Captive Insurance For Business Owners feat. Insurance Broker
@INS_BRKR: To send that $2 million to my captive, I elect for 831B. And now I have $1.5 million in underwriting profit. And that $1.5 million is not taxed on a federal level, only on a state level. And now that $1.5 million moves into surplus, let's call it. Invest that in a slew of different asset classes based on the regulatory environment. 831Bs can be a very useful tool for businesses with real insurable risks. to build up a pool of capital.
RYAN KOLDEN: That's a clip from today's show. I'm your host, Ryan Colden, and welcome to the Alternative Wealth Podcast. Today, we're joined by Insurance Broker from Twitter. Insurance Broker is an insurance consultant that engages in traditional market placements and captive setup as well as advisory. Insurance Broker is going to share with us how business owners can take advantage of creating their own insurance company in order to properly manage their business risk while doing so in a capital and tax efficient manner. This is known as an 831B small insurance captive or microcaptive. If you want to access the show notes, transcript or video, you can do that at ryangolden.com and you can find that link in the description. All right, let's get started with today's show. All right, so today we're talking with Insurance Broker. Just a quick introduction. Insurance Broker, he's an insurance consultant that engages in traditional market placements and captive program setup and advisory. Insurance Broker, would love for you to explain to the audience who is Insurance Broker and what do you do?
@INS_BRKR: Yeah, pleasure to be here, Ryan. Thanks so much for having me. Truly flattered. So I actually never intended on getting into insurance, which I think is pretty common amongst the industry. Most insurance brokers or consultants will tell you that they kind of try to get away from it and somehow came to them. I started my career in corporate finance, actually. And had sincerely zero desire of getting into such an industry. But, you know, as it happens, you know, fate had its way and I ended up partnering to start a, a brokerage or retail brokerage with, with a group that owned a few insurance carriers. And so I started a brokerage with them. We focused on large schedule, real estate risks, some healthcare risks as well. And vis-a-vis that I ended up running what was called. a risk retention group. A risk retention group is basically a form of insurance carrier, a mutual carrier, where the insureds, the clients of the carrier, own all of the risks themselves. They own the actual carrier, as opposed to a stock carrier, where a stock insurer would be someone where people that are shareholders own the actual carrier itself. So I started off as running an agency. I ran this risk retention And then I did some strategy for an admitted carrier as well. So risk retention group is really just a carrier written out of a captive facility. And through my experience there, overseeing a few captive facilities, starting some programs, Dealing with reinsurance and whatnot, I ended up going off on my own and doing what I like to consider three different things that kind of focus on client needs. One is traditional policy placements, right? Someone has a real estate risk, they own a bunch of buildings or they own an operating business and have liability risk. and whatnot. I go out to market for them and try to get them policies that meet their coverage needs, but also meet their financial abilities and capabilities to pay for that policy. I do what's called captive advisory, where I will liaise with agents for insureds or insureds themselves that are looking for alternative risk financing solutions and discuss what might be best for them and guide them on captives or structured policies of whatnot. And then third is ideal really on the carrier side, which is fronting agreements between carriers or for captives, programs that are looking to be set up that need fronting paper, MGAs. These are all buzzwords that we may or may not understand But this is more the back end of insurance. It's the carrier side of insurance as opposed to the front facing end, which is, you know, agencies and distribution and whatnot. So that's the focus of what I do. And it's, you know, it's been an interesting time so far.
RYAN KOLDEN: Awesome. Well, I appreciate you being here today. And I do want to spend the majority of our time today talking about 831B captives for small business owners or just business owners. Before we do that, we need to kind of talk about what risk is, how to mitigate risk and talk briefly kind of about the problem that's going on with insurance right now, which is skyrocketing premiums that we've kind of seen in the news recently. So what exactly in your mind is insurance risk and why should people and specifically business owners be concerned with risk?
