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Captive insurance companies, which are established to finance the risk of a parent group or groups and sometimes these groups’ customers, can provide advantages in risk management, insurance savings, wealth transfer and taxes. They are a form of alternative risk transfer used by major corporations, nonprofit organizations and medium-sized businesses.

How Does a Captive Work?

The owners of a group of businesses may decide to retain some of their own risk and form their own insurance company, called a “captive insurer,” instead of purchasing insurance from a third party carrier. This is an attractive option for companies who find a limited availability of certain types of insurance coverage in the commercial market or find that those coverages will be a significant expense. In some cases, the captive insurer may decide to insure the group’s customers as well. The primary jurisdiction in which the captive insurance company is organized is called a “domicile.”

Benefits of Captives

Captives can bring many benefits as alternatives to other risk financing plans. Properly structured, captives can bring the following advantages:

  • Reduced cost of risk
  • Cash flow benefits from captive
  • Coverage not available from commercial insurers
  • Direct access to the international market of reinsurers, which can be more flexible
  • Increased bargaining power with commercial insurers (if the captive holds a percentage of insurance)
  • Centralize retained losses spread throughout subsidiaries
  • Cash flow advantages on income taxes—premiums paid to a captive insurer can be tax-deductible, depending on several factors:
  • The transaction is a bona-fide insurance transaction under a defensible business plan
  • The captive’s owner is organized such that subsidiaries pay premiums to the captive
  • The captive writes a substantial amount of unrelated business, e.g., employee benefit business
  • Ownership is arranged such that insureds are not the same as shareholders.



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