Captive Formation and Management

How to pick the right captive manager

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

Selecting the right captive manager for your project is perhaps the most important decision you can make when deciding to form an affiliate captive insurance company. The range of quality between managers varies greatly. In the micro-captive industry, paying more does not assure you of quality either.

We recommend requesting a free preliminary captive assessment, or pre-feasibility study. This can provide you not only with an exact proposal of start-up and ongoing operational expenses of your captive, but will give you some ideas to the quality of analysis and responsiveness of communications with a manager.


Click here for information on the typical fees charged by experienced mid-sized to large captive managers.


If 3rd party risk pooling is a required part of your captive design to follow IRS guidance for qualifying your captive as an insurance company for federal income tax purposes, and/or to reduce risk of high severity losses retained solely by your captive, and thereby reducing volatility of losses in your captive program, be sure to inquire of your prospective manager the type of risk pooling facility they utilize, the associated costs, and the collateral elements of the risk pooling facility program. You can learn more about risk pool programs by visiting


A written engagement agreement controls every captive management relationship. No two managers have identical engagement agreements; in fact they vary widely and it is very unreliable to compare management service price quotes until you get confirmation in writing of exactly what services and outside costs are included. Also it is important to discuss a manager’s operating policies and procedures and the timing of those activities. You may find when talking to a captive management firm’s business development team that they do not really know that much about the details of operations post formation as typically they do not have any related hands on experience.

Here is a list of the main management functions typically needed after formation (formation stage essentially entails the captive design, creation and licensing):

  • insurance contract management (invoice, prepare policies, and manage policies)
  • captive accounting (creation and maintenance of accounting system)
  • bank and investment account review (assist with opening bank and investment accounts, and reconciling such accounts monthly)
  • claims management (whether directly or with involvement of a TPA, most management agreements include claims investigation, processing and payment)
  • fronting, surplus, pooling, reinsurance arrangements (managers typically coordinate involvement with other insurance companies and captives that may be part of your captive program)
  • investment guidance
  • regulatory reporting and exams (filing required reports with domicile regulators and assisting with any examinations)
  • actuarial assistance (engaging and working with actuaries)
  • financial audit assistance (identifying and working with outside financial auditors)
  • tax preparation (identify and assist with completion of income and other required tax returns by a 3rd party tax preparer)
  • corporate secretarial services (assisting with board and shareholder meetings and maintenance of a corporate book)
  • distributions and unusual transactions (sometimes managers assist with loans, capital financing arrangements, dividend approval, and wind up of captives but often for extra fees or with involvement of outside legal service providers)


These three (3) basic types of captive managers.

Broker/managers, the largest group by number of captives, have resources for integrating traditional insurance products, fronting, reinsurance, and third-party administration (TPAs) into the program. Fees can be difficult to compare and determine as brokers tend to spread costs internally without revealing them.

A few lawyers, banks, accounting firms, and claims firms have become managers in order to feed their other lines of business. These structures can be restrictive to the captive’s operations and often result in added costs for services typically included by full service independent firms.

Independent firms also come in a variety of shapes, sizes, and competencies.

Each form of manager has its own strengths and weaknesses. One is not necessarily better than another based purely on whether they offer a basket of products and services. So as to not be surprised, and to better understand the focus of your management firm, be sure to ask what related services they offer and whether or not they subsidize formation and management fees expecting to make money elsewhere in the relationship.

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Best Practice Standard Guidance for 831(b) Micro-Captives – CICA Guidance Press Release

By | Captive Best Practice Standards, Captive Claims Management, Captive Formation and Management | No Comments

On August 25, 2015, CICA, the leading US captive insurance association, issued a press release with additional guidance on how to do small 831(b) micro-captive programs right. Click here to review the press release and best practice guidance memo. Click here for information on purchasing CICA’s full practice standards guidance report.

Our captive programs meet or exceed all of these practice standard guidance. In fact our Managing Director helped establish these best practice standards when he worked at the executive level with several of the top US captive managers, and authored an article in 2014 published by Captive Review on best practice standards. Read his article by clicking here, as it has far more detailed guidance than the CICA guidelines. Click here to read an in depth article on claims handling best practice standards.