@INS_BRKR: Yeah. So insurance risk is one-sided risk. It's a risk where there's only potential negative ramifications of it as opposed to something that may be financial risk where I could have upside or downside. Insurance risk has only downside to it. So truthfully, everyone in the world has some sort of insurance risk. Me, by owning my house, I have insurance risk. If my house gets destroyed in a storm, a fire hits it, someone slips on my front stoop, those are all different examples of risks. And in the commercial space, they amplify themselves. If I own an apartment building, the ability for tenants or visitors to slip and fall or to hurt themselves or a piece of ceiling to fall on them, is amplified than my individual risk with my house. If I own an operating business, the liability of my products or my services that may impact them. If I'm a shareholder or if I'm on a board of directors, my fiduciary responsibility to my company and its shareholders is a risk as well. If I don't fulfill that duty, I could be sued for not fulfilling that responsibility. So everything and anything has insurance risks, right? If you look outside your window, you'll see telephone lines, you'll see poles, you'll see street signs, you'll see cars, you'll see businesses. All of those have some sort of insurance risk, and mitigating risk is basically offloading that risk in a manner that is capital efficient. I can go hedge against my risk, I can go self-insure my risk, or I can send that risk to an insurance carrier to take upon for me and kind of sleep a little better at night, if that makes sense.
RYAN KOLDEN: Yep, that definitely makes sense. And what are some common mistakes that you see that business owners, what are some common mistakes that you see that business owners commonly make with regards to risk mitigation? Are they typically overinsured, underinsured, paying too much in premiums?
@INS_BRKR: The thing that I see most amongst business owners isn't necessarily over and underinsured. It's more of not understanding my risk. And it's not necessarily to the fault of the business owner. It could be to the fault of the agency that is dealing with that owner or to the insurance industry as a whole, which I believe is not as transparent as it should be with its clients, with its insureds. The most important thing that any business owner can do is understand what are their risks and what is necessary to mitigate those risks. Only from there can you make an educated decision about how to treat and handle those risks. If I drive, if I have a trucking business and I don't understand that I have a risk of auto liability of hitting someone on the street, I might not understand that that is a big risk that needs to be mitigated versus my auto physical damage, right? My, my, you know, the windows of my truck getting blown off, right? So only once I truly understand my risk, I run through a process with an agent who explains to me my risks and what solutions are there for that risk. Can I make an educated decision about how to approach the mitigation of such a risk?
RYAN KOLDEN: Awesome. And one of the things when I sit with people that I commonly hear, you know, like sometimes people will ask it is, does paying more in premiums automatically equate to me having the best insurance? So my question to you would be, when it comes to insurance, does more expensive automatically mean better insurance when it comes to paying your premiums?
@INS_BRKR: 100% absolutely not. In no way, shape, or form in the insurance world does a more expensive premium mean better coverage of any sort. With whatever policy that you do get, it's important to understand the coverages and the exclusions to those coverages, the different nuances in the actual policy form, And make your broker explain it to you and make sure he runs through it because all too often you'll see brokers that, you know, they'll get a policy quote and they'll just, you know, ask you if you want to bind coverage or if you want to accept the quote and they don't run through you what it does, what does it cover? What doesn't it cover? What are the different nuances into what it covers, et cetera, et cetera. And ultimately price does not equal better. And the reason for that is because on the backend, on the insurance carriers end, There's a vast amount of different complexities and things that could be going on that impact that price. On the one hand, it could be their expenses, you know, what, how much How much cent per dollar are they paying for each premium and expenses? And what are their risk appetites? And what are their capacities constraints? If I'm dealing with a carrier that doesn't have much of an appetite for trucking risk, and I'm a trucking business owner, it doesn't make sense for me to necessarily go out and approach them for coverage. because it'll probably be more expensive than a different carrier that has a tremendous amount of appetite for trucking risks, right? So there's a lot of different nuances in the industry, but it all boils down to that more money does not equal more better.
RYAN KOLDEN: Right. And the other thing that we'll kind of get into with the 831 be small captives is how we can take premium and basically dual purpose it so it's not just a complete expense for a business. Now, I do want to briefly talk about health insurance for business owners as well as entrepreneurs. And health insurance for the small business owners can be prohibitively expensive. Are there any potential solutions for this?
