1. Captive Insurance Strategies
For
High Net-Worth Clientele
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2. Presentation Outline
• Risk Financing and Risk Transfer Background
• Review of Captive Insurance Structures
• Review of Captive Insurance Domiciles
• Review of Income Tax Strategies
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3. Risk Financing and Risk Transfer
Background
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4. Types of Risk Transfer Techniques
• Commercial Insurance
• Large Deductible
• Self-Insurance
• Captive Insurance
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5. What is Captive Insurance?
• A subsidiary formed to insure the risks of
its parent and affiliates.
• A captive is sometimes owned by and
insures more than one parent.
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6. Why Form a Captive?
• Allows the Parent company to maintain
control of their insurance program during
hard and soft market cycles
– Greater control of risk management program
– Greater access to reinsurance markets
– More flexibility with insurance coverages
– Investment income opportunities
– Stability of the price cycle
– Estate Planning Tool
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7. Captive Insurance Structures
• Pure captives
• Group captives - association, risk retention
groups
• Rent-A-Captives / Leased capital facilities
• Protected Cell Captives
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8. Basic Illustration of a Direct-Writing Pure Captive
Insurance Program
Captive Owner(s) /
Insured(s)
Premium $ Paid Loss $
Covered Claim
Excess Insurance Excess Loss
Premium $$$ Reimbursement $$$$
Captive Insurance
Company
Loss Reimbursement $
Excess Insurance
Company Reinsurance
Premium $
Reinsurance
Company
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9. Pure Captive Structure
Parent Company
Insured is parent,
subsidiaries, affiliates
or companies that
have a business
relationship with
Parent Company
Fronting Carrier
(Could be RRG)
Admitted Insurer in all
50 states, provides -or-
policy to insured
Pure Captive Insurer
Provides direct insurance or
reinsurance.
Excess Insurer Reinsurer /
Retrocessionaire
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(Insures above
Captive (Reinsures Pure
retention) captive)

10. Association Captive
Structure
Member
Organization
Made up of any legal
association of
individuals,
corporations,
partnerships, or
associations, except
labor organizations
Fronting Carrier
Admitted Insurer in all
50 states, provides -or-
policy to insured
Association Captive Insurer
Provides direct insurance or
reinsurance.
Reinsurer /
Retrocessionaire
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(Reinsures Association
Captive)

11. Risk Retention Captive
Structure
Members
Members must be
engaged in any
related, similar or
common business,
trade, product,
services, premises or
operations.
Risk Retention Group
Provides direct insurance to its
members in all 50 states after
registering with each state. Can
only provide liability insurance.
Reinsurer
(Could also be pure captive,
rent-a-captive or risk retention
group) 11
Provides reinsurance excess of
RRG’s retention

12. Rent-A-Captive Structure
Sponsor
Varies by Domicile – either insurance company,
captive insurance company or any entity that is
approved by the commissioner to provide all or part
of the capital and surplus required by applicable
law
Fronting Carrier
(Could be RRG)
Admitted Insurer in all 50
states. Issues policy to
be reinsured by Cell
Cell A Cell B Cell C
any entity, partners, any entity, partners, any entity, partners,
or joint venture or joint venture or joint venture
partners, or members partners, or members partners, or
within the same within the same members within the
corporate family of corporate family of
same corporate
the entity that are the entity that are
family of the entity
insured by a rent-a- insured by rent-a-
that are insured by
captive captive
a rent-a-captive
Reinsurer
Reinsures each participant
(protected cell) of the Rent-A-
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Captive

13. Review of Captive Insurance Domiciles
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14. Offshore vs Onshore
• Offshore Domiciles developed earlier than
Onshore
• Additional Flexibility in Offshore Domiciles
• Lower capital requirements Offshore
• Perception of Offshore Domiciles
– Tax Related Issues
– Bank Related Issues
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15. Offshore vs Onshore
• Onshore Domiciles regulated by National
Association of Insurance Commissioners and
State Insurance Departments
• Established Onshore Domiciles providing greater
flexibility than in past
• Better perception of Onshore Domiciles
– Tax Related Issues
– Bank Related Issues
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16. Worldwide Captive Statistics
• Over 5,300 captives formed worldwide
• Top Domiciles (as of December 31, 2006)
– Bermuda – 989
– Cayman Islands – 740
– Vermont – 563
– British Virgin Islands - 383
– Guernsey - 381
– Barbados – 235
– Luxembourg – 208
– Turks & Caicos Islands - 169
– Isle of Man – 161
– Hawaii - 160
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17. U.S. Captive Statistics
• Over 1,200 captives formed in United States
• Top Domiciles (as of December 31, 2006):
– Vermont - 563
– Hawaii – 160
– South Carolina – 146
– Nevada - 97
– Arizona – 74
– District of Columbia – 70
– New York – 39
– Utah – 30
– Montana – 21
– Georgia - 17
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18. Domicile Legislation
• Most Onshore Domiciles have very similar
captive insurance laws
• Variances to laws are usually in the
following areas:
– Captive Types
– Investment Requirements
– Annual Fees
– Premium Taxes
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19. Review of Income Tax Strategies
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20. Revenue Ruling 2002-89
• Parent Premium Deductibility, the 50%
Unrelated Risk Rule
– States that over 50% of premium to captive
is required to be from unrelated sources
– States that if captive has a brother/sister
relationship with insureds, then 30% of
premium to captive is required to be from
unrelated sources
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21. Revenue Ruling 2002-90
• Brother/Sister Insureds each with 5% to 15%
of total risk insured
– States that if a captive only insures its
brother/sister, than no brother/sister may
have over 15% of total premium and no
brother/sister may have less than 5% of
total premium
– IRS has set minimum number of
brother/sisters at 12
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22. Revenue Ruling 2002-91
• Group Captives (requires 7 approximately
equal shareholders)
– States that there be 7 equal shareholders
of group captive with approximately 15%
ownership each
– Only way to avoid this requirement is for
captive owner to add insureds and take on
a portion of insureds risk
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23. Revenue Ruling 2005-40
• Looks at risk shifting and risk distribution for a captive
insurance company insuring related LLC entities
• Rev. Rul. 2005-40 is a clear articulation of the IRS’s
current position that risk distribution entails two
elements.
– First, a significant number of independent, homogeneous
risk exposures must be transferred to the captive, such that
the law of large numbers takes effect.
– And second, the risk exposures transferred to the captive
must derive from at least several “independent” entities from
a Federal income tax perspective.
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24. Internal Revenue Code – Section
831(b)
• States that an insurance company with
less than $1.2 million in net written
premiums (direct premiums less
reinsurance premiums paid) may be
taxed on investment income only
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25. Internal Revenue Code – Section
953(d)
• States that an offshore company may
take 953(d) election to be treated as a
domestic company for Federal Income
Tax purposes. This allows the company
to also claim the 831(b) election
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26. Single-Parent Captive Option
• Design captive to insure brother-sister
companies
• Provide for third-party business to meet
IRS Revenue Ruling 2002-89 and risk
distribution of Rev Ruling 2005-40
• Ability to insure other risks in the future
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27. Estate Planning Captive Option
• Design captive to be owned by Family Trust
Accounts (revocable or irrevocable)
• Insure brother-sister companies
• Provide for third-party business to meet IRS
Revenue Ruling 2002-89 and risk distribution
of Rev Ruling 2005-40
• Ability to insure other risks in the future
• Upon death of family member(s) wealth
transfers without estate tax
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