In its most simple form, a captive insurance company is an insurance company owned by the parent that underwrites the insurance needs of the parent's operating subsidiaries.
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 . . . CAPTIVE
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.
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.
Recent Articles On Captives
2016.11.16 ... A Detailed Analysis of IRS Notice 2016-66 re 831(b) Captives
2016.11.13 ... Pretrial Memoranda Filed In Wilson 831(b) Captive Case Display IRS Attacks and Taxpayer Responses
2016.11.08 ... IRS Notice 2016-66 Regarding 831(b) Captive Insurance Companies Interpreted In Common English
2016.11.1 ... IRS Categorizes Certain 831(b) Captive Insurance Companies As A "Transaction Of Interest"
2016.10.15 ... 831(b) Small Captive Insurance Company Owners Face January 1 Deadline To Fix Ownership Structure
2016.9.29 ... Not All Captive Insurance Risk Pools Are Created Equally
Articles On Captives
An archive of articles by Jay Adkisson on captive insurance companies. Click here for more
Discusses the unique characteristics and problems of captive insurance companies that qualify for the IRC section 831(b) election. Click here for more
An overview of captive taxation, including the IRS's abandonment of its "Economic Family Theory". Click here for more
Tax: Protected Cell Companies
Considers the unique tax issues that involve protected cell companies (a/k/a SBUs). Click here for more
Tax: Risk Distribution: Multiple Insureds
Considers the IRS safe harbor for multiple insureds and risk distribution through many "points of insurance" generally. Click here for more
Tax: Risk Distribution: Unrelated Insurance
Describes the IRS "50% unrelated third-party insurance" safe harbor and related issues. Click here for more
Tax: Risk Distribution: Risk Pools
Introduces the concept of risk pools which are sometimes used by captive managers to assist their clients in obtaining 50% third-party insurance, and which are currently under heavy scrutiny by the IRS. Click here for more
Tax: Risk Shifting
Considers the tax law requirement that an insurance arrangement have a true shifting of risk between the insured and the insurer. Click here for more
Jay Adkisson has been an expert witness and is available for consultation as an expert regarding captive insurance company matters. Click here for more
Jay Adkisson 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. Click here for more
Jay Adkisson is regularly involved with the remediation of defective captive arrangements, and with consulting and second-opinion reviews of existing captives. Click here for more
Jay Adkisson frequently serves as counsel in disputes involving insurance companies. Click here for more
Adkisson's Captive Insurance Companies (2006) available at Amazon.com
Contact Jay at by e-mail to jay [at] risad.com or to 877-698-0678
(c) 2016 Jay D. Adkisson. All rights reserved.