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MOORE INGRAM JOHNSON & STEELE TENNESSEETOP 10 REASONS YOU CAN RECOGNIZEAN UNSCRUPULOUS CAPTIVE PROMOTER10. The client, in the first discussion aboutcaptives, insists that they pay 1.2m ininsurance premiums and the promotorresponds “no problem”5. Promoter agrees or even encouragesthe captive owner to invest most or all ofthe captive money in a life insurance policythat has little or no cash surrender value inthe first few yearsIn reality, premiums of exactly 1.2m shouldoccur as often as a lightening strike. Thecaptive should be used to secure neededinsurance coverages not needed premiums.Underwriting and actuarial substantiation for the insurance premiums paid areeither missing or insufficient.This is unacceptable in all instances.9. They suggest to their client that acaptive can be formed offshore for lesscapital, regardless of underwriting4. The promotor has a menu of coveragesand pre-written policies to choose fromregardless of the insured’s business8. The promoter agrees with client thatpremiums paid into the captive can bewithdrawn as a loan in any amount and assoon as the premium has been paid3. The promoter tells his client that henever really has to file a claim2. The promoter does not have one7. Premium levels never change throughout commercial liability insurance broker in histhe life of the captivecontacts list6. Promoter charges fees based upon apercentage of premiums paid1. The promoter has never read orsubscribed to Captive Review!to participate in this scheme by assisting entities to create captive insurancecompanies onshore or offshore, draftingorganizational documents and preparinginitial filings to state insurance authorities and the IRS. The promoters assistwith creating and “selling” to theentities often times poorly drafted“insurance” binders and policies tocover ordinary business risks or esoteric, implausible risks for exorbitant “premiums”, while maintainingtheir economical commercial coverage with traditional insurers.Total amounts of annual premiums oftenequal the amount of deductions businessentities need to reduce income for theyear; [ ]This should never happen purposefullynor even be considered when the compe-The promoters manage the entities’ captive insurance companies year after yearfor hefty fees, assisting taxpayers unsophisticated in insurance to continue thecharade.Everyone has a right to make an honest living (the operative word is “honest”).The IRS is completely justified in including micro captives on this tax shelter list.We have assumed management of severalcaptives, which we needed to rehabilitate.The captive industry, including several DOIDepartments in the USA domiciles and USAState Captive Associations, is doing a betterjob lately in not tolerating “unscrupulouspromoters” by insisting that micro captivesbe formed and managed properly.These micro captives can serve a vital rolein augmenting the insured’s commercial orgroup captive program. We have witnessed a business that would be defuncttoday were it not for the coverage theyfiled a claim on in their captive.It is imperative that every micro captive exemplify a real insurance companyby exhibiting, among other indices, riskshifting and risk distribution. These principles have been upheld by the Courts.Rent-A-Center, Inc. v. Commissioner,142 T.C. 1, 21 (2014); Sears, Roebuck & Co.v. Commissioner, 96 T.C. 61, 101 (1991),aff’d in part and rev’d in part, 972 F.2d 858(7th Cir. 1992); AMERCO, Inc. & Subs. v.Commissioner, 96 T.C. 18, 38 (1991), aff’d,979 F.2d 162 (9th Cir. 1992); Harper Grp. v.Commissioner, 96 T.C. 45, 58 (1991), aff’d,979 F.2d 1341 (9th Cir. 1992) and have beenechoed by the IRS in Revenue Rulings2002-89 and 2002-90.In closing, I hope our captive industrycontinues to weed out the unscrupulousfolks and I hope the IRS takes the time andeffort to distinguish those of us forming andmanaging captives properly for our clientsfrom the unscrupulous promoters. Neither task is difficult!“I hope our captiveindustry continues to weedout the unscrupulousfolks and I hope the IRStakes the time and effortto distinguish those of usforming and managingcaptives properly forour clients from theunscrupulous promoters”Micro Captives (captives with limited premiums and elect IRC Sec831(b) treatment) should only beformed and managed by a team ofexperienced liability, tax, accounting and actuarial experts. The policies should cover risks that are realand applicable to the insured payingthe premiums. The captive policiesshould be written to compliment andsupplement the insured commercialor group captive policies and notbe contradictory or redundant thereto.These captive policies should be annually reviewed for changes to the insured’sbusiness and/or commercial policies andperiodically repriced by a competent andindependent actuary.tent and independent actuary is pricing thepolicies.[ ] or, for a wealthy entity, total premiums amount to 1.2m annually to takefull advantage of the Code provision.7TENNESSEE REPORT 2015 WWW.CAPTIVEREVIEW.COM

