Captive Overview

A Captive Insurance Company (CIC) is an insurance company formed by a business owner to insure the risks of related or affiliated businesses. A Captive may be used to replace or supplement existing third-party insurance arrangements or to formally insure legitimate business risks that a business may currently informally self-insure. CICs can issue property and casualty insurance coverage that protect against a wide variety of possible risks as well as non-traditional insurance coverages, permitting the business to manage risks while potentially providing substantial ancillary benefits to the related business and its owners. This makes CICs attractive for business and tax planning purposes.

831(b) Small Insurance Companies

Small and medium size companies are able to access the benefits of captive insurance through the 831(b) provision.  This provision exists to level the playing field between those businesses who may choose to self-insure certain risks, and those who choose to use third-party insurance.  Historically, if a small business desired self-insurance against traditional or unique risks, it had to be provided with after-tax dollars.  Section 831(b) allows small businesses to reserved against these risks in a tax efficient manner.

The progress of 831(b) captives:

1956
Youngstown Steel formed what later became known as the first captive insurance company. Sec. 831 IRC.
1986
Congress inserts a provision into Sec. 831 to open up a significant planning opportunity for small insurance companies. Provision is known as Sec. 831 (b)
2002
IRS stops attacking captives and starts to formulate “safe harbor” rules to keep the captives regulated.
Today
  • 6000+ captives exist
  • Over 90% of Fortune 1000 companies have captives.
  • More than 50% of all property and casualty premiums come from captives.
  • 30+ U.S. states provide domicile/numerous international domiciles

Unique insurance coverages offered by CICs:

  • Administrative Action Insurance
  • Deductibles
  • Environmental Coverage
  • Business Risk Indemnity Insurance
  • Computer Operations and Data Retention Insurance
  • Contract Cancellation Insurance
  • Directors & Officers Liability Insurance
  • Employment Practices Insurance
  • Kidnap, Ransom Insurance
  • Litigation Expense Insurance
  • Loss of Key Employee Insurance
  • Product Liability Insurance
  • Special Property Risk Insurance
  • Tax Indemnity Insurance
  • Trademark and Service Mark Infringement Insurance