What is a Captive Insurance Company?

Captives may provide lower insurance and reinsurance costs, increased profits and cash flow

A captive insurance company is an insurer that is organized for the primary purpose of providing insurance protection to the businesses of its owners or persons related to the owners. A captive's policyholders can be related in a number of ways, including common ownership, common risk profile, or participation in a common industry. Many large domestic corporations have captive insurance arrangements, but mid-sized and small businesses also may benefit from captive insurance arrangements.

What are the Benefits of Captive Insurance?

Captives may provide lower insurance and reinsurance costs, increased profits and cash flow, increased availability of coverage, custom tailored coverage, direct access to reinsurance markets, improved risk management, loss control and prevention, reward favorable loss experience, provide cost control, and provide possible income and estate tax deferral or reduction.

What Kinds of Risks Can be Covered?

A business can insure risks that currently are covered by commercial insurance such as property and casualty, general liability, business interruption, and risks that currently are self-insured such as deductibles on commercial insurance, tax audit legal defense, loss of key customer or key supplier, and many others.

Who Uses Captives?

Nearly all Fortune 500 companies use some form of captive insurance.  Many small and midsized businesses, including professional practices and closely held businesses use captive insurance.  There are several thousand captive insurance companies in existence.

Where Do You Set Up a Captive?

More captives have been set up under the laws of foreign countries than in the U.S., although several U.S. states have favorable captive legislation, and the number of domestic captives is growing.  Over 650 captives are currently registered in Vermont alone.  Other states with favorable captive legislation include Kentucky, South Carolina, Utah, Hawaii, Arizona, Nevada and the District of Columbia.

The most popular foreign jurisdictions include Bermuda, the Cayman Islands, and the British Virgin Islands.  Foreign captives owned by U.S. citizens can make an election under Section 953(d) of the Internal Revenue Code to file U.S. income tax returns and pay U.S. income tax on their earnings.