@INS_BRKR: So health insurance is is punitively expensive and it's quite unfortunate and it obviously gets a lot of headline time in pop culture. For small business owners, The one solution that really kind of jumps off of my mind is PEOs. And PEOs, Professional Employer Organizations, basically bundle a bunch of different business owners together to benefit them with economies of scales in different matters. So one of those things that it can help with is insurance. health insurance, so that's employee benefit insurance, so the health insurance for my employees and their families, their children, their spouses, workers' compensation. If I'm a new group and I don't have a lot of operating history, workers' comp insurance can be very difficult to obtain at a good rate because I don't have history showing my risk from an employer's perspective. And so, PEOs can group up a bunch of different businesses together to benefit them from a worker's comp perspective. And then as well, payroll, they tend to offer payroll services. That's basically one of the benefits to them is that they get to get your payroll business as well as some HR functions as well, might be onboarding, offboarding, etc. So PEOs like to basically group up together different businesses to benefit them in the insurance side and different aspects of the business. And their real fee taking is on the payroll and the HR services that they'll tend to require you to do in order to give you the benefits of the health insurance and the workers comp and whatnot.
RYAN KOLDEN: And are there any downsides as a business owner to using a PEO? I'm assuming it's all just giving up control of those resources that you just mentioned.
@INS_BRKR: Yeah. So exactly that, right? So on the payroll side, you're probably not getting the most competitive rate. Same with HR services, probably more beneficial to have something in-house and you certainly have less control over that. From an insurer perspective, insurers don't like the use of PEOs, right? Because it doesn't give me the true story with this business itself and the risk itself, right? It's really just a group of risks. And I don't really know what's going on on the underlying risk. And so when I try to get off of a PEO, it could be difficult to do. It's not a given necessarily that I'll get coverage and what that coverage is going to look like. So it can be difficult. And you're also You lose control in the sense that, however, the group of businesses in the PEO are performing from an insurance perspective is how my risk is going to be priced. So if I join a PEO that has a really good loss history, very few claims, et cetera, et cetera, then I benefit from that. But on the flip side, if the group of businesses that are part of this PEO are performing poorly, I'm getting charged more rate and it can impact me negatively.
RYAN KOLDEN: Gotcha. And before we hopped on the podcast today, we briefly were discussing medical stop losses and how potentially they could be used in an organization. to help with health insurance costs. Can you briefly explain what a medical stop loss is and the pros and cons of it?
@INS_BRKR: Yeah. So if you think about insurance, on one side of the spectrum, there is full risk transfer. I pay a carrier to take my insurance risk. I pay them vis-a-vis premium. And they, in return, cover me for that risk. I get to sleep at night knowing that whatever they promised they covered me, they will cover me. And there's no additional expenses out of pocket. This is typically the most expensive upfront option within insurance, right? I pay them a premium. They also have a deductible of some sort and it goes out the window. I don't see it, but they cover me. On the other side of the spectrum, there would be fully self-insured. where I go and I set aside a pool of money and I say, whatever claims comes up, I will pay for out of pocket. So there is zero upfront costs. There is no premium to this, but there is maximum, maximum and unlimited variable costs. If someone has a heart attack or someone gets cancer, right, I am liable for those claims out of pocket. There is no coverage elsewhere, right? I decided to take that insurance risk fully onto myself. In the middle is what's called stop loss. Stop loss is essentially a mix of those two worlds. You pay an upfront premium. that will cover a certain amount of what we call retention, risk retention. I retain the risk up until $100,000 per employee. That means if an employee has a claim, it's coming out of my pocket, right? Above that, The premium that I paid is covered by the insurer that I am contracting with for their benefits as a part of the stop loss, right? So basically it's a cutoff point where my retention is no longer on the hook. So if $100,000, all claims up until $100,000 will be my responsibility. Above $100,000 will be the carrier's responsibility. And so it bears this upfront cost of premium, but a much smaller premium that it would have been in the marketplace, in the traditional marketplace, because it's only starting from $100,000 and up and not $0 and up, or whatever my deductible would have been and up. And it caps the liability I have on myself, that variable cost, as opposed to the fully self-insured route, because I'm only liable up until $100,000 or whatever my retention cutoff is, right? So it's a mix of the best of both worlds. And there's a lot of nuances within how this works, right? There's spec and aggregate, there's deductibles, there's reinsurance, et cetera, et cetera. But on a basic level for groups that have, depending on the situation, typically 100 plus eligible employees. Sometimes you can get it with 50 or 75 eligible employees, depending on the program. You can set up this hybrid. It's a hybrid of self-insured and traditional market type policy where I retain some risk more than I would normally. I offload some risk. And typically, the upfront costs and the maximum amount of variable liability that I have should come out to be cheaper than either of the two other options on the spectrum, whether that be a traditional policy major medical or whether that be a fully self-insured type of program that I have set up.
