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Agribusiness Adopts Self-Insurance to Manage Unique Risk

National companies or local farmers both have unique exposures to loss that threatens their revenue. The agribusiness can be defined as encompassing crops, processing, packaging, manufacturing and distribution, just to mention a few. Threats include disease, pollution, and Mother Nature, not to mention equipment breakdown and business interruption. While an increasing number of large farmers already retain a portion of their risk through a captive, more medium-sized growers are appreciating the financial benefits of captives, either through their own means or with group captives.

While the lines of coverage such as workers’ compensation, liability and automobile can be placed in captive for agribusiness, growers, for example, face unique exposures in the agribusiness industry that has been getting a lot of notice – subsidies. For example, in 2015, Congress seriously considered reducing or eliminating the subsidies for crop insurance premiums for growers whose adjusted gross income exceeded a certain level. If passed, a large number of growers and farmers would likely stop participating in the RMA-managed crop insurance program and instead choose to “self-insure” or purchase private insurance coverage. For many, the decision to self-insure would have included the use of a captive since it meant that they could amass loss funds with significant tax advantages. For those that were not large enough to capitalize their own captive, a surge in participation in Group Captives would have been the result.

What Makes a Good Candidate for a Captive?

For starters, businesses generating $1.5 million or more in profits could capitalize a Single Parent Captive, which can bring the total cost of risk (TCOR) down. In addition, retained losses should exceed $250,000. The primary benefit of creating and using the captive effectively can be its annual income tax savings that’s generated. This saving can be used to invest in seed operations, acquisition of equipment and processing plant upgrades. It can also be used to retain vital employees or expand the workforce.

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