We at Captive Experts are thrilled to see this pro-active trend to improve practice standards by other managers to help protect the long-term viability and reputation of the micro-captive industry.

For more detail on Captive Experts’ turnkey captive design, formation and management best practice standards and procedures, click here.

Medical Marijuana Captive Insurance Companies for Cannabis Dispensaries and Cultivators

By | Cannabis Captives, Captive Formation and Management, Captive Taxation, Medical Marijuana | No Comments

Advanced Legal, Tax, Financial & Insurance Planning for Medical Marijuana Industry Businesses


Of all the industries in the US, medical marijuana businesses face the greatest operational challenges today. The legal regulatory environment for any medical marijuana enterprise is full of landmines. This article addresses strategic methods to retain and protect more of the income and wealth being accumulated by successful businesses in the burgeoning medical cannabis industry.


All successful entrepreneurs who make a lot of money building valuable enterprises start to worry and lose sleep over income taxes, estate taxes and losing everything they worked so hard to build due to disputes, mistakes or catastrophic events beyond their control.


Some experienced lawyers can help you recognize the issues and implement well established strategies and techniques involving tax, asset protection and estate planning. Few lawyers however also have experience in designing advanced risk management science structures, precisely what is needed by medical marijuana industry businesses in light of the complex and controversial legal environment they must navigate.

Asset Protection/Estate Planning

Asset protection involves techniques designed to prevent a loss of assets in the event of catastrophic unfavorable litigation, bankruptcy and even potentially protecting assets from government forfeiture proceedings. Estate planning involves techniques to efficiently manage and fairly distribute tax efficiently accumulated wealth during one’s lifetime and on one’s death.

Implementing asset protection techniques after you know about a problem threatening your assets is usually not effective due to fraudulent conveyance statutes and similar case law created judicial doctrines that make it improper to move or hide assets once you know they may be needed by a 3rd party who has claims against you. Basically if you procrastinate and delay planning until your assets need protection from a known 3rd party, it is likely already too late to assure success. In fact it could be criminal to attempt to hide assets after someone makes a rightful claim against you or their right to has already arisen due to something you or your business did that injured or damaged them.

Typical asset protection techniques include but are not limited to:

  • planned systematic gifts of personal and business assets to children or others directly or indirectly through complex trusts and other vehicles;
  • creation of affiliate businesses owned by children or family trusts;
  • taking advantage of special protective legislation, such as homestead exemptions excluding the value of personal residence from creditors.


Typical estate planning techniques often considered include but are not limited to:

  • (basic plan) having a revocable living trust, a will, one or more powers of attorney, a living will and some manner of testamentary instructions;
  • (more advanced) one or more irrevocable trusts in combination with the above;
  • structured business ownership interests with varying classes of ownership, buy-sell agreements, options to acquire and other complex business transaction agreements.

The most important thing about effective asset protection and estate planning is to get started early with fact finding and due diligence followed with documenting alternative solutions and associated costs to implement and maintain.

Risk Management & Finance  – Custom Privately Held Captive Insurance Company Solutions

Good insurance for medical marijuana operations has always been difficult to find, and was expensive. This is more the case now than ever. On June 3, 2015, Lloyd’s of London announced a ban on its insurance broker syndicates writing any new policies in the USA to businesses growing or selling medical marijuana. Lloyds was not the only source for insurance but they were the most competitive. Other insurance carriers may follow since cash generated from the sale of marijuana, even when used to buy insurance, invariably implicated federal Anti-Money Laundering laws, even though for the time being the US federal government has indicated an intention not to enforce them against businesses operating legally under state medical marijuana laws.

Fortunately there exists a well established method of addressing risk management and risk finance objectives of medical marijuana businesses – closely held captive insurance companies, known as CICs. CICs are now licensed by over 30 US states. CICs are designed to provide custom insurance coverage that is not available from commercial insurers, is too expensive, or is simply not adequate in coverage design or claims handling to meet business needs.

Most of the Fortune 1000 have had CICs for some time. In the past 10 years, more and more successful closely held businesses in nearly every industry have formed their own affiliate CIC.


