Presentation 8 Remind us briefly how a simple form of captive works. Captives ca

Question

Presentation 8 Remind us briefly how a simple form of captive works. Captives can provide many benefits. Read "Why captives", summarize the benefits and drawbacks of using captives. 1. 2. Read "IRS and captive" and explain how certain advantage of captive could be abused. 3. Overall, captive has long been a morally debated financial arrangement. The rise of Vermont as a popular captives' domicile tells a story full of controversies. Selectively summarize the 3 articles related to Vermont ("Vermont becomes insurance haven" Life in the shadows", "Strong year of growth for Vermont captives")

Explanation / Answer

1. How does the simplest form Captive work?

The financial arrangement of Captive works in providing Insurance. Captive is a subsidiary of a company created with the sole purpose of providing insurance to the non-insurance parent company or group of companies. This is also known as a "Pure Captive".

Advantages:

a) Greater flexibility in setting premiums: Traditionally, market insurance companies muct price their premiums based on a variety of factors Ex- cost of claims, overhead, future cose of investment. But the owner of a Captive can bypass these expenses, and later use this money for further investment.

b) Coverage of wider variety of risk: To cover certain risks, insurance companies will charge a higher premium. But, having a captive ensures that you can have a "risk fund" of your own, as an insurance. This will cover a variety of risks. And in absence of the expense, earn profit.

c) Control: No challenges to be faced between providing adequate insurance and maintaining healthy Cash Flow. You decide the premium.

d) Experience: Dealing with insuring your own company gives you adequate experience in dealing with the insurance sector. And if interested, one can expand the business into that market.

Disadvantages:

a) Quality of Service: Lack of expertise may lead to inadequate or inefficient service

b) Capital: Since the entity is basically going to be self-insured, it may be difficult for them to find investors.

c) No-tax benefit: This is a huge disadvantage. Every insurance premium is liable to benefits in taxation. However, being self-insured, the company will loose out on the opportunity.

d) Extra man-power: People with special skill-set will have to be hired for the opening of a completely new department, which may not be suitable for the entity in the end. This is a huge undertaking as well.

2. IRS and Captive: The abuse of Captive

Every year, the common taxpayer encounters various taxation frauds and scams in the name of promoters who take the help of Phony tax shelters. This occurs, because the law allows businesses to form "captive", so as to protect themselves against certain risks. These insured business entities claim deductions on premiums paid on behalf of insurance policies. Those amounts paid are as insurance premiums, to a “captive” insurance company owned by the insured.

However, in the fraudent cases, owners of the fraud captive persuades the taxpayers to invest in their entity, even though they have no relevance to general insurance. These "captives" may consist of unfair policies which do no good. They may invest the tax-payers money in investments which are illiquid or speculative. Policies of these fraudsters may contain of deceptive, ambiguous and vague terms, which can be taken advantage of by the party which drafted them. Hence, IRS have marked the micro-captive business as one of the most abusive and corrupt business segment in current times.

3. Vermont becomes Insurance Haven: More te han 560 US companies, including starbucks, Walmart have set up Vermont based entities to insue their biggest risks and liabilities. So, why does these companies have operations in the chilly land-locked state of Vermont? Lucrative, tax breaks. For example, Wells Fargo, with its wholly owner insurer is earning huge profits. This lucrative business is doing wonders for the state of Vermont. Following this, companies are looking at Vermont to put their pension in the insurance. Even though criticisms like the lack of capitalization have occured, which makes them a riskier venture to invest in, the companiesare in no mood to slow doen their trajectory.

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.