22 Hoosier Banker November 2014 The Indiana Bankers Association is pleased to announce the addition of a Preferred Service Provider (PSP) in the area of captive insurance management services. The KeyState Captive Management Company LLC (KeyState) assists banks with the establishment of a captive insurance subsidiary, allowing a bank to expand its coverage (over and above its commercial policies) and improve its overall risk management. The proposed captive structure 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 in coverage levels on existing policies (excess layers), and identifies other risks to insure where commercial insurance is not available to the bank. KeyState, in conjunction with Crowe Horwath LLP (Crowe), works with the bank, guiding it through the various steps of implementation. The first step is the preparation of an independent assessment of a bank’s current commercial insurance coverage, which provides a detailed peer comparison for each commercial policy (benchmarking coverages, limits and deductibles). The assessment is then used to identify and select the coverages that the bank will place inside its wholly owned small insurance company. KeyState, Crowe and the IBA began introducing this program to banks in 2012, initially targeting banks that are $450 million in assets or larger. By the end of 2014, more than 85 percent of Indiana banks in that asset range will have implemented the Bank Captive Program. In early 2015, KeyState will begin introducing the program to Indiana banks ranging from $250 million to $450 million in assets. Along with the benefits received from enhancing the bank’s risk management process, Congress approved an incentive through the election of the Internal Revenue Code, Section 831(b), which 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 a potential annual tax savings of approximately $400,000 per year, if the captive experiences no claims for a given year. Claims, of course, will occur, but the bank would have to pay these claims regardless of whether a captive is in place. The captive simply provides for a tax subsidy to set money aside for future potential claims. To date, 15 Indiana banks have taken advantage of this solution, with several others currently completing due diligence regarding the opportunity. The participating banks are one of three established risk-sharing pools, created to spread larger events of risk throughout the pool. PSP SHOWCASE About the Author Rod Lasley is vice president-products & services of the Indiana Bankers Association, and also serves as president of the for-profit companies owned by the IBA. He can be reached at 317-387-9380, email: RLasley@indianabankers.org. IBA Welcomes a New Preferred Service Provider
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