RYAN KOLDEN: Okay. Moving from medical stop loss, I do briefly want to touch upon insurance premiums that they've been in the news recently before we dive into 831B small captives. Now, as we kind of As people are probably aware of, insurance premiums, they've been in the news recently, specifically in California and Florida. With regards to California, the nation's number one and number four property and casualty companies, State Farm and Allstate, said they're going to stop issuing new home insurance policies in California. In your opinion, what exactly is going on with insurance in California?
@INS_BRKR: So what's going on with insurance in California? isn't a microcosm of what's going on within insurance around the world. But to speak specifically about what is going on in California is, in my opinion, a tremendous amount of overregulation. And so in California, there's a regulatory body that prevents carriers that are already operating within the state to apply for rates above a certain percent larger than what they were previously in the previous years. So when you have carriers that are charging or have approval to charge for rates, let's call it $10 per thousand or whatever it may be, but they're not profitable on that business, they're going to need to go and charge more rates. But this regulatory body essentially doesn't allow them to go out and charge the rate that they need to be able to charge to become profitable, which basically presents an insurer with two options. One, continue to write business unprofitably or leave the state. And most seem to be, you know, forced into this position where, you know, I'm not going to write profitably, so I'm going to leave the state. And when carriers start leaving the state, it obviously you know that there's less competition there's less options out there for the ultimate customer and that ends up leading to a compounding we spiral you know where spiral within what there was before. And so you have this issue of rate you have this issue of the regulatory environment in general is a very difficult climate in california California and New York are typically regarded to be the tougher of regulatory climates for insurance. And this background, insurance is not regulated on a federal level. Insurance is regulated on a state by state level. So each state has its own Department of Insurance or Department of Financial Services, Department of Banking and Insurance, depending on the state, whatever it's called. And so California happens to be a very tough environment. I recall I was actually speaking with someone at a pretty prominent national carrier recently, and they told me, not in the housing or not in the real estate sector, not property, but on a specific casualty line that they do. They told me that they've been trying for years and years to get approved for rates in California and they just keep going on in circles and circles and circles and they finally made the decision this year to just drop the filing and basically they can't write business in California now. They might try again in a few years but the regulatory environment is such that it doesn't allow for free market which ultimately negatively impacts the customer. And, you know, not to say it's all regulatory issue, right? You know, we have the risks, the wildfire risks, the earthquake risks out in the West Coast. And those, what we would call cat or catastrophe risks, ultimately lead to losses which impact insurers. But the regulatory climate is not helping the ability for insurers to write profitably. And as such, they're forced to leave the state, essentially.
RYAN KOLDEN: I see. And is regulatory kind of issues the same thing that's going on in Florida or is Florida a separate case?
