)
Risk Distribution
Unrelated Risk Model
At least 50% unrelated risk - Revenue Ruling
At least seven unrelated entities (Group Captive) - Revenue Ruling
Brother-Sister Model
12 or more insureds - Revenue Ruling
Each risk must have between 5% and 15% of the overall exposure
Limits on the types of corporate entities that can be counted
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12. Reinsurance Purpose Structure
$650k excess of $300k is yours
$300k excess of $50k is reinsurers
$50k is yours
Purpose
Protect captive against catastrophic loss
Preserve Capital
Risk Transfer
Risk Distribution
Structure
Cost is 6% of Ceded Premium (which is 51% of Gross Premium)
On $1M limit, reinsurance pays $300,000 (see diagram)
Only 10% cash is held as a deposit in trust account
Your Captive
51% of Premium
Reinsurance
Captive Participants
Stop Loss Reinsurance Policy with AM Best A-rated carrier
Captive Participants
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Captive Participants 12

13. 831(b) Tax Election For Actual Insurance Company’s Only
$1.2M or less in NET premiums written
Underwriting profit not taxed – ONLY taxed on investment income
May be onshore or offshore (offshore requires 953(d) election)
Administrative expenses not deductible (except those having to do with managing investments)
Claims not deductible
Net operating loss not allowed to carry over
Due to attribution in a control group, structure is critical
Investments are allowed like any type of captive
Most effective in low frequency/ high severity risk models
In our opinion, the 831b election has been seriously abused by promoters that are exclusively pushing the tax benefits of the captive. They are not focused on the insurance and risk management aspects of the captive. This will not hold up.
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14. Captive Structures Educate – Evaluate – Elevate
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15. Single Parent (Pure) Captive
If necessary,
Reinsurance Program
Captive
Individual or Company
Typical Coverage Examples
Loss of Key Contract/Employee
Reputational Cover
Difference in Conditions
Builders Risk
General Liability
Prop/Auto Ded
EPLI/D&O
Business Litigation
Code Change
Products/Comp Ops
Use Examples
Reimburse retentions
Insure low frequency – high severity coverage
Insure risk of multiple divisions or subsidiaries of the operating business
If standalone, statutory capital in DE is $250,000
If a Series, statutory capital in DE is $50,000
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16. The Series LLC Captive Why a Series Model? Speed of Implementation
Typically more cost effective:
Mgmt Fee
Audit/Actuarial Fee
Premium Tax
Lower barrier to entry – the cell may use the sponsor’s statutory capital until it “grows its own”
Great for business affiliates
$250,000 in Statutory Capital
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17. For more information, contact:
Mike Spaan, CEO, InLight Risk Management
Direct: Or
Jerry Messick, CEO, Elevate Captives
Direct:
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