Setting up a captive insurance programme primarily for tax purposes could get owners and managers into serious trouble, according to president of Roundstone Insurance, Michael Schroeder.
These comments follow in the wake of news that, as of fiscal year 2015, Healthcare Services Group (HSG) will transition its workers’ compensation and certain employee health and welfare insurance programmes to HCSG Insurance, its wholly owned captive insurance subsidiary.
The resulting tax benefit of doing so has been claimed by HSG to be its main motivation, in the hopes that it will “favourably impact on cash and marketable securities by approximately $20 million upon full funding of the captive”.
The captive was originally formed in January 2014 to provide Healthcare Services Group with “greater flexibility and cost efficiency” in meeting its property and casualty and health and welfare needs, including health insurance requirements for individual client facilities mandated by the Affordable Care Act.
Additionally, upon completion of its reorganisation, the group said that it expects to accelerate, also for tax purposes, the deductibility of estimated current and future insurance claims.
Schroeder commented: “As opposed to going self-insured completely, with a captive you gain broader access to the reinsurance markets, which for workers’ compensation is very important.”
“Also, by forming a captive you bring some discipline into your claim reserving and claim management functions. Claims, loss control, underwriting, or actually pricing the risk to your operating companies—all of those things come with owning an insurance company and that’s what a captive is.”
HCSG Insurance currently provides general liability coverage to HSG. It did not respond to requests for comment.
