Increase Deposits by Promoting Captive Insurance Model Sessions

Increase Deposits by Promoting Captive Insurance Model Sessions 4 a and 4 b (1: 45 -2: 45) By: Jeremy Colombik, CPA Captives ● NQDC ● Insurance Brokerage © Management Services International. All Rights Reserved

What is a Captive? § It is an Insurance Company © Management Services International.

Pre-Captive Solutions Example: Your client is an owner of a very successful business: § Yearly Gross sales of 10 MM § Business Income of 1 MM o Risk Insured with Commercial Insurance Policies: Trade Credit, Directors and Officers Liability, Employee Dishonesty o Self-Insured Risks: Employment Practices, Cyber Risk, Loss of Key Talent, and Business Interruptions Business Income 1 MM Taxes (420, 000) After Tax Income 580, 000 Total Profit 580, 000 © Management Services International. All Rights Reserved

Post-Captive Solutions Yearly Gross sales of 10 MM Business Income of 1 MM Captive No Captive Benefits: § Profit Center § Reduce Commercial Insurance Premiums § Better Management of Risk § Increase Risk Awareness § Tax Benefits Solution Business Income 1, 000, 000 Captive Solution Remaining Business Income after Captive (500, 000) 500, 000 (210, 000) (420, 000) 452, 500 742, 500 580, 000 Solution Less Taxes Profit center after expenses for Captive Total Dollars o Risk Insured with Commercial Insurance Policies: Trade Credit, Directors and Officers Liability, Employee Dishonesty o Risk Insured with Captive Insurance Policies: Employment Practices, Cyber Risk, Loss of Key Talent, and Business Interruptions © Management Services International. All Rights Reserved

Assets and Deposits for Bank Captive Client Referrals Allow the Bank to Hold Money in Checking Account and /or Manage Captive Reserves Yearly Gross sales of 10 MM Business Income of 1 MM Business Income Captive Solution Remaining Business Income after Captive Solution Less Taxes Profit center after expenses for Captive Total Dollars Captive Solution No Captive Solution 1, 000 (500, 000) 1, 000 500, 000 (210, 000) (420, 000) 452, 500 742, 500 580, 000 n $452, 500 x 5 = $2, 262, 500 $452, 500 x 10 = $4, 252, 000 © Management Services International. All Rights Reserved

Why Is North Carolina Doing This? § Premium Tax § Jobs (insurance manager, accountant, actuaries, auditors and other professionals) Both mean more revenue for them. © Management Services International. All Rights Reserved

What is 831(b)? § 831(b) effectively allows a small insurance company to receive up to $2. 3 million per year in premiums, without paying any income taxes on those premiums. § The 831(b) election does not affect -- at all -- the deductibility of the premiums paid by the operating business to the Captive. Premiums are otherwise deductible, they may be deducted by the operating business just like any premium payments to a Captive. § This has the effect of creating an up to $2. 3 million deduction in the operating business, with the premium monies transferred to the Captive, and with the Captive not paying any income taxes on the receipt of those premiums. © Management Services International. All Rights Reserved

Comparison Captive vs. Non-Captive Risk management and the potential return with or without a Captive Non-Captive return on 100 k per year Year 1 Net Business Income * 105, 000 Income Taxes (40%) (42, 000) After Tax Income + Capital Contribution 10 k ** Investment Income (10% Avg Return) Total Cash 73, 000 5, 277 Year 5 Year 10 Captive return on 100 k per year **** Year 1 Year 5 Year 10 100, 000 500, 000 1, 000 10, 000 5, 000 1 st year Set up -5, 000 One time Risk Assessment Fee -5, 000 Operating Expenses **** -10, 000 -75, 000 -120, 000 3, 800 51, 333 210, 398 505, 000 1, 005, 000 Captive Insurance Premiums (202, 000) (402, 000) Capital Contribution 303, 000 68, 520 One time Risk Assessment 603, 000 Fee 289, 507 $ $ 78, 277 $ 371, 520 892, 507 * 1 st year will include risk assessment fee ** Capital Contribution only considered on 1 st year Investment Income (4% Avg Return ) $ 1, 090, 398 ****Operating Expenses (management + ceding + claims) Net Gain With Captive 20, 523 104, 813 197, 891 Total Cash and surplus ***Results may vary © Management Services International. All Rights Reserved $ 98, 800 $ 476, 333

Your client is a success business owner Identify Typical Exposures § Relies on their reputation and referrals § Keeps track of their invoices with their laptop § Has multiple employees and one key employee § The business is located on the coast where natural disasters may occur Most businesses are exposed to numerous risks that do not fit easily into standard policy forms and the decision to form a captive insurance company is one that could prevent financial burden for business owners. © Management Services International. All Rights Reserved

