A Rapidly Evolving Situation: Insurance Markets and Real Estate Development (Part 2)

March 19, 2024


In Part 2 of this two-part series, Bilzin Sumberg’s David Resnick and Joseph Tucciarone, Founder and CEO of National Network of Accountants, discuss the innovative risk management, cost control strategies, and other benefits of captive insurance for real estate owners, investors, and developers.


RESNICK: Hello, everybody, I'm David Resnick - Partner in Bilzin Sumberg’s Corporate and Finance Group. I'm excited to welcome you to a discussion on an increasingly salient topic in today's insurance markets, the usefulness of captive insurance in the real estate industry. 

As with many other parts of the economy, insurance markets over the past several years have experienced a high degree of uncertainty and increased risks, a trend that has made itself felt among policy holders in the form of increased insurance costs. In the real estate industry, owners, investors, and developers are seeking innovative ways to better manage their risks while controlling associated costs.

One increasingly prominent avenue for doing so is utilizing captive insurance whose popularity has been growing in the real estate sector. I'm sitting down today with Joseph Tucciarone, founder, and CEO of the National Network of Accountants. Joe has counseled countless companies on utilizing captive insurance planning to address their insurance needs while maximizing their bottom lines.

We're going to tap into his expertise to delve into why captive insurance can potentially hold great value to players in the real estate industry. Joe, thanks for joining me today. 

TUCCIARONE: Thank you very much, David, for having me today. 

RESNICK: Can you tell us generally what captive insurance is and why this should be seen as an alternative to commercial products that are out there?

TUCCIARONE: I want to first say to you that currently it is an alternative. More than 50 percent of the commercial marketplace today is actually handled by captive insurance companies.

Last year we did, in the industry, 104 billion dollars in captive insurance, which represented more than 50 percent of the total amount of insurance that was sold in America.

Captive insurance is a term that's probably very misunderstood by a lot of people. People are not sure what it is. It's an anomaly. Really what it is, it's another corporation that you set up that ensures your business. 

RESNICK: So, if there are real estate professionals out there that have, let's say an LLC, they run their business through an LLC.

The LLC would be the sole shareholder of a newly formed C corporation, which would act as the captive insurance vehicle? 

TUCCIARONE: That's correct. It makes it very simple. There's steps in the process of how it's done. But in theory, you've got it exactly right. And the uniqueness of it is that since it's your own insurance company, you can really define the policy.

To be in business, what's the number one issue we all look for? Control. So, you'd like to have control, you'd like to have control over your course, you'd like to have control over what's being covered, you'd like to have control over your claims, you'd like to be able to choose which attorney you use instead of the insurance company choosing it for you.

You'd like to be able to do, decide on where you're going to invest that money. You can determine that. So, it really is an opportunity for a business owner to take control of his insurance. 

RESNICK: So insurance to me can sometimes seem a little frustrating. And what I mean by that is - year after year, we're paying premiums. Year after year, we don't always make claims and the money kind of just disappears. So with that in mind, what benefit does the captive provide to the owner? 

TUCCIARONE: Well, let's think about this. The owner pays a portion of his premium to his own captive insurance company. These insurance companies have one year, 12 month, time limit. At the end of 12 months, depending upon the amount of claims, let's assume there are no claims, that money that he put in becomes reserved. It's just reserved for future claims.

And he does it every year. And all of a sudden this reserve money is growing. He is number one. Remember I talked about control. He will control where it's invested. He will control where that's used. That's his money. And he could take it out of that insurance company. So that reserve keeps building. And I have seen people use that for further construction, for changes, for modifications.

Yeah, it's a great way to accumulate assets on a tax favorable basis. And you can use them later on if you can control your risk. If you're going to have a lot of claims, you're going to use that money for the claim. If you're not going to have a lot, if you can control the risk, and I'll tell you how we control the risk.

It's not only from your pool of money, but you're also going to have to be part of a larger pool. We have a pool of about a hundred million dollars. You're part of that pool. So some of the claims will go into the pool. Some of the claims will come out of your, your captive. That's another decision that we make when we do the feasibility study.

RESNICK: So, does it make sense to only have a captive or only have a commercial product, or are some companies or businesses having both?
TUCCIARONE: Well, most companies have both. The larger companies have both. They always have both. There's reasons for that. To be able to do a captive insurance company, what you really need to do is to do planning.

You need to do a feasibility study. A feasibility study looks at where you are now, what your expenses are, what your risks are, and pieces it together. There may be a situation where you have a commercial insurance company that has a very, very high limit. Well, you're not going to take that limit on yourself.

So what you'll do is, you'll keep that commercial insurance company, but you'll raise the deductibles, and you'll insure the deductibles in the cap. So if you really get slaughtered, a major company will come in, okay, but in a normal everyday occurrence, you'll be able to pay a small amount. 

RESNICK: Many of our clients in the real estate sector are utilizing financing, you know, whether maybe it's construction financing, maybe there's bridge financing, maybe there's perm financing to take out construction financing. Are lenders comfortable? With this product? 

TUCCIARONE: Well, every lender will normally want you to have insurance. They'll want you to have insurance that has a rating. Not some fly by night insurance company, so what you will do is you want to make sure that the insurance, used for those purposes, are rated by AM Best. 

So AM Best, as long as they have a rated carrier, then the financing group will be fine with it. 

RESNICK: And that's something where you - where a company like yours would assist in getting the captive insurance company rated.

TUCCIARONE: Absolutely. It's essential. Because on these, a lot of real estate, you know, I can discuss with you many real estate companies that have multiple, multiple, multiple projects going on.

And, you know, we certainly had all of their, their insurance rated. So we'll use, that's again, you have a commercial carrier working with you. So this is a combination. This is not I'm getting rid of my commercial. Just flying captain. This is how do I best create a financial position? How do I get greater financial flexibility?

So what I'm hearing is if you want to make sure that you have the right coverage, proper coverage, and the ability to save money and make money, captive insurance is something that our real estate clients and listeners should consider. 

TUCCIARONE: Absolutely. Not considering it is, in my way, a bit irresponsible. 

RESNICK: To our audience, thank you for tuning in. We look forward to bringing you more informative and timely resources related to real estate development, acquisition, disposition, and investment.

For more information on captive insurance, from National Network of Accountants, please download this PDF

Joseph Tucciarone: 
Email: jtucciarone@nnaplan.com
Mobile: 516.398.1337

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