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INTRODUCTION TO CAPTIVE INSURANCE
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 ~ Captive ▪ Exxon-Mobil ~ Ancon Insurance Company ▪ Archer 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:
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.
2020.03.25 ... The IRS Sends Soft Warning Letters To Thousands Of 831(b) Risk-Pooled Captive Owners
2020.02.04 ...The IRS Strikes A Rich Seam Of Tax And Penalty Gold In Risk-Pooled 831(b) Captives And Is Sending In More Miners
2019.12.31 ... The Next Generation Captive Insurance Tax Shelter Explained
2019.12.05 ... Bitter Coffee: Starbucks Squabbles With The Washington Insurance Commissioner Over $633 Million Paid To Its Captive Insurance Company
2019.11.17 ... IRS Suggests Criminal Referrals To Be Made In Abusive 831(b) Captive Tax Shelter Cases
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
U.S. Tax Considerations For Captive Arrangements
§ 831(b) Captives
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
Adkisson's Captive Insurance Companies (2006) available at Amazon.com
Contact Jay at by e-mail to jay [at] jayad.com or to 702-953-9617
© 2020 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 https://captiveinsurancecompanies.com