Tom Cifelli

Nov 26
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Avoiding Sham Risk Pools and Protect Pool Collateral From Misuse

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Captive Experts LLC manages a risk pooling arrangement for members of the Harbor Risk Pool Association (www.HarborRiskPoolAssocation.com). This is the most cost effective risk pooling arrangement we are aware of in the closely held family business enterprise risk micro-captive industry.

It also addresses the shortcomings of many risk pools including but are not limited to weak underwriting, inflexible pool reinsurance formulas not properly priced for different policy terms and limits, a lack of actuarial support for reinsurance pooling formulas, lack of regular reporting (no transparency), inadequate or excess collateral requirements, no claims investigation, and no capacity for participants to protect misuse of collateral.

The contractual pool arrangement of participant captives who are members of the Harbor Risk Pool Association addresses these concerns. This pooling arrangement also provides periodic financial, claims and pooled risk exposure reporting.

 

 

 

 

 

Nov 12
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Good example of self insured risks all companies face perfect for enterprise risk captive coverage

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Read this excerpt by a Los Angeles class action lawyer explaining the complexity of self insured risks most companies are not aware of. Properly formed and managed captives can provide a source of recovery for companies to defend these actions and pay associated losses. Without a captive serious business liquidity issues could arise.  http://marcprimo.blogspot.com/2014/02/portland-firm-settles-two-lawsuits-with.html

Nov 11
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Another Captive Withstands IRS Challenge on Risk Distribution – Tax Court Securitas TC Memo 2014-225

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The IRS lost another challenge to captives in the recent Securitas tax court case. Captives help businesses improve risk management and build liquid loss reserve investment portfolios to protect the enterprise from an ever increasing risk environment which is especially true for US businesses today. Over 90% of the world’s litigation and regulatory actions are in the US. It is unfortunate the IRS continues challenging captives rather than publishing more definitive guidance to prevent practices it feels are abuses. Click here to read an excellent summary by a tax CPA of the recent Tax Court victory for captives that further amplifies the findings of the Rent-A-Center case that risk distribution is not merely measured by number of insured companies.

Oct 06
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Cyber, IT and Data Security Risk Underwriting

By | Captive Cyber Insurance, Cyber Risk Underwriting, Risk Assessment | No Comments

Cyber related risks keep escalating for two (2) primary reasons; first increasing attacks, now estimated at over 177,000 daily last year according to Price Waterhouse Cooper’s 2014 report, and second, because of new laws and regulations increasing business liability. Examples include California’s new bill that requires one year of free credit monitoring to all customer victims of data breach.

While big companies like Target, Home Depot and JP Morgan get media headlines, companies of all sizes are exposed to serious cyber and IT security risks and need to insure against these exposures.

Learn more reading this October 2014 Business Insurance article (click here).

Underwriting cyber, IT and data security coverage is complex, as is writing and pricing (rating) associated captive policy contracts.

Captive Experts has significant related expertise having drafted associated policies and procedures for competing managers and for captives to follow and require of their insureds.

Sep 14
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Artex Risk Confirms IRS Tax Investigation of its 831(b) Micro-Captive Program

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Artex Risk Solutions, Arthur J. Gallagher’s (AJG) Bermuda based alternative risk division, has confirmed it is involved in the US Internal Revenue Service (IRS) investigation into the 831(b) micro-captive industry.*

*reprinted from the 9-9-2014 article in www.CaptiveInternational.com

The investigation relates to captives that use the tax code 831b, which means they have less than $1.2 million in annual written insurance premiums and have elected to pay tax only on investment income. They pay no tax on their underwriting profits.

David McManus, president of Artex Risk Solutions, confirmed to Captive International that an investigation is ongoing and believes it involves quite a number of other captive managers who specialise in 831b captives and that it will likely spread to others.

McManus said: “We have already communicated with our small captive customers and referral partners on this and it’s really no surprise that Artex, as one of the largest captive managers in the world, is involved. The IRS clearly recognises captives as a legitimate tool for businesses, when used correctly and Artex believes that its small captive formation and management activities are lawful and will withstand IRS scrutiny. Like all industries, the captive marketplace continues to evolve and in the end of the day if this investigation drives out abuses the industry will only emerge all the stronger and better for it.”

The IRS has upped the number of investigations in this area. Alex Webb, chairman of the North Carolina Captive Association and partner at Webb & Coyle, told Captive International recently that the increased frequency of audits, particularly of captives domiciled in offshore jurisdictions, is driving a sense of anxiety in the captive management community. Some managers have expressed concerns around FATCA and the possibility of being audited simply for existing offshore.

