Risk is Inevitable: Learn How to Use it to Your Advantage
The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.
International Businesses Can Find Security and Advantage in Creative “Captive” Insurance Products
Dover, DE: On Monday, December 7, 2012 US Air flight 659 departed Philadelphia International Airport, USA, bound for San Francisco. The Airbus 320 was completing its fourth hour in flight, positioned roughly 3 miles above the harsh Rocky Mountain terrain below. The airline cabin had become quiet. Lights were dimmed. Meal and beverage carts were stowed. Passengers were seated and quietly at work on their computers, watching videos or resting.
Without warning, the aircraft plummeted for several long seconds and banked aggressively. As laptops bounced to the floor and drinks spilled, frightened passengers scrambled to hold onto their belongings, and those with young children clung in a state of panic their families. Confusion, chaos and fear had set in.
In time, calm was restored. The captain explained to startled passengers that the aircraft, while armed with the latest predictive weather technology, had inadvertently crossed paths with a high altitude “microburst”. He assured passengers that while he anticipated that the “worst was over,” everyone should “remain seated and safely secured with their seatbelts until further notice”, and that while such experiences are “infrequent”, he and his flight crew “train for such experiences”. Flight 659 continued safely on its journey, landing in San Francisco without further incident.
To turn a phrase;Risk Happens, especially in the international business forum. For example, in the Middle East, Egypt’s, geo political landscape is changing abruptly, causing businesses to quickly recalibrate decisions. Egypt’s neighbor to the east, the United Arab Emirates (UAE), has recently being cast in a dark light, with calls for the UAE to be blacklisted by the Financial Action task force (FATF), fostering a “kick–in-the-stomach” feeling similar to that experienced on an aircraft in a microburst for any US based company doing business there. But… there is opportunity if you know the rules of survival.
According to Brad Barros, Managing Director and co-founder of Attainium Capital Development Advisors, LLC(Attainium) “What’s most important for American companies doing business abroad is the combination of awareness and preparation. In order to survive and then thrive. Regardless of the veracity and velocity of change, businesses need an experienced financial captain at the controls of a strong risk-resistant craft (or in this case a solid risk finance strategy). For American businesses doing business in the Middle East, there is an opportunity now that few middle market companies are aware exists.”
The US tax code supports the creation of insurance companies that may be created by, and insure the risks of one’s own business. These companies, generally domiciled in states like Delaware and Vermont, are called “captive insurance companies” (captive) and can insure business enterprise loss of revenue risks that are otherwise currently self-insured. A short list for businesses working overseas includes coverage from political turmoil, breach of contract, regulatory or governmental change, currency devaluation, and uncollectable accounts receivable. One of the significant benefits of a captive is that premiums paid from a business into its captive may be deductible, as is traditional casualty insurance. What is different is that unlike self-insurance (retained earnings or after tax savings) captives use the pretax “whole dollar,” so there may much higher levels of protection when compared with their competitors who self-insure.
In addition, retained earnings and shareholder savings are generally exposed to a company’s creditors, while captive insurance may be protected. Surplus inside a captive insurance company can be invested back into or alongside the premium paying business, and may qualify for further tax advantages, as mandated by congress. If the insurance company experiences a good claims experience over time, corporate profits inure to its shareholders.
Doing business anywhere includes an element of risk. However, knowledgeable American companies doing business in Egypt, or anywhere - without spending a penny, piaster or dirham more – can potentially use tax deductible funds to build much larger levels of reserves and surplus inside of a protected insurance company, and then be poised to take market share in times of uncertainty from their less prepared, and thinner funded competitors.
About Brad Barros:
Brad Barrosis Managing Director and co-founder of Attainium Capital Development Advisors, LLC(Attainium). Over the past 35 years, Attainum’s founding principals have worked with hundreds of successful privately and publicly held businesses, designing and implementing benefit, insurance and risk-management solutions effectuating billions of dollars of benefits with programs involving more than $300,000,000 of recurring annual insurance premiums.
Posted in: Trading Ideas