Captive Insurance is an Alternative Risk Transfer solution that allows a business to own its own insurance company and fund their own losses. Captive Insurance Programs act as a conduit for businesses to transfer risk, especially for businesses that are underserved by the traditional insurance market.

Captive Insurance solutions represent a way for business owners to have the insurance protection they need while simultaneously helping to manage risks and expenses. Large, multinational corporations have used Captive Insurance for decades, and now smaller companies are able to take advantage of the benefits as well.

Benefits of Captive Insurance include:

Reduced Costs

  • Allows stability, and potentially reduction, of insurance costs.
  • Many reinsurance facilities only work with other insurance companies, but a Captive gives you cost-effective direct access.
  • Eliminates the cost of the traditional insurance company’s overhead and profit.
  • Acts as a tool to allow for a more efficient allocation of costs in a way that is difficult through simple allocations.

Improved Coverage

  • Your Captive can provide your business(es) with fully customized responsive insurance coverage.
  • Allows you to get insurance coverage for unique or specific situations where the traditional commercial insurance marketplace is inefficient, limited, or non-existent.
  • Since the Captive is owned by the insurer, the transparency in claims history and claims management is far better than in the traditional insurance market.
  • Gives you control of insurance premiums and services in a much more effective way.

Risk Management

  • The use of a Captive allows an insurer to embed a robust and proactive approach to risk management.
  • Gives the insured the ability to track loss performance through the income statement of the Captive.
  • Allows the insured to reserve for risk exposures that don’t meet the all events test.

Financial Gains

  • A Captive is a new stream of revenue; all insurance companies exist to earn a profit, including Captive Insurance Comapanies (CICs).
  • Able to retain profits based on claims history and asset accumulation; premiums paid into a Captive that aren’t paid out in claims and expenses are returned by the Captive as net underwriting profit.
  • Investment income can be earned on net underwriting profits.
  • The insured is able to borrow back reserves and capital from the CIC, improving cash-flow timing and investment returns.
  • CIC profits can accumulate over time to substantial sums, which can be paid out to the owners as taxable dividends.

Tax Efficiency

  • CIC’s commonly provide a more efficient tax structure in addition to providing many tax benefits that are not available through any other solution or strategy.
  • Excess reserves paid out as dividends are taxed at long-term capital gains rates, essentially converting ordinary income into capital gain.

There are Six Different Types of Captives:

  1. Single Parent Captive – Formed primarily to insure the risks of its parents or affiliates.
  2. Association Captive – Formed by a trade, industry, or service organization to insure its members.
  3. Group Captive – Formed to insure the risks of multiple related or unrelated companies.
  4. Agency Captive – Formed by insurance companies to reinsure a portion of their clients’ risks.
  5. Rent-A-Captive – Formed to allow captive “benefits” access to companies who wouldn’t have access to those benefits otherwise.
  6. Protected/Segregated Cell Captive – Formed to allow for the segregation of assets and liabilities among different cells and their parent, each of which must individually meet the definition of an insurance company.

Please contact us to answer any questions you might have or to obtain a quote for you or your board.  We have included some actual claims to show the many different exposures you may have as board member.