The benefits of CICs are many and are most easily understood when compared to retail insurance and self insurance as shown in the chart below:

CICs are licensed insurance companies, under special provisions that allow them to sell insurance to affiliated businesses, but not the general public. This allows them to be more economic to form and operate, as compared to traditional insurance companies.

Because the tax advantages of CICs can be substantial, the IRS has made it clear they do not like CICs. Nevertheless designed and operated correctly, provided your primary reason is to improve enterprise risk management, and not tax avoidance, your CIC could very well create significant income and estate tax savings, not to mention if claims losses are controlled, accumulate significant investment reserves assets that could also be asset protected. CICs certainly allow far greater control over your insurance and claims handling practices then does commercial insurance even if affordably available.

Types of Insurance Coverage a CIC Can Write to Protect a Medical Marijuana Business

CICs can write a host of insurance policies. The following are some of the types of insurance a CIC can write that are particularly appropriate for medical dispensaries and cultivators:

  • crop insurance
  • loss of producing plants
  • product liability
  • product recall
  • intellectual property
  • unfair competition
  • legal defense
  • regulatory liability risks
  • crime
  • employee theft

IRC Section 831(b)

One special tax provision designed to encourage use of CICs to finance insurable risks is known as section 831(b). This special income tax provision allows all underwriting income of a qualifying CIC to be exempt from federal income tax. This results in premiums paid by the operating medical marijuana business to deduct the insurance premiums paid the CIC if they qualify under section 162 (ordinary and necessary business expense), yet not be subject to income tax by the CIC. This creates a more economically efficient  method to build loss reserve investments inside the CIC over self insuring risk.

IRC Section 280E

Another special obstacle medical marijuana businesses face is the US Treasury I.R.C. Section 280E provision, pertaining to expenditures in connection with the illegal sale of drugs, which states in part “no deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business … consist of trafficking in controlled substances….”

Most tax advisers believe expenses which comprise cost of goods sold (COGS) are deductible under 280E. It is important when designing a CIC for a medical dispensary or cultivator to be aware if 280E and maximize insurance coverage which can be included as COGS.


Medical marijuana dispensaries and medical marijuana cultivators have great need to do advanced planning to address acute problems they face involving legal, tax, financial and insurance impacts of their business operations. Opportunities for effective solutions exist if you contact qualified professionals. We encourage readers to discuss the above topics with their legal, tax, financial and insurance advisers.

About the Author:


Thomas A. Cifelli is an Arizona attorney and also owns a specialty captive insurance solution provider firm. Visit and for more information.

Construction worker shortage increasing liability risks of contractors and owners

By | Captive Formation and Management, High Severity Captive Risk Exposures, Risk Assessment | No Comments

by Bill Kenealy (reprinted from Business & Insurance – see link following for more info)

NASHVILLE, Tennessee — As a global trend toward urbanization and large infrastructure projects looks to spike demand for services in the coming decades, the construction industry is at a crossroads.

While the industry has benefitted from a raft of advances in building design and technology, it still needs to address lingering concerns about labor shortages and construction defects. The recession decimated the construction industry and thinned the ranks of skilled workers, and worries persist about whether there are enough workers to go around as the industry’s workload scales up, experts say.

“You need the right people for the right job,” said Timothy R. Kania, New York-based senior vice president for energy and construction with Liberty International Underwriters. “So you have to be concerned about the qualifications of the people executing the job.”

Many in the industry express concern about the implications of the labor shortage for worker safety.

David B. Walls, Dallas-based president and CEO of Austin Industries, said the issue of worker safety became an overriding passion for him early in his career after the father of an inexperienced worker who was killed on a jobsite Mr. Walls was overseeing confronted him with the words, “ “Why did you kill my son?’ “

“The good news is that the construction industry has continued to improve its safety record over the last few years,” Mr. Walls said earlier this month at the International Risk Management Institute Inc.’s 34th Construction Risk Conference in Nashville, Tennessee. “The bad news is that it is, according to the Bureau of Labor Statistics, still the worst of any industry.”

In addition to implementing best practices to avoid common jobsite accidents such as falls and electrocution, a world-class safety regimen must value people and be effectively communicated at all levels of an enterprise, Mr. Walls said.

“Leadership is the weakness when it comes to safety at constructions firms,” Mr. Walls said. “Most companies nail the structural processes for safety, but forget about the leadership.”

