Third bank captive INSURANCE pool and captive program is endorsed

By Josh Miller, Oct 2014

The KeyState Companies finalized its third pool of bank captives and has a total of twenty-three banks now realizing the benefits of this small insurance company risk pool structure. KeyState's captive program has been endorsed by the state banking association, or their for profit service corporations, in Indiana (IBA), Georgia (GBA), Kentucky (KBA), Oregon (OBA), Wisconsin (WBA), Ohio Bankers League (OBL), Illinois Bankers Association (IBA), and Oklahoma Bankers Association (OBA). The Bank Captive Program has been implemented and grown in partnership with these associations and Crowe Horwath LLP.

The formation of a small captive provides a bank with a vehicle to identify and manage its enterprise risk. A captive allows a bank to expand its coverage over and above its commercial policies and improve its overall risk management. The proposed captive structure designed by Crowe Horwath does not replace any of a bank’s current commercial policies. Instead, the captive augments the commercial policies through the self-insuring of deductibles, increases coverage levels on existing policies (excess layers), and identifies other risks to insure where commercial insurance in not available to the bank.

The initial step in the formation of a captive is an independent assessment of a bank’s current commercial insurance program, which provides a detailed peer comparison for each commercial policy (benchmarking coverages, limits, and deductibles). This assessment provides the bank with an independent insurance audit, which bank management and boards have found very valuable. The assessment is then used to identify and select the coverages that the bank will place inside its wholly owned small insurance company.

In addition to the benefits received from enhancing the bank’s risk management process, Section 831(b) of the Internal Revenue Code provides small insurance captives with a tax subsidy. Assuming the captive is properly structured and meets bright-line tests laid out in IRS letter rulings, Section 831(b) allows a small insurance company to receive up to $1.2 million in tax free premiums per year, while the bank deducts the same amount as insurance premium expense. The net result is, on a consolidated level at the bank’s holding company, is a potential annual savings of approximately $380,000 per year if the captive experiences no claims for a given year. Of course claims will occur, but the bank would have had to pay these claims whether or not a captive was in place. The captive simply provides for a tax subsidy to set money aside for future potential claims.

The multiple benefits of improved risk management, expanded coverage availability, and potential tax benefits may make the formation of a small captive insurance company advantageous for your bank. If we can assist you in evaluating the formation of a small captive insurance company, please contact Josh Miller at (702) 598-3738 or [email protected]. We would be happy to schedule an introductory call or meeting to discuss the benefits of a captive.*

*Banks interested in forming a captive should consult with legal and tax advisors familiar with captive insurance company structures. KeyState makes no representations as to the effectiveness of any particular captive insurance structure. KeyState does not offer legal or tax consulting services.