Contingent Business Income and Expense § Business Interruption § Contract Cancellation § Regulatory Changes/ Regulatory Investigation § Loss Due to Labor Shortage/Stoppage or Work Stoppage § Loss of Hospital Privileges § Loss of Hospital Referrals § Loss of Key Agent/Carrier/Subcontractor/Tenant § Loss of Key Contract/Customer § Loss of Key Person § Loss of Key Supplier (Supply Chain Risk) § Uncollected Receivable/Trade Credit § Supply Chain Interruption § Bankruptcy Legal Captive Insurance Typical Coverages Property § Commercial Policy Exclusions (Differences in Conditions) § Equipment Breakdown § Inland Marine § Loss of Inventory § Property Damage - In Transit § Property Damage - Mold & Fungi § Mineral Right Contract/ Mineral Right Regulatory § Environmental Liability/ Pollution Gap Coverages § Contractual Liability § General Liability Gaps § Intellectual Property § Personal and Advertising Injury Deductible Reimbursement § Auto Liability § General Liability § Pollution Liability § Products Liability § Workers Compensation © Management Services International. All Rights Reserved Executive Risk Coverages § Administrative Actions § Billing Audit Expense (Docs only) § Directors and Officers Liability § Employee Theft and Dishonesty/Employee Fidelity/Crime § Employment Practices Liability § Reputation Expense § FDA- Related Expense § HIPAA Audit Expense § Loss of Licenses § Legal Expense and Defense Costs Reimbursement § Fiduciary Liability § Wage and Hour Expense Other Coverages § Commercial General Liability § Cyber Risk § Patent Infringement § Pollution Liability/Clean Up § Reputational Risk/Brand Rehabilitation § Strike Insurance § Subcontractor Assurance Coverage/Subguard § Voluntary Product Recall/Contamination § Wrongful Acts

Captive Structure § An individual or business becomes a shareholder in a CHIC. § The CHIC offers property and casualty insurance for a business entity including standard coverage's and specialized coverage's for unique needs of particular business entities. Coverage is available only to businesses owned by CHIC shareholders. § The business applies for and purchases insurance from the CHIC. § An actuary assesses and quantifies risk and coverage limits. § Policies are approved and issued to the business. © Management Services International. All Rights Reserved

Captive Structure Insured (s) Captive Insurance Company Issues Policies, Collects Premiums, Disburses Funds to TPA, State, and Feds Corporate Legal Counsel TPA Claims Captive Manager Bank & Investments Audit & Taxes © Management Services International. All Rights Reserved Typical Structure Board of Directors Actuary Domicile Regulations

Captive Insurance Ceding Co. Captive Insurance Co. Operating Business $_____ annual insurance premiums for property and casualty insurance coverages Ownership Control duc e R sk P tion lan Offers Insurance lines of coverages and pays claims. Half of risk is distributed amongst all direct written business Reinsurance Insurance Co. Captive Insurance Co. Receives $____ on annual premiums for reinsuring risk Ri Owner Invest $_____ to become a shareholder in a Captives insurance company © Management Services International. All Rights Reserved Contribution of Capital

How a Claim works? CLAIMS § As with all insurance companies, captives are expected

Insurance RISK Pooling INSURED 100% Premium 100% Claims Ceding / Fronting Company POOL 50% Insured’s Claims 50% Insured’s Premium (Less Ceding Commission) 50% 3 rd Party Premium (Less Ceding Commission) Reinsurance Company – CHIC (Captive) © Management Services International. All Rights Reserved 50% 3 rd Party Claims

Claim flow § Example of a $300 k claim § How much of that $300 k claim is your captive responsibility © Management Services International. All Rights Reserved Captive (10) - 15 K Captive (9) - 15 K Captive (8) - 15 K Captive (7) - 15 K Captive (6) - 15 K Captive (5) - 15 K $150 k to be spread out in pool Captive (4) - 15 K Captive (3) – 15 K Captive (2) – 15 K Total Claim $150 k+$15 k = $165 k Your Direct claim responsibility $150 k Your Captive (1) - 15 K You submitted a Claim for $300 k

approved Claim § § § Claim Receipt with all supporting documentation Send to third party underwriter for analysis Receive final outcome after thorough analysis Provide Client with recommendations and approved result. Disbursement of amount stipulated by coverage Claim Analyst Recommendation: Following our claim review and supporting financial/ patient booking documentation submitted in respect of the closure and subsequent loss of income for the operating location, our recommendation would be to settle the submitted claim as follows: US $37, 500 - 20% deduction for rebooking clients - US $1, 000 deductible. Recommended settlement offer = US $29, 000 © Management Services International. All Rights Reserved

Misconceptions in Captives Common Misconceptions in Captives § Captives are very expensive § All Captives are offshore § Captives are not good risk management tools § Captives are only for Fortune 500 companies § Captives are not a good business decision © Management Services International. All Rights Reserved

Assets and Deposits for Bank Captive Client Referrals Allow the Bank to Hold Money in Checking Account and /or Manage Captive Reserves Yearly Gross sales of 10 MM Business Income of 1 MM Business Income Captive Solution Remaining Business Income after Captive Solution Less Taxes Profit center after expenses for Captive Total Dollars Captive Solution No Captive Solution 1, 000 (500, 000) 1, 000 500, 000 (210, 000) (420, 000) 452, 500 742, 500 580, 000 n $452, 500 x 5 = $2, 262, 500 $452, 500 x 10 = $4, 252, 000 © Management Services International. All Rights Reserved

Who Qualifies for Captive Insurance § Do you work with business owners that have gross revenues of one million or more per year? § Are your clients looking for better management of risk? § Do your clients enjoy benefits that exceed the cost? © Management Services International. All Rights Reserved

Who Are We…? § We provide the finest expertise in creating and managing Captives (CHIC). § We manage and form Captives for a wide variety of businesses (small to medium sized companies) (Onshore and Offshore) üCompliance/reporting üUnderwriting üClaims Management üFinancial Management MSI is one of the Largest Captive Managers in the North Carolina Domicile © Management Services International. All Rights Reserved