@INS_BRKR: Florida might be a little more nuanced. There's a tort issue in Florida. Basically, a lot of personal injury attorneys, right? If you ever drive around down the highway, you'll probably see a lot of personal injury advertisements and that's because they make a lot of money from suing insurance carriers basically. And so in Florida, I think there's some statistic that only 25% of losses in the United States occur from Florida. or 25% of the population or something like that, but 90% of all insurance lawsuit filing, something like that, are down in Florida. Basically, there's a tremendous industry down in Florida which basically convinces homeowners and insureds to go out and file what you might call frivolous lawsuits in order to just get money because the business of insurance, right, is I take in money as premium and I insure your property. And now I make money on that premium. I make money on that by underwriting profitably and additionally investing that money to go pay out claims. And when a claim arises, I basically have two options. I can approve the claim or I can deny the claim. But if I deny the claim, I might get sued for denying the claim. And if I get sued for denying the claim, now I have two options. I can settle or I can take it to court. Settling majority of the time is the cheaper option for the carrier. And that's because they have to retain and pay counsel to deal with the case. They have to reserve losses for cases now, which basically impact their balance sheet. They then have to also take it to court. And most juries do not like insurance carriers. So, unless it's an extenuating circumstance where they know that they are 100% in the right, you know, without a doubt, majority of the time, a case taken to court will not be in the benefit of the insurer. And so, their goal is typically to settle as quickly as possible for the smallest amount of money as possible. And so, personal injury attorneys take advantage of this by knowing this. And so they'll now go out, find people to go sue the carrier to make a quick buck essentially. And that impacts the, the environment, the insurance environment in Florida as a whole. So that's one thing there are certainly. regulatory issues within Florida, one impact allowing for this to happen, but as well nuances within rate and within carriers and how they operate within the state as well. There's been a tremendous amount of carriers that have gone into receivership in the state, meaning to say they went bankrupt now. And truth be told is that's not all to blame on the regulatory environment, but a lot of it to blame on catastrophes, right? Hurricane risk, wind and flood risk down in Florida are big risks, right? You know, both on the west and east coast. And so, no matter which way you cut it, right, you're going to be paying for more for insurance down there in the traditional marketplace. And you know, it's just a natural aspect of life down there is when you have hurricanes that cause billions of dollars of damage on an annual, semi-annual you know, five year basis, you can look at Hurricane Andrew, I think, right, caused a tremendous, tremendous damage and numerous carriers have to go into receivership from that. So it's not a easy environment to operate in. And as more insurers realize that they cut back their capacity, meaning they cut back the amount they're willing to write in that state, and that ultimately causes rates to go up.
RYAN KOLDEN: Okay. And I know Florida and California are a particular like, they're kind of an extreme relative to the rest of the nation, but regardless, cost of insurance has been going up nationwide. And my question is, do captives, specifically like what you work with, do they offer a potential solution to this in the perspective of a business or a corporation?
@INS_BRKR: Right. So, you know, just to comment on that first point, right. So regardless of catastrophe risk or not, rate in America for property risks has gone up tremendously. Right. You know, of course, certainly so with, you know, areas that have catastrophe risk, you know, that would be your coastal areas, whether it be the Carolinas or be Florida, Texas. And then California and the West Coast and some of the Midwest with their wildfire risk, right? Those have obviously gone up. But even in more mild areas, rates have gone up tremendously, both in the property and the liability side. And markets that are offering products become harder and harder to find. So the operating environment in general as an insured trying to find coverage is difficult, nonetheless, and expensive nowadays. And CAPTA certainly can be a good solution for that. Captives allow one to transfer all or a portion of their risk to themselves vis-a-vis what's called the captive entity. You know, to take a step back for a moment. There are, I believe it's 27 states that have captive insurance laws, and then a number of offshore domiciles as well, including Bermuda, the Caymans, et cetera, that allow for what's called a captive insurance entity to be set up. And a captive insurance entity, you know, I don't think the law actually has a legal definition for it that's agreed upon, but it's, you know, the most common definition is a an insurance entity that insures the parent that owns it, right? So if you think about a traditional insurance carrier, right? Travelers, let's call it, right? I don't own travelers, right? I might have stock in travelers, but I don't own travelers. And so when I send my policy premium to them for them to give me coverage, I don't have any ownership in them. But when I send money to a captive to insure, I own that captive, I own that cell. as a part of that captive or rent it, right? And it's sole responsibility is to insure me. And so there's a number of domiciles that allow one to set up these special entities. And when having one of these entities, I am now able to retain a portion or all of my insurance risk. I can take all of my property risk or I can kind of chop it up into pieces Take some pieces in the captive send some pieces to the traditional market or use even the captive to access reinsurance markets. What a captive is is is basically this insurance shell that gives me flexibility on how i treat my insurance risks and. When I decide to send premium to myself as opposed to a traditional marketplace, it can certainly be a solution to the extreme rate environment that we're seeing in the traditional marketplace. I can lower my premium. Maybe I want to keep my premium at the same rate to benefit from the different various benefits of a captive. But ultimately, I own my risk to a certain extent now, and it's really up to me to have that risk perform well and to make money off of it as opposed to sending that money every year out to travelers or Allstate to cover my risk.
