This blog post touches briefly on the possible use of a captive insurance company for doctors and their medical practice groups. More specifically, it is about a medical group creating its own captive insurance company in order to help you (the doctors) more cost-effectively deal with your insurable risks. Only a certain portion of the group’s risks will be covered by your captive insurance company as illustrated below. Your medical group also will still use third-party insurance carriers for the portion of the risks not covered by its captive company.
One word of warning. Captives have been around for years. However, more recently the sales pitch for captive insurance companies, particularly where the primary selling point is on overly-aggressive tax benefits, has resulted in some captive planning approaches becoming akin to abusive tax shelters.
A key factor in helping to avoid these overly aggressive sales situations is to focus primarily on how a captive can be beneficial from a business planning and risk-management perspective. Secondarily are the resulting tax benefits.
My particular interest in bringing this post to your attention is the result of having attorney Kim Bunting in our law firm’s Atlanta (Georgia) office. Kim is a corporate lawyer who for many years was head of the risk management group in Atlanta for a Fortune 50 company. She has vast experience with insurance risks, actuarial matters, captive insurance companies, and so forth. Click here for Kim’s law firm bio.
Kim can help with a preliminary review of your group’s situation starting from a business / risk management perspective. If the captive is feasible, Kim can assist with the mechanics of setting up and operating the captive. This enables you to keep the focus primarily on the feasibility of a captive without being too overly persuaded by sales pitches that target primarily the tax benefits of a captive.
Here are more details about this use of a captive. A captive insurance company is your medical group’s self-owned insurance company designed to cover a defined portion or slice of its insurable risks. This is different from self-insurance. Self-insurance is where you pay out-of-pocket the loss amount resulting from uninsured claims.
By contrast, with a captive your group pays premiums to its captive company for the insurance coverage. In addition the group continues to pay its other third-party insurance carriers for the remaining slice or portion of risk that is not insured by the captive company. The combination of insurance from the captive and the third-party insurers makes up the group’s overall insurance coverage.
The primary benefit is that your group is placing funds in its captive company with the hope that the claims history remains minimal, resulting in the premiums accumulating as assets within the captive. In many instances, and depending on the particular structure, these are premium dollars that would otherwise have ended up in the coffers of third-party insurance carriers.
The captive does not have to be an all-or-nothing proposition in place of third-party coverage, nor should it be. The captive can be used to layer in additional slices of insurance coverage so that your group ends up reducing what it pays to third-party insurance companies, with the corresponding goal of retaining and accumulating those premiums inside the captive company as well as insuring any risks your group does not currently insure.
In addition to your deductibles, you can, as an illustration, use the captive to insure for claims above the first $1.0 million of a claim up to $2.0 million. Under this illustration your group pays third-party insurance carriers for the risks above this $2.0 million threshold. Or, your group can get started with a captive by using it initially only to insure the deductible portion of its third-party coverage, plus any other uninsured risks that it desires as part of this planning.
Finally, the set-up between the captive and other third-party insurers risks depends on your group’s particular situation, its claims history, its premium costs, etc. An insurance and actuarial review of its risks and claims is essential for optimizing the set-up for a captive in relation to other third-party insurance coverage. In all events the captive must be bona fide in terms of the premiums payable to the captive and its related coverage of risks.
NOTE: This is a promotional communication and is not legal or tax advice that readers may rely as a recommendation or advice for their particular situation.