26 August 2016Analysis

Small and cell captives are a cost-alleviating solution for middle-market companies: JLT

Small 831(b) captives and cell captives can provide both cost saving and other efficiencies, especially for middle market companies, according to JLT Towner Insurance Management.

“Increasing risk exposures make cell captives an economical option for organisations of most any size to access the Terrorism Risk Insurance Act (TRIA),” says JLT Towner managing director and US Consulting practice leader Thomas Stokes.

“Now, independent of that, middle market companies with a variety of risk exposures are becoming more aware of captives that elect Internal Revenue Code (IRC) 831(b) status, especially with the premium limit rising in 2017. The law change will automatically include many existing and planned captive structures.”

JLT Towner said that organization in 2016 that write $1.2 million or less in premium are not taxed on underwriting income, and that this limit is expected to rise in 2017 to $2.2 million.

Stokes added: “This means many more companies will qualify to elect 831(b) status next year. It wasn’t surprising that we heard many risk managers talking about this change during the conference, just as we have heard from clients and risk managers in recent months.”

JLT Towner highlighted that while captives can offer tax advantages under the right circumstances, they still incur potentially limiting startup costs, especially for middle-market entities.

It suggested cell facilities, such as JLT Towner’s Connecticut-based Isosceles Insurance Company, can help alleviate some of the carrying costs.

Stoke commented: “Many middle market and smaller captives that didn’t qualify for 831(b) election may do so next year.

“The lower cost of entry with Isosceles dramatically lowers the startup hurdle, reducing initial capitalization requirements and ongoing costs because the cell structure has a sponsor that puts up initial capital. In more complex situations, companies might use a cell facility to access TRIA, pay for employee benefits and access global reinsurance markets.”