Bill Noonan, New York-based vice president of risk management at construction services provider Structure Tone, agreed that effective communication is vital to worker safety.

“The only thing worse than not having a safety program is having one that nobody pays attention to,” Mr. Noonan said. “You get the behavior you tolerate, so you have to have employee buy-in from the start.”

Effective communication is critical when dealing with subcontractors, Mr. Noonan said, adding that to be truly effective, risk managers need to move beyond email exchanges and insist on face-to-face meetings with the people on their jobsites.

“I think town hall meetings are extremely important,” Mr. Noonan said. “It’s important that we invite subcontractors in to talk to us instead of just firing off a letter.”

Likewise, Frank Keres, Chicago-based risk manager with Clune Construction Co., said safety and risk management are inherently linked.

“I can’t be a risk manager unless I’m the safety guy,” he said. “So, if you are a risk manager, you have to be out in the field.”

Moreover, risk managers need to leverage the expertise of their insurers to ensure they get the proper coverage.

“When it comes to worker safety, the broker/agent might be the most important person we have,” Mr. Keres said. “They can be a true intermediary and smooth communication between a contractor and underwriter.”

Nonetheless, he said risk managers looking to create a better safety culture need to be receptive to input from all quarters.

“Safety should flow from the bottom up because workers are the ones getting hurt,” Mr. Keres said. “You should be listening to your employees, not just your owner and insurance people.”

Sonja Guenther, Denver-based vice president and workers compensation specialist at IMA Financial Group Inc., said no suggestion to improve workplace safety should go unexamined.

For example, when data revealed a propensity for soft-tissue injuries and muscle strains in certain trades, such as masons, on jobsites, a relatively straightforward, low-cost resolution presented itself, Ms. Guenther said.

“We used to laugh at the idea of workers stretching before work,” Ms. Guenther said. “You wouldn’t think about playing golf without stretching, so why would you allow a mason to lay brick in cold weather at 7 a.m. without stretching?”|338|308|302|84

IRS 831(b) Captive Tax Audit Concerns

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

September 12, 2014

by Tom Cifelli, Managing Director


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.


Financing Captive Capital and Insurance Arrangement Collateral Requirements

By | Captive Formation and Management | No Comments

While cash is king, there are alternatives available to consider for financing capital or collateral requirements associated with captive, reinsurance and other alternative risk transactions.

This is an under-utilized area especially relating to new enterprise risk captive arrangements where owners’ domicile “partner”  selection is often influenced by minimum initial start-up capital requirements.

Most owners are not even advised by their captive managers of alternative considerations, largely since managers simply want to close the deal as quickly as possible and keep matters simple as complexity, no matter the benefits derived to the client, delay and complicate formations making managers work harder for their share of the spoils.

In risk pooling arrangements where pooled premium is often retained for a significant period of time, an early release can be accommodated through collateral posting by one of these methods. (Sidenote: If you are involved in 3rd party risk pool facility that does not retain any collateral, you should be concerned about the integrity of such a pool as it is not best practice compliant – consider our Strategic Review services for owners of captives concerned about the quality and costs of their captive program).

Here is a snapshot of capital and collateral financing “vehicles” and applications:

  • Cash or cash equivalent deposits;
  • Letters of Credit, aka “LOC” (used for all manner of purposes in lieu of cash) – cons are they are invasive to issue and have re-occurring annual costs and often invasive reporting and analytic requirements to maintain;
  •  Trusts (often referred to as Reg. 114 Trusts) – pros include often less expensive or invasive as an LOC, no lengthy credit review process, income remains depositors.

The main advantages of Reg. 114 trusts include:

  • assets remain on books of depositor,
  • wide investment discretion within trust generally,
  • accepted collateral for most domiciles and carriers,
  • easy to set up and dissolve,
  • can replace multiple LOCs,
  • no annual renewal process.

It may even be possible to use existing real estate assets as corpus of Reg. 114 trust, preserving use of liquid elements of your business and personal investment portfolios.

Captive Experts LLC has relationships with providers of LOCs and Reg. 114 trusts for our clients. Also for clients of 3rd party managers who are admitted to play in our 3rd party risk pool.

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