Captive Insurance Programs / Alternative Risk
What is a Captive Insurance Company?
A captive insurance company is a subsidiary insurer that is legally established, owned, and controlled directly by the parent company it insures. It operates as a form of corporate "self-insurance," managing and financing retained losses within a formal structure under the supervision of a state insurance department. The captive is wholly owned and controlled by the entities it insures.
Those who opt for captive insurance typically do so to:
Assume their own capital risk by establishing an independent insurance company.
Operate outside the commercial insurance marketplace.
Achieve specific risk financing objectives.
What Are The Benefits of Captive Insurance?
Benefits of Captive Insurance include enhanced control over expenses, tax-saving opportunities (such as deductions for insurance premiums paid to the captive), and the ability to insure risks that may be deemed uninsurable by conventional insurers.
When considering Single Parent Captives versus Group Captives:
Single Parent Captives involve feasibility studies analyzing the effects of establishing an insurance company, covering risk-transfer solutions, insurance coverages, premiums, risk retention, capital, financial projections, potential fronting by admitted insurance companies, cost-benefit analysis, and actuarial assessments.
Group Captives, resembling traditional insurance, require less involved feasibility studies, including lists of exposures, past premiums, loss information, loss analysis (including projections), financial statements to assess company support for a Group Captive, and meetings with the management team.
831(b) Mini-Captive
The 831(b) Mini-Captive option allows an insurance company, including a captive, to be taxed solely on its investment income if it receives less than $2.4 million in premiums annually. This election aims to encourage the formation of new insurance companies. With the 831(b) election, a small insurance company can receive up to $2.4 million per year in premiums without paying income taxes on those premiums.
Importantly, the 831(b) election does not affect the deductibility of premiums paid by the operating business to the captive. As long as those premiums are otherwise deductible, they remain deductible by the operating business. This results in a potential up to $2.4 million deduction in the operating business, with the captive receiving the premium funds tax-free.
It's essential to consult with a tax advisor before implementing any strategies related to the 831(b) election or other tax-related matters.