Frequently Asked Questions

  • The alternative risk transfer market is a portion of the insurance market that allows companies to purchase coverage and transfer risk without having to use traditional commercial insurance.
  • Alternative Risk Transfer programs have been around since the 1950s.
  • Most Fortune 500 companies use an Alternative Risk Transfer business/insurance tax strategy.
  • Alternative Risk Transfer strategies include risk retention groups (RRGs), alternative insurance products, insurance pools, and captive insurance.
  • A Captive Insurance Company, or CIC, is an insurance company formed to insure the risks of its owners.
  • It is a legitimate insurance company, licensed in an appropriate jurisdiction, complete with policies, claims, policyholders, reserves, and surplus.
  • Since CICs are generally owned by the same economic interest as the primary company or companies they insure, the business owners capture a portion of the underwriting profits.
  • Captive Insurance Companies can do any (or all) of the following:
    • Replace commercial insurance
    • Insure enterprise risks
    • Insure warranties
    • Insure employee benefits/healthcare
  • Large corporations have used Captive Insurance for decades, and now smaller companies are also able to take advantage of the benefits through the Bundled Program.
  • Captive Insurance Companies participating in the Bundled Program are “single-parent” Captives, meaning they’re owned 100% by the individual insured business and are not part of a group captive.
  • In the Bundled Program, the owner of the Captive can retain up to 50% of the underwriting profit.
  • All Captive owners will pay taxes on any dividends paid to them by their Captive.
  • Taxes on investment earnings within the Captive may result in double taxation when dividends are paid to the owner.
  • For traditional Captives, premium income is offset by reserves for losses (claims), and the resulting underwriting profits (and any investment earnings of the Captive) are taxed at ordinary tax rates.
  • Captives that qualify as “small” will be taxed at a 0% rate on underwriting profits under section 831(b). Most investment earnings are taxed at ordinary rates.
  • 831(b) elections also allow Captives to accumulate surpluses from underwriting profits without incurring taxes on their retained earnings.
  • Historically, third-party insurance could be obtained by paying tax-deductible premiums to a third-party, but selfinsurance had to be provided with after-tax dollars.
  • It was the goal of Congress to level the playing field between businesses who choose to self-insure risks and those who choose to use third-party insurance.
  • Congress intended to incentivize small businesses that have uninsured risks and who otherwise don’t properly reserve for risks.
  • Because of this, these small businesses stand a much greater chance of surviving adverse conditions.
  • To qualify as a “small” Captive under section 831(b):
    • The Captive must receive $2.3M or less in annual premiums, AND:
    • The Captive must meet the “Diversification Requirements” established by the PATH Act.
  • IRS Notice 2016-66, issued November 1st, 2016:
    • Requires virtually all Captive Insurance Companies making an 831(b) election to file form 8886.
  • The Internal Revenue Code does not provide a specific definition for the term “insurance”, however, it defines an “insurance company” as a company which derives over half of its business from issuing insurance or annuity contracts or reinsuring risks underwritten by insurance companies.
  • For U.S. Income Tax purposes, an insurance company must be taxed as a C Corporation, but it can be formed as any type of entity.
  • All Captives must be formed for “legitimate business purposes” to avoid being deemed as a “Sham” by the IRS.
  • There must be real insurance risk; Captives may only insure risks that have potentially measurable and economically feasible damages associated with them, typically determined by a third-party Actuary.
  • There must be risk shifting, referring to when the risk of loss is transferred from the insured to the Captive, which occurs when the Captive issues policies to the insured.
  • There must be risk distribution, which occurs when the Captive transfers a portion of the risk it underwrites to an unrelated party or an adequate number of related parties.
  • All Captives must be formed for legitimate business purposes to avoid being considered a “Sham” by the IRS.
  • Taxpayers are “free to arrange financial affairs to minimize tax liability,” according to U.S. Tax Court ruling, however...
  • The pursuit of tax deductions is not a legitimate business purpose for the formation of a Captive.
  • Premiums paid to Captives that the IRS deems to be a “Sham” do not constitute business expenses and will be disallowed by the IRS.
  • Examples of “Legitimate Business Purposes” for the creation of a Captive include, but are not limited to the following:
    • Insuring risks that are currently insured via traditional third-party insurance arrangements.
    • Insuring risks that are currently self-insured via after-tax reserves.
    • Insuring risks that are presently uninsured or underinsured.
    • Insuring risks that commercial insurance markets don’t provide coverage for.
    • Reducing the cost of premiums compared to third-party insurance costs.
    • Gaining access to reinsurance markets.
    • Increasing loss control measures.
    • Balancing insurance coverage.
Risk distribution occurs when the Captive transfers a portion of the risk it underwrites to an unrelated party or an adequate number of related parties:
  • For unrelated party risk distribution, a minimum of 30% of premiums received by a Captive must come from unrelated entities.
    • This is typically achieved through Risk Distribution Pools, which transfers risk from each individual Captive to the pool through a quota share reinsurance agreement, allocating risk on a pro rata basis.
    • Access to Pools can be provided by Captive Managers.
  • No transaction should ever be completed for the sole or partial purpose of tax savings. The IRS can deny deductions for transactions that seem only to be tax motivated, or worse, can impose prohibitively costly penalties.
  • Captive Insurance Companies should only be implemented by business owners who are primarily motivated by risk management and asset protection, and those concerns should be documented as the purpose for the Captive.
  • Establishing and maintaining a Captive can be complex and expensive; many companies find the complexities of managing assets and claims to be too burdensome.
  • Captives can face regulatory scrutiny in the form of audits, especially for Captives with low claims histories or poorly defined risks.
  • They can’t meet the risk distribution requirements alone.
Bundled Captives are simply a Single-Parent Captive that comes “bundled” with a designated carrier to handle the logistics of Captive management and regulatory complexities, making Captives more accessible to more businesses.
  • This solution provides a risk distribution pool for businesses who can’t meet the risk distribution requirements alone.
  • This solution has a much lower financial entry point than traditional Single-Parent Captives:
    • Must generate at least $5M in gross revenue
    • Must spend at least $250k in P&C premiums annually (excluding Workers Compensation and/or Commercial Auto)
    • Insurance is issued on A+ Paper
  • The carrier issues policies and shares risk and premium (up to 50%) with the Captive; claims are paid by both.
  • Ownership of the Captive remains 100% that of the insured business owner.
    • The Captive retains up to 50% underwriting profit and 100% of the investment income (after tax).
    • The Captive retains funds from a carrier at a “0” tax rate under IRS 831(b).
  • The Captive owner can determine their level of participation from 10% to 50%.
    • The Captive owner has full authority of claims adjudication, handling, and settlement.
    • The Captive owner determines coverage language and forms.
    • The Captive retains only the elected risk(s) while undesirable/catastrophic risk can be left to the carrier partner.
  • The Captive’s loss potential is capped (both per occurrence and aggregate) to insure financial viability.

Contact Us

Bundled Single Parent Captive Program

Bundled Single Parent Captive Program offered Nationwide! We offer Professionals, Transactional, Title Agencies, Accountants, Lawyers, Architects, Engineers, and Litigation Containment.
Call Toll Free: 1-800-368-3363 or local St.Pete | Tampa: 727-346-9472