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HFX Insurance Risk Pool

The operations of the HFX captive insurance company (IRC831b), is similar to those of a traditional insurer except HFX specializes in providing new group rates to small businesses. A captive insurance company issues direct policies to its insureds, reinsures with national carriers, collects the premiums and pays claims. It also sets aside reserves to pay its legal obligations arising from the insurance or reinsurance agreements, pays for its operating expenses and pays dividends to insureds/owners. In addition, it earns investment income on the invested assets.

HFX is providing Rental Captive Services under IRC 831b. A rental captive is formed by investors to provide captive services to organizations that want the advantages of a captive but do not or cannot form their own captive. The rental captive typically “rents” its capital and surplus to the policyholder organization for a fee and provides its own administration and reinsurance services.

  • A Captive is a small insurance company that is allowed special tax benefits not allowed under normal company domiciles. (Captive structures were first used in the 1870’s).
  • Participation in a risk pool provides third party risk and allows HFX first $2.2 million tax-free/captive subsidiary.
  • Participation in a risk pool typically provides protection from losses which are not covered under a company’s traditional insurance services and investors/organizations receive a tax deduction of 40%. Funds are used as insurance reserve capital. HFX reinsures all services to protect against loss from high rated insurers such as Colonial Life, Aetna, United Healthcare, etc.

Investment Summary

Before the ACA, risk pools for insurance companies were historically used to provide insurance services to keep prices down, and were used by States and insurers. Subsequent to the ACA, the federal government mandated that all state risk pools be turned over to the federal government under one CMA risk pool which drove premiums up dramatically.

Congress has ruled that those risk pools be turned back over to states and insurers to help bring premiums back down. Most premiums reflect the time value of money. The implicit assumption is that investment returns will at least equal the amortization of the discount in premiums over the course of time.

Risk Pool Example

Assumptions:

  • Captive qualifies as a bona fide insurance company.
  • Tax rate is 40% (combined federal and state).
  • Investment income is ignored (but will be subject to taxation - typically federal only/not state).
  • Assumes no losses. Loss activity will reduce benefit.
  • There will be a capital requirement in the first year of captive formation - $120K minimum.

  • More Information

    For more information on HFX Self-Funded insurance programs, you can download and review the following eFiles in PDF format.