Captive Insurance Companies


  • IRS announces its settlement initiative for abusive 831(b) captive arrangements
  • 2019.09.26 ... Understanding The IRS Settlement Initiative Offer For Targeted 831(b) Captive Insurance Companies (Forbes article by Jay Adkisson)


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In its most simple form, a captive insurance company is an insurance company, which is owned by the parent but legally separate from it, that underwrites some or all of the insurance needs of the parent's operating business subsidiaries.


To say that captives have fundamentally changed the insurance marketplace would be an understatement. Once upon a time, large business organizations purchased their insurance satisfied all their insurance needs by purchasing insurance in the commercial marketplace, just as an individual would buy auto or homeowner's insurance just on a much larger scale. No more.


Today, nearly all large business organizations have their own insurance companies -- and sometimes several -- and use these captives to provide primary coverage for the bulk of their insurance needs. If a risk is too great for their own insurance company to take on, the captive lays off the risk by purchasing reinsurance directly from one of the large reinsurance companies. The effects include the elimination of the "middlemen" insurance companies (and thus the middlemen's advertising costs and agent commission costs, etc.) and much greater efficiencies in the handling or claims, thus dramatically lowering the organization's overall costs of insurance which inures to the benefit of shareholders directly and to the overall health of the economy indirectly.


Until 2001, the IRS repeatedly but unsuccessfully challenged captive insurance companies as subterfuges for non-deductible self-insurance within the business. After the IRS lost its $600+ million challenge against a captive owned by United Parcel Service in 2001, the Service resigned itself to the legitimacy of captive insurance companies and soon thereafter abandoned its economic family challenges to captives. The IRS has since issued a great deal of guidance to assist captive owners in their proper structuring, management and reporting.


Nearly all major corporations have captives -- indeed, it is hard to identify a major corporation that does not have at least one captive insurance company. Some corporations have multiple captives that serve different risks. For instance, a corporation may have one captive that primarily covers the corporation's general liability, environmental liability, and product liability risks, and then another captive that insures the employee benefit liabilities of the corporation, such as workers compensation and healthcare.


Examples of corporate captives: Parent ~ CaptiveExxon-Mobil ~ Ancon Insurance CompanyArcher Daniels Midland ~ Agrinational Insurance Company ▪ Verizon ~ Exchange Indemnity Company ▪ A T & T ~ Gateway Rivers Insurance Company ▪ ConocoPhillips ~ Sooner Insurance Company ▪ Starwood Hotels ~ Westel Insurance Company ▪ C B S Corporation ~ Central Fidelity Insurance Company ▪ Boeing ~ Astro Limited ▪ New York Times Company . . . Midtown Insurance Company.


Increasingly, non-profit organizations are also forming captive insurance companies to handle their insurance risks in-house. One example above is Veritas Insurance Corporation, a captive insurance company of the University of Michigan. Another is the National Catholic Risk Retention Group, Inc., a form of captive insurance company wholly owned by its member dioceses.


More than half of the states have now passed captive insurance enabling statutes, and more than a half-dozen of those states now aggressively cater to the domestic captive market. Captives are now being formed for medium-sized businesses that are able to pay as little as $500,000 per year in premiums to their captive.


There are many ways to differentiate captives, but they may be parsed into two primary groups:


  • Group Captives are captive insurance companies that are formed by a group of companies in the same or similar business sectors to provide particular types of insurance to all the companies in the same group, which insurance may be otherwise difficult or cost-prohibitive to acquire on the commercial insurance markets. Examples of this may be found in captives that were formed in the 1970s and 1980s to provide product liability insurance at a time of a very hard insurance market when such insurance was hard to procure at a reasonable price. In more recent years, such group captives have proven to be very popular for workers compensation insurance and medical malpractice insurance.


  • Pure Captives are captive insurance companies that are formed to provide insurance only to other operating subsidiaries of the parent organization. Pure captives are very much a creature of tax law: Congress (and like bodies in other countries) could tomorrow negate the need for these captives simply by allowing these business organizations to internally reserve against their risks, which is presently not allowed for a variety of primarily tax-related reasons. Thus, it is of primary importance for many of these insurance companies to qualify for tax purposes as a captive (the premiums paid to captives are tax deductible and the company may accrue reserves against income) as opposed to simply a self-insurance program (the premiums paid are not deductible by the insureds and reserves may not be accrued).


Unfortunately, beginning in the late-2000s, certain small captive insurance companies which elect under Internal Revenue Code section 831(b), began to be mass-marketed as tax shelters, thus drawing the ire of Congress and the IRS, and so now greater care must be taken with so-called "831(b) captives" to ensure that they are indeed fully tax-compliant. Because of the media attention focused on these smallish captives, they command a wildly disproportional amount of the discussion about captives although in terms of total premium dollars received they are but a drop in the bucket compared to the larger corporate captives.


C O M M O N      P A G E      F O O T E R



2019.09.28 ... Johnson & Johnson Wins Appeal On $60 Million Tax Case To New Jersey For Captive Insurance Company

2019.09.26 ... Understanding The IRS Settlement Initiative Offer For Targeted 831(b) Captive Insurance Companies

2019.09.16 ... IRS Announces Global Settlement Of Abusive 831(b) Captive Insurance Tax Shelters

2019.08.08 ... Artex Defeats Attempt To Form Class Action And Forces Individual Arbitration Of Captive Disputes

2019.07.04 ... Second Class Action Against A Risk-Pooled 831(b) Captive Promoter Roils Sector

2019.05.28 ... New York Denies Stewart's Shops Deduction For Premiums Paid To Its Captive Insurance Company

2019.05.23 ... Sixth Circuit Also Gives CIC Services Thumbs-Down On IRS Notice 2016-66 Challenge

2019.04.23 ... Third US Tax Court Opinion Denies Deductions For Risk-Pooled 831(b) Captive Arrangement In Syzygy

2019.03.29 ... Macy’s Captive Insurance Company Faces Potential $23.8 Million In Maryland Corporate Tax Liability




General Resources


State Regulation


U.S. Tax Considerations For Captive Arrangements


§ 831(b) Captives

  • 831(b) Captives Generally ... Discusses the unique characteristics and problems of captive insurance companies that qualify for the IRC section 831(b) election



Expert ... Expert witness and available for consultation as an expert regarding captive insurance company matters


Evaluation & Formation ... Jay has been involved with the formation of well over 100 captive insurance companies since 1998, and now assist prospective captive owners in evaluating their suitability for a captive, and in forming the captive and obtaining its insurance license


Litigation ... Frequently serves as counsel in disputes involving insurance companies


Remediation & Closing ... Remediation and termination of defective captive arrangements, and consulting and second-opinion reviews of existing captives



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Adkisson's Captive Insurance Companies (2006) available at


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(c) 2019 Jay D. Adkisson. All Rights Reserved. No claim to original government works. The information contained in this website is for general educational purposes only, does not constitute any legal advice or opinion, and should not be relied upon in relation to particular cases. Use this information at your own peril; it is no substitute for the legal advice or opinion of an attorney licensed to practice law in the appropriate jurisdiction.  This site is