KNOXVILLE, Tenn. – November 2, 2021 – 2020 proved to be a challenging year for many businesses as they navigated the fall out of the pandemic. As 2021 unfolded and COVID cases decreased, many experts felt this was the light at the end of the tunnel and an end to COVID woes. But unfortunately, that wasn’t the case. 2021 has had its own obstacles. Although businesses have been able to reopen and, in most cases, resume business as usual minus some concessions, businesses have still been plagued by supply chain issues and delays, labor shortages and a myriad of other risks from natural disasters to cybercrime.
Randy Sadler, a principal for CIC Services, a captive insurance management firm, says for businesses with captive insurance, this financial strategy came to the rescue.
“COVID has been particularly hard on businesses, especially during government issued state-wide shutdowns,” said Sadler. “Businesses with captives saw their COVID claims paid or were able to use their accumulated wealth to weather the storms.”
In late March and early April, a physician practice in Alabama spoke to this challenge as non-emergency procedures were suspended. The business had to condense operations to only emergency patients. They found they went from 200 surgeries per week to only 10 to 12.
“We have a captive insurance company and the basis of our claim was a dramatic reduction in revenue for a six-week period due to the COVID-related state mandate,” said the chief executive officer for the company. “We had a claim of several hundred thousand dollars that allowed us to continue operations and offset the revenue loss.”
Now back to their pre-COVID volume, the payment of their COVID claim demonstrates the importance of captive insurance as many businesses who thought they were covered by pandemic disease or business interruption through their commercial insurance policy realized they were not—and suffered irrecoverable losses.
The payment of COVID claims wasn’t the only win for captives over the last year.
During 2021, there were two major court victories for CIC Services and captives in a case against the Internal Revenue Service (IRS). CIC Services sued the IRS over its unlawful notice 2016-66. In 2021, the case went all the way to the U.S. Supreme Court where CIC Services triumphed unanimously against the IRS. In September, a U.S. District Court granted CIC Services an injunction against the IRS and notice 2016-66.
In many cases the ability to form a captive insurance company is critical to survival.
One example is a pain management medical practice, located in Ohio, where the leadership spoke to the benefits of captives providing broad policies with coverage that can be customized or dictated. In the case of this firm, the business was faced with regulations that often prevent private medical practices from being successful as the fines dug into their bottom line. For example, any discrepancies in medical charts or a simple, harmless mistake in the charts could lead to a $25,000 fine.
“Regulations make it harder to operate in our field,” said a doctor for the company. “Margins are already narrow and with a fine often totaling tens of thousands of dollars it can mean the difference between being profitable or not or even having the ability to pay employee bonuses. So, we realized there was no way to keep the margin stable and we were motivated to form a captive insurance company.”
The business also found that in addition to fines related to regulations, the captive was also beneficial in covering attorney fees.
“Like the fines, attorney fees often can’t be covered any other way outside of captive insurance,” the doctor said. “One disgruntled patient can lead to $30,000 or even $40,000 in legal fees and it can’t be covered under anything else by a captive.”
As the end of the year approaches, CIC Services shares that now is the time to form a captive in 2021 as the 30-day countdown has begun. Proper formation of a captive insurance company requires adequate time for thorough risk assessment, underwriting and a feasibility study, including actuarial work, to price insurance policies and develop a pro forma, corporate formation, licensing and the issuance of policies. Sadler explains it’s important to start the process soon and provides this insight:
A captive is a choice to own your own insurance company. Captives can be employed to:
- Replace commercial insurance
- Insure enterprise risks
- Insure warranties
- Issue performance bonds
- Insure employee benefits
- Insure Bundled Program risks
- Address any combination of the above
Benefits of captive ownership include:
- Improved risk management
- Improved cost control
- Improved business practices
- Asset protection
- Insurance profit
- Wealth accumulation
- Favorable tax treatment
“It behooves businesses to begin the captive insurance conversation now and not let another year go by,” said Sadler “As the last two years proved, crises can happen at any time and are often unexpected and unpredictable. Before the next one strikes, protect your business with a financial strategy that provides more insurance and more money.”
About CIC Services:
CIC Services is a captive insurance manager and strategist. Since 2005, the company has helped small and mid-sized business owners turn risk into wealth by owning their own insurance company. More information on CIC Services can be found at captivatingthinking.com.