TENNESSEE CIC SERVICES & ASSURANCE PARTNERSCLEARING UP THECONFUSIONSean King and Nate Reznicek, of CIC Services and Assurance Partners LLC. respectively,help shed some light on the growth of micro captives and confusion surrounding themCaptive insurance companies.A tool once reserved for onlythe largest of companies hascontinued to see significantgrowth in utilization acrossall industry in the US. Competition fromstates continues to drive down the cost ofentry into the market and the exponentialsophistication of small and middle-market businesses aligns with the significantcompetitive advantages available throughthe ownership of a captive insurance company.The continued growth of small andclosely-held companies has led to a steadytrend of formations of new “micro captives”. This influx of new captive insurancecompanies has led to some confusion,half-truths, and misinformation aroundthe purpose of these captive insurancecompanies and the legitimacy of thearrangements.Captive Review (CR): What is a “microcaptive”?Sean King (SK): Micro captives are simplysmall captive insurance companies generally utilised by middle-market, privately-held businesses. Small businesses faceunique survival challenges as compared toFortune 1000 companies. Their revenuestreams are not nearly as diversified, theyhave smaller and often more highly-leveraged balance sheets, and they cannotreadily access capital and credit marketsto smooth cash flows when the unforeseenhappens. Events that might simply knocka few dollars of the earnings per share ofa Fortune 1000 company can easily bankrupt small or mid-market business.Written bySean KingSean King is a principal and one of the founders ofCIC Services, LLC., and serves as In House Counsel.With a background in accounting, law, taxation andinsurance, Sean is uniquely qualified to work in thecaptive insurance industry.Written byNate ReznicekNate Reznicek champions the agencies captiveinsurance program offering and is the centralisedcommunication link to the Assurance Partners’risk management resources and resource partners.Assurance Partners develops sustainable enterpriserisk management strategies and programs designedto lower business owners’ total cost of risk, increaseprofitability and help ensure financial stability.Nate Reznicek (NR): Micro captives look,feel, and operate very similarly to “traditional” captive companies. However ownership of these captives is typically heldby owners of small or mid-sized closely-held companies instead of the Fortune1000 organisations in which we are mostfamiliar. These micro captives are moreoften used to insure first-party exposures,deductible reimbursements, businessinterruption or loss of income events, andother low frequency/high-severity eventsthat larger companies, with their more8robust business models, may choose tojust informally “self-insure”.CR: What are the advantages of the 831(b)tax election for captive insurance companies?SK: “Small” insurance companies (thosethat take in less than 1.2m per year ofpremium income and meet a few othercriteria) can elect under Internal Revenue Code Section 831(b) to pay no taxon their underwriting profits. This taxbenefit is designed, in part, to incentivisesmall businesses to form captives to bettermanage their well-known risks. It is alsointended to make operating these smallerinsurance companies economically viableas without the tax subsidy, the operatingcosts (legal, accounting, actuarial, administrative, managerial, jurisdictional, etc.)would in many cases exceed the potentialbenefits.Micro captives, being small and otherwise meeting the criteria, frequentlytake advantage of this tax benefit and aretherefore often referred to as “831(b) captives” or “micro captives”.Congress cares about the risk management practices of small businessesbecause, per the Small Business Administration, such businesses employ nearlyhalf of all private sector workers, represent more than 99% of the country’sexporters, and have accounted for nearlytwo-thirds of all net new jobs created overthe last 17 years.NR: Sean is exactly right. The 831(b)election helps to level the playing fieldbetween the Fortune 1000 captives (andTENNESSEE REPORT 2015 WWW.CAPTIVEREVIEW.COM

CIC SERVICES & ASSURANCE PARTNERS TENNESSEEtheir significant tax advantages) and successful small/mid-market businesses.These businesses are the backbone of oureconomy and the risks they face are veryreal. This election provides these smallerbusiness with the opportunity to formallyinsure their risks, closing significant gapsin coverage and providing protectionfrom significant existing exposures.CR: How should the captive ownerensure the policies written throughthe captive stand-up to regulatoryand IRS scrutiny?SK: The Captive Insurance CompanyAssociation (CICA) has published two“best practices” documents. Complying with the recommendationstherein goes a long way toward ensuring the legitimacy of one’s captivefrom a regularity and tax perspective.a change of mind-set. These individuals are now owners of an insurancecompany and as such must operate thecaptive as such. The ideal candidate forcaptive insurance company ownershiphas a high level of accountability for theperformance of their risk managementprograms. Individuals that fit this mouldhave the most successful and profitablecaptive insurance operations.“It is important toremember that thereis more to a legitimatecaptive insurancecompany than justdefensible policies”NR: It is important to remember thatthere is more to a legitimate captiveinsurance company than just defensiblepolicies. Although a captive does not haveto operate in the exactly the same fashionas a traditional commercial insurancecarrier, they are still insurance companiesand must operate as such. Proper legaladvice, actuarially determined premiums,appropriate risk distribution/sharing,effective loss control, for example. Theseare just a few of the traits that a legitimate captive should have and help ensurealignment with best practices.CR: Why is Tennessee a suitable jurisdiction for establishing a micro captive?SK: Our home state of Tennessee is anideal jurisdiction form 831(b) captives.Unlike some competing jurisdictions, Tennessee does not just license these captivesbut it actively regulates them also. Theregulators are strict but sensible, whichis an all-too-rare combination these days.Businesses forming captives in Tennesseehave the peace of mind of knowing thatowner that would diminish their captive’sperformance or ability to provide muchneeded coverage to their insureds. T

Pareto Captive Services, talks to Captive Review about what an employee benefit captive can offer medium-sized employers 36 TENNESSEE: A LEADER IN CAPTIVE INSURANCE Norman Chandler, co-founder of Arsenal Insurance Management, explains why Tennessee is a leading domicile for