2014 Wickens, Herzer, Panza, Cook & Batista Co.

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Captive Insurance Companies Can Provide Advantages May 9, 2014
for Small and Mid-Sized Businesses
By Daniel C. Urban, Esq., Anthony J. Cox, Esq. and Douglas J. Swearingen, Jr., Esq.
What is a captive insurance company?
A captive insurance company, often referred to simply as a captive, is an insurance company that is owned
and controlled by its insureds to underwrite the risks of the parent and/ or the parents affiliated companies.
This differs from the more traditional practice of seeking out and paying an outside insurance carrier to
underwrite business risks. Captives can be organized in many ways to meet the risk requirements of its
parent.
What are the advantages of forming a captive insurance company?
For decades, large companies have enjoyed the benefit of captive insurance companies. Now, small and mid-
size closely held companies are getting wise to the benefits that captives can offer. Some of these benefits
include:
Affordability. Commercial insurers have high overhead costs that are built into what they charge for
your policy. A captive gives you the opportunity to insure risks that otherwise would be too expensive
at a stable cost.
Access. A captive gives you the opportunity to insure risks that commercial carriers will not, and to fill
the gaps left in most general liability insurance policies.
Tailored Coverage. A captive insurance company gives you the opportunity to develop policies which
custom- fit the needs of your business, and gives you flexibility when it comes to prioritizing and
administering claims.
Asset Protection. Under a traditional insurance arrangement, premiums paid in excess of claims
result in a loss to the insured, but with a captive, any excess premium payments stay with the insureds
captive. And money paid to the captive is money off the books of the operating business, making it
unreachable to creditors in the event that something goes wrong.
Tax Savings. Risk management is the most important reason to form a captive, but there are also a
number of tax benefits available to the captives parent. For example, insurance premiums paid to the
captive by parent and affiliate companies are deductible in many situations. The captive must be
organized and managed as a true insurance company, and not as merely a tax shelter vehicle, in order
to capitalize on this advantageous treatment. The captive must have sufficient elements of risk transfer
and risk distribution, and at least 50%of its total revenue must come from issuing insurance.

Wickens, Herzer, Panza, Cook & Batista Co. May 9, 2014

2014 Wickens, Herzer, Panza, Cook & Batista Co. Page 2
Can a captive insurance company help my business with healthcare costs?
Its true that some companies with self- funded healthcare programs have found that pooling risk with other
similarly situated companies in a medical stop- loss captive are an effective way to control costs following the
passage of the Affordable Care Act. Nevertheless, each company should weigh the risk of the captives initial
capital requirements, policy termination provisions, potential underwriting losses, reduced diversification, and
fees from the captive manager before determining that a captive is right for its needs.
Can I form a captive insurance company in Ohio?
Currently, any business that wants to form a captive insurance company must domicile the captive outside of
Ohio. But that is likely to change soon. House Bill 117 would amend Ohio law to allow for the formation of
captive insurance companies within the state. The bill was passed by the Ohio House of Representatives on
June 4, 2013, introduced before the Senate on June 5, and is currently being reviewed by the Insurance and
Financial Institutions Committee. If the bill passes and is signed into law as expected, businesses can domicile
their captive insurance companies in Ohio and will not need to form their captives out of state. But regardless
of how the bill progresses, businesses seeking the benefits of captive insurance may continue to do so by
domiciling their captives in one of the states that currently allow for their formation.
Im interested in forming a captive insurance company. How can I find out more?
If you have questions regarding captive insurance companies or the formation, benefits, and risks of captive
insurance companies, please contact Dan Urban at (440) 695- 8082, Anthony Cox at (440) 695- 8088 or
D.J. Swearingen at (419) 627- 3117.

For more information about our Firm please visit
our website at WickensLaw.com.