RYAN KOLDEN: Just to summarize what you said, a captive is more or less a way that a business owner or a corporation can set up their own insurance company, so to speak, to where they're taking on either all or a portion of some of their business risks. And it allows them to not only cover a risk in the business or to ensure a risk in the business, but it also can play out to be somewhat of a more efficient means of retaining premium inside of the captive.
@INS_BRKR: Exactly. The way I think about it is ordering lunch or catering a wedding. I might go out with a few friends to a pizza store and pay $1.50 a slice for pizza, me and my five friends. But if I'm trying to cater a wedding with 500 people and I go to the pizza store to order pies for 500 people, That is a less capital efficient solution. It's not a scalable solution to cater for wedding. There are businesses out there that specifically provide solutions for wedding catering, right? And those are the capital efficient or the scalable solutions. And it's the same thing with insurance. The traditional insurance markets are designed to hold the risk for certain appetites of risk, for certain sizes of risks. And when you get beyond that in the traditional marketplace, it's not necessarily the capital efficient solution anymore. You might have to go secure additional reinsurance for your specific policy or group of policies which will make it more expensive or they don't know how to handle your risk because it's a certain size or a certain class and it becomes less of a capital efficient solution and ultimately the most capital efficient solution will then be to retain that risk internally or a portion of that risk internally. offload some of that to yourself and send the rest out to a reinsurer or a traditional market. And that could provide a tremendous amount of benefit. Yeah.
RYAN KOLDEN: Nope. So we've talked a lot about captives so far, but what is specifically an 831B captive? Can you talk a little bit about that? About what an 831 is? For sure.
@INS_BRKR: So 831, so IRC 831, Internal Revenue Code 831, is a code that discusses the treatment of taxes within a captive insurance entity. And so I can elect 831A or 831B. 831A basically states that the underwriting profit of my captive will be taxed federally. What that means to say is if I send a million dollars in premium to my captive, and I have $100,000 in claims, I now have a $900,000 underwriting profit. If I elect for 831A, I will be taxed federally on my $900,000 of underwriting profit. If I elect for 831B, 831B allows for my underwriting profit to not be taxed on a federal level and In order to elect for that, I have to meet certain qualifications. Those qualifications are insurable risks and standard insurance theory, meaning to say that It's spread, there's enough spread across my different risks and whatnot has to be, we call this a micro-captive by the way, filing for an 831B. And the maximum, I believe in 2024, the maximum amount of premium could be $2.8 million in this facility in order to be able to elect for an 831B. And there's a few other qualifications out there. And so what this allows me to do is essentially, if you think about it from a business perspective, I own XYZ Trucking Company. And XYZ Trucking Company sends $2 million to a captive facility. So that $2 million, assuming these are what we would deem insurable risks, That $2 million is now tax shielded from XYZ Trucking's income statement, right? Because it's an insurance expense, it's a valid expense, and that minimizes my net profit for tax. And so now I have less profit, so X is tax shield to my parent company. I send that $2 million to my captive. I elect for 831B. And now I have $1.5 million in underwriting profit. And that $1.5 million is not taxed on a federal level, only on a state level. And now that $1.5 million moves into surplus, let's call it. And now I can invest that. I can go and now invest that in a slew of different asset classes based on the regulatory environment. The only tax that I will pay now is on the capital gains of those investments that I invested at $1.5 million, right? And so 831Bs can be a very useful tool for businesses with real insurable risks to build up a pool of capital and a sort of trust, if that makes sense.
RYAN KOLDEN: Yep, that makes sense. And what kind of businesses can benefit from having a microcaptive?
