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Captive Risks

Captive insurance companies are not a solution for every situation but they go a long way towards improving business risk management practices.

The business risks of owning a licensed insurance company are many.

If you do not properly design and operate your captive, not only may the captive itself be exposed to regulatory sanction and fines, but it may also fail to qualify for assumed special tax incentives. Also the insured companies paying premiums may find the deductibility of those premiums challenged, exposing them to tax deficiencies and penalties.

The worst case scenario is selecting captive consultants and managers who do not follow industry best practices, promise you the world to get your business, and then create a flawed program that ultimately is deemed abusive and in violation of the recently codified economic substance test. With all the new professionals entering the captive industry who lack depth of experience, this worst case scenario may eventually occur to some captive owners.

To avoid surprises, hire experienced professionals to guide you. Do not select your service providers purely on price. Be committed to operting your insurance company according to industry best practice standards. This will require ongoing eduction and research on an owner's part. Many owners attend industry conferences, sometimes even before deciding to invest in a captive.

If you do not have the time or interest and are considering a captive primarily to take advantage of the substantial available tax incentives, perhaps it's best you not invest in a regulated insurance company transaction at this time and explore the opportunity further.

Insurance and banking are two of the most lucrative industries to invest in, but owning and operating a regulated company should only be considered by committed and sophiticated businessmen and women aftere they are comfortable they understand the pros and cons and have sought indpendent professional advice.

Having said all this to alert you to important considerations, done correctly, owning and operating a captive insurance company could pay substantial dividends to you and your for years to come and protect hard earned family business and other investment assets.

To learn about the start-up and ongoing costs of a captive insurance company, click here.
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