Is 2024 The Year Small Business Owners Should Consider Captive Insurance? 4 min read
Preparing For The Future Rather Than Worrying About It?
Nobody says now ‘IF there is another pandemic,” rather we now debate the probability of “WHEN.” When the Federal Government stepped in and declared a business a “Non-essential service” and closed its doors all our darkest fears about freedom and business were realized at that moment.
Almost 4 years have passed and yet for many, the possibility of a repeat keeps owners up at night.
The opportunity for a small business owner to utilize her/his primary company to form and own a captive insurance company has never been as compelling as it is in the year 2024. Since the Tax Reform Act of 1986?, captive insurance has been utilized by Fortune 1000 companies and large corporations, mainly due to the significant resources needed to establish and maintain a captive insurance entity. Recent developments have now made this innovative risk management solution increasingly accessible and attractive to a much broader range of small and mid-sized businesses.
Forces Contributing To The Rapid Rise of Captive Insurance Since 2019
- Inflation and Interest Rates: Inflationary pressures have led to increased claims payouts and operational costs for insurance companies, resulting in higher premiums for policyholders.?
- Increasing Insurance Costs: The upward trend in insurance premiums has prompted small and medium-sized businesses to seek alternative solutions, such as captive insurance, to manage their risks more cost-effectively.
- Growing Exclusions & Loss of Coverage: There has been a notable rise in policy exclusions, leaving certain risks uncovered by traditional insurance. Additionally, some insurers are withdrawing from markets prone to climate change-related losses, leaving businesses in those areas with limited options for coverage.?
- Costs to Form and Manage a Captive: Innovative microcaptive design and structure in 2024 with oversight by past IRS prosecutors and forward-thinking US-based domiciles have led to much more affordable “Safe-Harbor” captive insurance? plans for a small business owner.
- IRS Court Case Precedents: Recent legal victories have created a much more favorable environment for captive insurance. Landmark IRS cases? and the Supreme Court's decisions4 have clarified and legitimized the use of captive insurance arrangements. In some IRS captive court cases clear structural issues with new clarity around sloppy captive management and lack of compliance?? have greatly contributed to future captive insurance success.?
- Commercial Insurance Regulation: In some regions, rapidly increasing regulatory constraints on rate increases have made it difficult for insurers to cover the costs of their policies, leading to insurers withdrawing from multiple high-risk markets. Loss of insurance makes it tough.?
- Increased Domicile Options: In such a highly regulated industry as Insurance, Small Business owners no longer need to consider limited state participation or off-shore domicile utilization as their only options. Increased domiciles including tribal Indian nations in the U.S. now offer domicile services with fewer regulatory hoops and less red tape to form a captive.
- Disbanding of MicroCaptive Audit Teams: Following key court victories, the IRS has reconsidered the 2020 formation of 12 IRS “tiger audit teams” built to scrutinize MicroCaptives, they then increased the insurance premium contribution limits for 2024 to $2.6m annually, and disbanded all 12 of the specialized audit teams.
- Increased Risk Awareness: The 2020 pandemic highlighted the importance of robust risk management, leading many businesses to explore non-traditional risk options?. The unlikely recurrence of future ERC and PPP bailouts has led to a paradigm shift for many business owners determined to be more self-sufficient by considering captive insurance as an option.
- Boomers' Retirement Mindset: The unique nature of Boomer-owned businesses, including their approach to risk, further underscores the appeal of captive insurance as a viable exit strategy protecting the transactional interests of both buyer and seller.
- Boomer Business Sales: 41% of the 33m US small businesses are owned by Baby Boomers- BB, with the youngest now reaching 60. Retiring BB business owners are driving a surge in the sale of small businesses. The transactional risk coverage? offered by captive insurance is high on that list. Expect nearly 1.4m Boomer companies for sale between 2024 and 2030.
- Small Business Automation: A recent survey by McKinsey and Co?. 2023 - showed that two-thirds of small businesses have an automation pilot program running. This applies to at least one aspect of their business processes. That is a huge leap compared to the 57% in 2018.?
- Improved AI and InsureTech: Advances in technology, such as AI-powered chatbots, marketing & sales automation, and risk management tools are becoming more of the norm.?
- Real Data Analytics: Improved data analytics enable businesses to consider and price their predictive risks more accurately, now making captive insurance a more viable option.
- Affordable Digital Platforms: SaaS product solutions converting to platforms have reduced costs, added features, and increased access to integrated captive insurance solutions.
- IRS & State Experts: ?As many as 100 Ex-IRS prosecutors and state regulators have retired from government employment since 2010 now working in the private sector for risk advisory firms and captive plan administrators advising on regulatory matters and IRS compliance.
- Experienced Risk Advisors: The availability of knowledgeable risk advisors and captive plan managers makes it much easier for small businesses to interview and ask questions ? about the operation of a captive insurance company with a capable 3rd party captive administrator.?
- Increased Domicile Options: The rapid growth of US domiciles offering captive insurance service options has made it much easier to find a regulatory environment that suits any need.
- Small Business Success Stories: The rapidly increasing number of successful small and medium-sized business captives serves as a testament to the viability and benefits of this small business risk management strategy.???
Not the time for business owners to fear or worry?
The IRS will continue to be as vigilant as ever in 2024 at seeking out and auditing managers & business owners who use captive insurance companies as illegal tax shelters. However, if you build and manage captive insurance properly, you have NO reason to fear. The convergence of unforeseen forces over the last 5 years has created a unique window of opportunity for small business owners to research, learn about, and consider captive insurance as a real risk management solution. There are plenty of non-tax benefits to support the use of a captive. If you want to discuss the impact on your tax position, that is a great conversation you should be having with your CPA.
Small business owners are the backbone of American success
Focusing on future risk doesn’t mean incessantly worrying about it.? Increased Anxiety, followed by a loss of focus and then motivation, lessened confidence, and lastly making poor decisions have always been the cascade of mental challenges for those who insist on focusing on “future outcomes”...the same outcomes that none of us can control.??
Your mindset is everything.?Focus on task execution.
Remember as you focus on improving the leading indicators at work, skill improvement in the moment, and working on the daily tasks that you know lead to success, anxiety immediately comes back down.? You then find a new motivation to work, your confidence starts to build again, your focus returns and good decisions automatically follow.? The key to success always begins with what we focus on.?
As you consider how to reduce your business risk, choose to research, and then to interview and select an experienced Captive Plan Administrator/Manager??? with a proven track record of compliance. Identify those who follow 100% of existing IRS regulations, and who take a true “risk management approach” to reasons for forming and managing a captive Insurance company. You will likely find both excellent options for risk mitigation and a better vehicle for the building up of your cash reserves like we have not seen in the past 3 decades for a small business owner.?
Steven J. Frame, Risk Management/Business Performance Advisor can be reached at 385.236.9219 or [email protected]