@INS_BRKR: Truth be told, any business can really benefit from it. It's really a matter of risk assessment. And so you'll have what we call the traditional risks, right? So property, right? Property insurance, general liability insurance, professional liability insurance, workers' compensation, auto-liability, auto-physical damage, those are what I would call the traditional insurable risks, right? And, you know, any of those, you know, technically fit the confines of an 831B captive as long as the qualifications of risk management and risk placement are met, along with the maximum premium in the captive entity. But then you have, let's call it risks that might not necessarily be on my radar. And those risks, those are risks that might need to be assessed. Do I have key employee risk? Is there one employee, or maybe I'm the business owner and if something happens to me, my business stands to lose a lot of income. Or do I have business litigation risk? You know, I have a real reason to be concerned that I might be sued and lose money in a lawsuit. Or do I have a supplier risk? You know, if I lose a key supplier, the key supplier goes down. You know, and I can't fulfill orders, I lose income, or do I have another form of business income risk, you know, something like, you know, where COVID hits. I'm a dentist, you know, I'm a dentist and nobody can come see me because of, you know, because of mandates and whatnot. So, you know, there's various types of risks that you won't find solutions for in the traditional marketplace, but there's still real risks nonetheless. And as long as I can justify those risks, You know, an A31B captive could be a real tool to, you know, to providing security, you know, mitigating those risks, as well as, you know, the various benefits we discussed.
RYAN KOLDEN: And in your experience, when you're advising clients, what's holding these clients back from ensuring their risks in the captive or simply they just didn't even know this existed?
@INS_BRKR: Nine out of ten times is clients don't know it exists the one at a time. So they do know it exists. They weren't explained it properly. And so they don't understand how it, how it works. Right. But, you know, just to throw out a stat there, I believe this, the number is 90 or 95% of fortune 500 companies have, have some sort of captive entity. And there's a reason for that, right? The reason being is that they're a real, a real prudent means of risk management. And, you know, it's something that more and lower middle market businesses should be aware of and, you know, look into how it can fit into their business plan. Because, you know, there's certainly upfront costs to captives, but they can be a real, real long-term benefit to the organization and to you as the business owner.
RYAN KOLDEN: Right. We're talking about, in a way, with the small captive, setting up your own insurance company, just kind of in layman's terms. And it sounds very complicated. Insurance companies sound super complicated. It sounds like a lot of experts, attorneys, CPAs. What exactly is needed for a business owner to implement a captive insurance plan?
@INS_BRKR: So you're right. There is an ecosystem that is relatively complex. What I say, you'll hear people say in the captive spaces, the benefit of captives is their flexibility and the downside to captives are their flexibility, right? There's so much opportunity and you can really mend it and mold it to what you want it to be, but it takes a tremendous amount of navigating to figure that out. And so, just to talk about the ecosystem, there are attorneys that deal specifically with this, there are accounting firms, typically in the form of a captive manager as they're called that deal specifically with this. There are programs as well that will help you get into a facility but may not give you access to a captive manager, to the legal work that you need or to the banking work. And then there are programs that have everything packaged into one. The best thing that someone can do if they're exploring this from a business perspective is to find a trustworthy advisor that understands and knows the landscape and knows the ecosystem and can point them in the right direction. But that does not have their own conflict of interest in that. Meaning to say, if I go to an advisor that owns their own captive facility, right, they're basically trying to sell me a product through their advisory services. But go to an outside advisor, someone who understands the ecosystem, but doesn't have a vested interest in you picking one captive manager over another, or picking one facility to set up your program within versus another. And that's what I do to a certain extent, is I liaise between the programs and the firms that provide services within it, and the insured and or their agent, right? I understand the ecosystem, I understand the landscape, I understand the programs that already have plug and play solutions built in. And based on the goals and the needs of the business owner, I can say, I think that one, two or three are probably your best options. Why don't we set up a call with them as opposed to the insured kind of, you know, just looking around on Google and finding a few different groups that have facilities and kind of just calling them up, you know, and seeing how it works.
RYAN KOLDEN: Yep. I think we've done a pretty good job. Are you not me? Not we you. I think you've done a pretty good job of explaining A31B captives, the only kind of question that I think that I commonly get when I talk to clients about this solution is how can one, you know, let's say a business owner has a captive, how can they get money out of the captive, either during, like while the captive's alive or, you know, once it's, once it's been shut down?