Speaking during the Insurance Companies session of the American Bar Association Section of Taxation meeting in Phoenix earlier this year, Sheryl Flum, branch chief, IRS Office of Associate Chief Council, insisted that the IRS has no intention of shutting down the captive insurance industry.

Flum said: “Most Fortune 500 companies have captives, and now with section 831(b), a lot of middle-market and closely held companies are forming captives. Given this environment of proliferation of captives, we are seeing an uptick in IRS interest in captives. The government is trying to walk a very thin line here because we are not trying to chill legitimate captive entities. We recognise that in a lot of cases, there are small businesses where it makes a lot more economic business sense to do self-insurance through a captive and then do a pooling arrangement.”

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Note from Captive Experts:

Read our earlier IRS captive tax audit alert post which gives a broader view on this issue. We believe the IRS will find and make examples of captive management firms whose design, formation and management practices have defects. This will prove good for the small captive insurance company industry longer term. It will provide additional needed guidance from the IRS, and will cause widespread improvements in industry practice standards and procedures.

Sep 12
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IRS 831(b) Captive Tax Audit Concerns

By | Captive Formation and Management, Captive Taxation | No Comments

September 12, 2014

by Tom Cifelli, Managing Director

CAPTIVE TAX AUDIT CONCERNS

If you engage a captive manager with experience you should not be concerned about tax or regulatory audits other than the extra time and expense they might incur to defend positions taken. The IRS and the industry have established pretty clear guidance on what is required for a captive program to be created for legitimate business purposes and what a solid design and management program looks like.

The increased attention by the IRS in auditing 831(b) electing captives and even doing some promoter audits is a good thing; it will force all firms to improve practice standards and others to get out of the industry where they lack requisite skills and experience to properly design, form and manage excellent customized captive risk management solutions. There most certainly are promoters pushing tax shelter attributes of captives and buying life insurance with pre-tax captive dollars who are not focused on helping clients improve risk management. These promoters are hurting the captive industry and may be found in violation of tax shelter promotion restrictions.

Some captive managers who are legitimately trying to help clients improve risk managers may be found to have defectively designed programs for a variety of reasons ranging from poor underwriting to defective risk pool structures and practices.

The IRS audit activity increase in recent years is not isolated to captives. Click here for a law firm release advising clients the IRS tax audit activity has been increasing across many areas under President Obama’s administration. The IRS audit of captives is certainly nothing new; from 1970s until 2001, the IRS challenged every captive program. It was only due to its many defeats in court that in 2001 it abandoned its economic family doctrine challenge to captives and adopted the seminal 2002 revenue rulings that underlie the industries accelerated growth in recent years.

Properly designed and managed 831(b) electing captives should still be fine, and should expect no audit adjustments required after an IRS review. Some may be required to defend positions taken in tax court, as the IRS continues taking some unreasonable positions despite acknowledging the importance of captives to an increasing number of US businesses. Click here to read a recent press release announcing the tax court ruled in some captives favor implicitly approving participation in 3rd party risk pools to achieve risk shifting and distribution relying on IRS revenue Ruling 2002-89 guidance.

However, those 831(b) captives formed purely to save taxes, without requisite due diligence and care required to properly design and operate a customized captive risk management program, could find the IRS denying the deductibility of premiums paid the captive.

The IRS is also increasing the scope of its captive promoter audits, recently serving several larger enterprise risk “micro-captive” focused firms with extensive information discovery request. The IRS will evaluate these firms marketing and operating practices.

IRS associate legal counsel has advised they are walking a fine line as they do want to chill captive formations with legitimate risk management objectives that are operated properly. She stated they will look at reasonableness of underwriting practices, citing as an example of a practice they have problems with is a New Jersey company buying volcano insurance from its affiliate captive. She said while this would not make the arrangement a sham, the premium should be very low considering the remoteness of the covered risk.

We do anticipate the IRS will take issue with some widespread industry practices, such as back dating of policy periods and auto renewing of policy and premium programs without any underwriting or actuarial updates from year to year reflecting consideration of loss history and changed circumstances.

The IRS may also take issue with some risk pooling practices in this industry. Some risk pools allegedly went many years without paying any claims. In fact, possibly not even having any records of having made any claims calls and inquiries with insured companies. Some risk pools do not require any collateral for paying losses, a practice the IRS may argue is evidence they never intended to have any.

Over the next several years there is sure to be associated litigation.

We are available to assist as subject matter experts in the event you need assistance due to tax treatment uncertainty of your captive program. We also offer strategic captive reviews – these identify areas of weakness. If your current captive program has deficiencies of serious concern, we can help with captive rescues and create an improved successor program.

Contact us for a free consultation today.