G. Kristin Delano, Esq.
Question: Do you recommend writing deductible buy-back coverage in a segregated cell?
Answer: If the captive is going to write reinsurance of coverage written by the standard carrier (provider of the primary insurance covering the statutory requirement), then the policy can be written in a segregated cell. Each of the leased employees is covered by the standard policy and can be counted as an insured by the for purposes of determining compliance with the tax requirement for distribution of risk.
If, however, the standard policy is a high deductible policy, then the standard carrier’s policy covers the leased employees for the first dollar of their coverage. Injured employees will have not claim against the captive policy. The PEO is the only possible claimant. If that direct policy is written in a segregated cell, there will be only one insured, and there won’t be any distribution of risk. The arrangement won’t qualify as insurance for tax purposes.
Question: If that is the case, why don’t we simply structure the captive arrangement as reinsurance of what would otherwise be the deductible layer so I can use a segregated cell to protect my assets?
Answer: You can as long as the standard carrier will cooperate. The problem with a reinsurance arrangement is that the standard carrier will be required to perform due diligence with respect to the captive and negotiate the terms of the reinsurance agreement. Not all standard carriers are willing to be bothered.
Question: If my assets aren’t in a segregated cell, how is my capital protected from the claims of other PEO’s?
Answer: Your assets will be protected if the captive’s entire obligation with respect to each policy written is 100% reserved with a combination of premium paid by the insured plus capital supplied by the group that owns the insured. Under such an arrangement, there is no way that the claims of any PEO can exceed the capital supplied either by the PEO or its owners.
Question: Is my standard carrier going to go along with this arrangement?
Answer: If your standard policy is a high deductible policy, your standard carrier will want collateral. However, there is no reason for them to care whether the collateral is supplied directly by the PEO or is supplied by the captive putting its reserves into escrow with that carrier. As long as they have liquid assets to satisfy the PEO’s obligations to pay claims, they should be satisfied.
Question: Does the captive policy satisfy my statutory requirement to have workers comp coverage?
Answer: No. The standard policy written by your high deductible carrier satisfies the statutory requirement. The captive policy is strictly for the benefit of the PEO.
Question: I have a guaranteed cost policy. How would a captive program help me?
Answer: Perhaps by switching to a high deductible policy, you can benefit from keeping a larger portion of your manual premium to add to the profitability of your PEO. If that is the case, the captive arrangement can help with your collateral requirements. If you are not willing to switch to a high deductible policy, there is no reason to invest in a captive program.
Question: What size should my PEO be before I should consider a captive program?
Answer There are three variables that have to be considered in determining whether a captive is economically feasible for your PEO:
The PEO’s manual premium;
The percentage of manual premium payable as premium to the standard carrier for the excess coverage; and
The percentage of manual premium represented by your loss pick/fund.
Generally speaking, if you have manual premium of $500,000, you may want to look further to see if a captive program makes sense .
Question: Do you have any financial illustrations that will assist me in evaluating a captive program as applied by my PEO.
Answer: Financial illustrations are available upon request.
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