@INS_BRKR: Yeah, it's a very good question. So while the captive is alive, To get money out, you can either take a dividend, so the shareholders or the owners of the captive can each take dividends from the captive itself, which, you know, require knowledge of the taxation and whatnot of that. There's also something called the loan backs, which, you know, may or may not be viewed favorably by the IRS and certain people out there. But, you know, as long as they meet the standard requirements of what a loan is, you know, There should be no issue. It's essentially taking a loan from my captive to utilize it for whatever needs I may have. And as long as it meets the qualifications of a true loan or promissory note, there should be little issue. But obviously, speak to legal and tax advisory on those nuances and those issues. So those are the real ways to get money out during the life of a captive. And of course, you can invest the assets in a captive and different asset classes while it's there, while it's sitting in the capital surplus of the captive. There's no issue with that. In order of getting money out of the captive, post-life is really winding down the captive or putting it into what we would call a runoff. And essentially what that means is When i decide to close my ice cream store, my business that i have, i have an ice cream store business, if i decide to close it down, i just close it down one day, right? You know, i sell off all of my ice cream cones, i get rid of all my inventory and my equipment, and the business is shut down. You know, i might have to do a filing or two to remove the EIN or whatnot, but my business is shut down. When it comes to insurance carriers, Insurance carriers are on the hook for claims and liabilities. And they can't just go off and shut down one day. They have to be put into what's called a runoff. And runoff is basically where the business is no longer operating, but assets have to be left on the balance sheet in order to pay off any claims that might come up over a period of time. And that period of time ultimately depends on the type of risks it's insuring. If I have a property insurance business, the length of time I have to put my business into runoff is significantly smaller or less than if I have a life insurance business, right? Because as you can imagine, the claims from a property insurance business are typically opened and closed in a much shorter period of time than a life insurance business. A life insurance has a tail or has claims that can that can be open or last really the life of the policy lasts for 80, 100 years, you know, depending on the situation, right? So the same thing is with the captive. In order to close a captive, I have to put it into runoff. It has the ability to be claimed against for a certain period of time. And then only after that time is it really closed or, you know, fully shut down. But, you know, the way I view it is that, you know, there's little reason to ever really have to go that route because at a minimum level, it should be viewed like a trust, right? And so if I build up money in this captive facility over time and over time and my business is acquired or my business is shut down and maybe if it's acquired, the new owners of the business, they don't see the need for a captive and they want nothing to do with it. It should just be viewed as a trust with a pool of capital in it. that could be invested and utilized in different ways and have beneficiaries at a certain point. But if I run it off and I try to take assets out of it, you're getting yourself into a situation where you definitely need legal advisory and you're getting yourself into tax liabilities as well from it.
RYAN KOLDEN: Right. Awesome. Insurance broker, I think we're about wrapping things up. We've talked today about just insurance risk, the issues in California, Florida, the nation as a whole, 831, small captives. Is there anything else that you want to mention before we kind of wrap things up here?
@INS_BRKR: No, I think it's been a pleasure talking with you about insurance and captives. I can go on for days, if not months, about insurance and captive. And so I hope this information is helpful to some business owners as they kind of try to understand the insurance climate and the different solutions that exist out there a little better.
RYAN KOLDEN: Yeah, I absolutely appreciate your time. How can people connect with you?
@INS_BRKR: Um, so I'm on Twitter. Um, unfortunately, unfortunately my, uh, handle is INS_BRKR that's insurance broker. They can as well email me at info@recoverrisk.com. That's R E C O V E R R I S K.com.
RYAN KOLDEN: Okay, perfect. I'll make sure to put that in the show notes as well as description that way if people have any questions they can reach out to you. So that's going to wrap it up. Thank you for listening and we'll catch you on the next show. Thank you for listening to the Alternative Wealth Podcast. Today's show notes and resources are available to you at RyanKolden.com. If you liked this episode, make sure you subscribe and leave a review. The opinions and views expressed here are for informational purposes only and does not tax legal financial investment or accounting advice. This material is educational in nature and should not be deemed as solicitation of any specific product or service. All investments involve risk and have potential for a loss of principle. Should you need such advice, please consult with a licensed financial, tax, or legal professional. Neither host nor guest can be held responsible for any direct or incidental loss incurred by applying any of the information offered.
