A captive is an insurance company set up by its owners primarily to insure against its own specific risks. Captives are an effective way to take financial control of insurance allocations and manage risks.

What can a captive insurance company invest in?

Pre-tax investment income is invested in a balanced portfolio of cash, cash equivalents, bonds, and other assets. Captives may invest a portion of their unencumbered funds in private equity in order to maximize the investment returns.

What are the main reasons for the formation of captive insurance?

Why Form A Captive?

• Greater Control over Claims.
• Increased Coverage.
• Increased Capacity.
• Underwriting Flexibility.
• Access Reinsurance Market.
• Incentive for Loss Control.
• Reduced Insurance Costs.
• Capture Underwriting Profit.

Is captive insurance a reinsurance?

Are captives legitimate insurance companies? A captive is a legitimate licensed insurance or reinsurance company, but it does often have a limited scope in that typically it will only cover the risks of the parent company and its subsidiaries.

What is a captive insurer and some of the reasons for forming a captive?

Reasons To Form a Captive Insurance Company

• Reduced Reliance on Commercial Insurance.
• Reduction of the Costs of Risk Management.
• Stabilization of Pricing.
• Provision of Cover Where Otherwise Unavailable.
• Access to Reinsurance Markets.
• Improved Cash Flow Benefits.
• Reduction of Government Regulations and Interference.

What is the purpose of a captive insurer?

A “captive insurer” is generally defined as an insurance company that is wholly owned and controlled by its insureds; its primary purpose is to insure the risks of its owners, and its insureds benefit from the captive insurer’s underwriting profits.

What is the difference between captive insurance and reinsurance?

A direct writing insurer issues insurance policies to its insureds. A captive insurer operating as a direct insurer insures the risks of the group and purchases reinsurance on the commercial reinsurance market. This reinsurance is not designed to deal with high-frequency or low-severity loss occurrences.

What is the purpose of captive insurance company?

Where does a captive insurance company pay its premiums?

The parent company pays insurance premiums to its captive insurance company and seeks to deduct these premiums in its home country, often a high-tax jurisdiction. A parent company will locate the captive insurance company in tax havens, such as Bermuda and the Cayman Islands, to avoid adverse tax implications.

Can a captive insurance company be a tax shelter?

If the captive insurance company has at least 12 insureds, each having between 5% and 15% of the total risk, then there is sufficient risk distribution, too. However, the IRS may still challenge premium deductions where it believes there are stopgaps that thwart risk distribution, such as reinsurance or tax-shelter like arrangements.

Who is the captive in a reinsurance arrangement?

Where the captive is the reinsurer, it is generally the captive sponsor that wants to retain a significant portion of the risk and (more importantly) the premium but does not want to go through the expense and time of incorporating a captive direct writing insurance company.

Can a captive insurance company be used for estate planning?

Captive insurance companies can also be used for estate planning. A captive can be owned by family members of the parent corporation’s owners or a trust set up for the benefit of those family members. Because there is a business purpose for setting up the captive, the transaction should be respected.