What is a Captive?
A captive is an insurance company that insures the risks of its parent, shareholders, or affiliated companies. Your captive issues insurance policies, collects premiums, and pays claims. Captives essentially manage your organization’s risks more efficiently and effectively.
The Captive Insurance Company solution has long been utilized by some of the largest companies in the United States. Congress has enacted tax incentives to encourage the formation of captives for the small and medium sized business market. At its core, a Captive Insurance Company is a wholly owned company that insures the risks of companies affiliated with the shareholders of the captive. The Captive Insurance Company may also offer other planning benefits.
The origin of the Captive dates back to the 1870’s when Protection and Indemnity associations were founded. “Captives”, as the term was coined by Fred Reiss, realized growth in the 1960’s, primarily in off-shore insurance jurisdictions.
Today, there are an estimated 6,000 captives worldwide, of which 200 were formed in 2012. Single Parent/Group captives represent 74% of managed captives. Insurance jurisdictions, otherwise known as “Domiciles” located on shore (U.S), represent over 60% of the captives currently in operation.
Established captive insurance case law is represented by two major decisions; Humana Inc. vs. Commissioner (1989) and The Harper Group v. Commissioner (1992). Through these rulings, the IRS established “Safe Harbor” captive laws, which are described in; IRC Rev Rulings 2002-90 / Safe Harbor 1 and Revenue Ruling 2002-89 / Safe Harbor 2.