Tired of paying big premiums to an insurance company to protect your business assets? You can pay yourself instead.
Here's an option for entrepreneurs looking to control insurance premiums: Start your own insurance company.
Raymond Ankner, a veteran of the insurance industry, is helping closely held, medium-sized companies create their own insurance companies and self-insure. Besides controlling costs, there are some estate-planning reasons to do so as well, he says.
Setting up your own insurance company — “captive insurance,” in industry parlance — was once the province of only the largest Fortune 500 companies because of the cost and the potential liability involved.
But a series of favorable Internal Revenue Service rulings following years of litigation by large corporations have given the green light to the practice that once seemed risky, says Ankner. His Naples-based company, CJA Marketing, is making a big push to help privately held companies create their own insurance firms.
“Fortunately, the Fortune 500 companies have already fought the fight and paid the bill for us,” says Ankner. While IRS rulings authorizing premiums as operating-expense tax deductions aren't the final word, it's unlikely the government tax authorities would forbid the practice now, he says.
What's more, states regulate insurance. “The majority of states have adopted captive laws because it's a revenue source for them,” says Ryan Mitchell, executive vice president and chief actuarial officer of RMC Group.
CJA's captive insurance business is growing. The company has 35 customers and Ankner plans to reach 50 by the end of the year.
Ankner is an entrepreneur himself. He started his first company in 1974, specializing in developing retirement plans for small closely held companies. Ankner is trained as an actuary, a profession that helps insurance companies and others calculate the probability that certain events can occur to assess the potential financial impacts.
Ankner has five affiliated companies that employ a total of 75 people nationwide. Besides the captive-insurance consulting firm, Ankner also owns First Actuarial Corp., a third-party administration that does actuarial work for pension plans; PlanGen, a Web-based system for life insurance agents to draft client proposals; RMC Reinsurance, a reinsurance company for life, property and casualty insurers; and Bristol Properties International, an upscale residential brokerage firm in Naples.
Originally based in Chicago, Ankner moved his company to Naples seven years ago for the same reason that thousands of tourists come here: “For me, it was the weather,” he says. “I was a snowbird here for years.”
Ankner says he has no problem recruiting bright young talent to move to Naples. “I moved 10 people here,” he says. “These are all young guys.”
Captive insurance is nothing new, but it has usually been the province of large companies. For example, Allstate Insurance was originally established as a captive of Sears, the retail giant.
A captive insurance company is one that is formed as an “in-house” agency for the purpose of insuring the risks of its parent company or its affiliates. Instead of paying premiums to an insurer, a business owner can pay premiums to a related company.
It's not inexpensive to do, mainly because of the paperwork and the management of the insurance company. Ankner says it only makes sense if a company is paying $500,000 or more in premiums annually. For example, one of Ankner's clients is a commercial roofing company in Oklahoma and protecting against various perils in that business is costly.
CJA charges $50,000 to start a captive-insurance company, though those costs total that sum only after the company does a feasibility study, prices the insurance and files the business plan with regulators. Then, CJA charges $3,000 a month to manage the insurance company.
There are several requirements captive insurance companies must meet, according to IRS revenue rulings. First, there has to be a true transfer of risk from the parent company to the captive insurance firm. Second, that risk has to be widely distributed, so Ankner's company manages a pool for its clients into which a portion of the premiums are deposited and shared when payouts are needed.
Captive insurance companies can obtain reinsurance, which lowers the risks. That's insurance for insurance companies and it's not available to the public. One of the benefits of reinsurance is it's less costly than traditional commercial insurance policies.
Ankner is currently negotiating with reinsurance companies to write policies for captive insurance companies he plans to establish for doctors to protect against malpractice lawsuits. “You need the major reinsurers to protect against the extreme losses,” he says.
There are surprisingly few captive-insurance companies. At last count, there were 5,800, says Mitchell, and about a dozen competitors for CJA, most of which focus on only the largest companies.
Sometimes, companies form captive insurance firms to insure against risk for which there is no commercial market. For example, Ankner has a customer in Boston whose business depends on a supplier in New Orleans. The captive firm insures against the possibility that the supplier might go out of business, a risk that commercial insurers won't or can't underwrite.
Another client, a hedge fund, formed a captive insurance company to insure that it would be protected should one of the partners walk away. In a most unusual case, a doctor formed a captive insurer to protect against the death of fish he raises for medicinal purposes.
Besides these advantages, there may also be estate-planning benefits to creating a captive insurance company, Ankner says.
For example, if you give ownership of the captive insurance company to your children or grandchildren, the assets accumulated in the company can be transferred from one generation to the next. Gift taxes are minimal because the majority of the assets come from premium payments, which are ordinary business expenses and not gifts. The initial capitalization costs are the only assets of the company that are considered gifts in a transfer of ownership.
It's an extra consideration that works in favor of creative a captive insurance firm. “We help them with their estate planning,” Ankner says.
(This story was updated Oct. 20, 2016 to reflect how many states regulate insurance and Ryan Mitchell's correct title.)