Captive Insurance Historic

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Tax Advantages

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While professional tax advice should be sought before making the decision to form a captive, there may be certain tax advantages associated with such a decision.

These might include the tax-favored accumu- lation of underwriting and investment income (which may depend on, among other factors, the domicile of the captive, the residence or citizenship of the captive’s owners or the source of its income).

Another advantage may be the deductibility of premiums paid for by the insured for tax purposes (as premium expense of the insured).

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Also, if a captive qualifies as a true insurance company for tax purposes, then unlike other corporations it can deduct currently a “reasonable and fair” loss reserve for unpaid actual losses incurred.

Finally, state premium taxes otherwise payable in a commercial insurance program may be reduced. Although tax advantages may be of significance in the decision to form a captive, they should never be the prime-moti- vating factor.

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Reduced Reliance on Commercial Insurance

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As the captive matures, its surplus grows, giving it greater capacity to retain risk. Increased surplus also creates new opportunities for accessing reinsurers and entering pooling arrangements, which further increase available capacity.

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Reduction of the Costs of Risk Management

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The price of insurance coverage purchased in the conventional market typically reflects a significant markup to pay for the insurer's acquisition costs (including marketing and broker commissions), adminis- tration, and overhead as well as profit to the insurer.

The fact that premiums are paid in advance repre- sents a lost opportunity to earn investment income.

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Establishment of a captive cannot eliminate these costs, but it can reduce them. The extent of the reduc- tions will depend on the captive's own loss experience, the claims handling costs and the degree to which the captive promotes cost consciousness and efficiency in the parent.

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Asset protection from the claims of business and personal creditors

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A collateral benefit to a captive is that each dollar paid by the operating business to the captive thereby reduces the assets of the operating business by that same dollar. Thus, if something goes dreadfully wrong for the business, those dollars are no longer available to creditors of the business.

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Insuring risks that would otherwise be uninsurable

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From time to time, the conventional market is unwilling or unable to provide cover for certain risks, espe- cially for liability and casualty loss. The establishment of a captive (or group captive) to write such lines or to provide additional capacity can be an answer to these market problems.

Coverage, which have at times been unavailable or difficult to obtain on satisfactory terms, include product liability, professional liability, and oil pollution, hazardous waste and labor strike insurance. Whenever insurance cover is unavailable or overpriced, the feasibility of a captive is enhanced.

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Possibility to draft your own Policies

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Captives can draft carefully custom-tailored policies to fit the exact needs of the business. This not only means covering areas of exposure and eliminating exclusions, etc., but the policy can also be drafted in ways that make it nearly impossible for a third-party claimant against the business to assert a claim directly against the policy (unlike most commercial policies).