Cost of Administration

The following details anticipated annual operating fees, professional services and expenses for a pure captive.

 

Operating costs should generally not exceed 5-6% of annual premiums (assuming a $1.0-$1.2 million captive) and quite often are below $60,000.

 

There are limited economies of scale when utilizing multiple captives, and the same goes for the benefit (or lack thereof) of only a captive which has less than $500,000 in annual premiums.  Most of the costs below are fixed.

 

A estimate of your annual operating costs will be prepared as part of the preliminary feasibility study process.  These numbers will be nailed down in the captive's business plan, produced with the final feasibility study.

 
Services
Legal Review
          5,000
Audit        10,000
Actuary          5,000
3-5 Year Insurance Audit (1)
 3,000            

Administrative Services

        25,000
Insurance License/Premium Tax 4% (2)
 5,000            
Total       53,000

(1) The State of Kentucky requires an insurance exam every three

years (which probably can be extended to five years that will be

billed directly to the captive insurance company.  The cost of this

exam will be in the range of $7,500 to $15,000.  Therefore, the cost
that should be accrued on an annual basis would be
$1,500 to $3,000.   This cost is included in the above costs. 
(2) Due March 1, annually.























         
















     
 
         
         







Next . . .

The IRS Definition of "Insurance"

Risk Shifting and Risk Distribution

Economic Family Doctrine


Case Law

Humana v. Commissioner

Hospital Corporation of America v. United States

Kidde Industries Inc. v. Commissioner

Harper Group and Includible Subsidiaries v. Commissioner


Safe Harbor Rulings

Revenue Ruling 2002-89 (50 Percent Rule)

Revenue Ruling 2002-90 (12 Entity Rule)