Risk

Captive Insurance

Understand the one structure that turns your insurance premium into your own balance sheet: the real economics, the real filings, and the exact reason the IRS has spent two decades taking these apart.

  • Advanced
  • 8 min total
  • 12 chapters

What decision this helps you make: Whether your loss history, retained layer, and appetite for regulatory work justify owning an insurance company, and which structure, if so.

What this topic is

A captive is a licensed insurance company owned by the businesses it insures. Instead of paying premium to a commercial carrier and never seeing it again, the group pays premium to its own carrier, which pays claims from reserves, buys reinsurance above a chosen attachment point, and keeps whatever underwriting profit and investment income remain.

Why it matters

A commercial premium is expected losses plus a load: acquisition costs, administration, a risk margin, the carrier's profit, and premium tax. On predictable, well-controlled risk that load can be a large share of the bill. A captive lets a company keep it, in exchange for keeping the volatility, funding regulatory capital, and running a real insurance company with real filings.

Who should learn it

Owners and finance leads with meaningful, stable insurable losses, several years of clean claims data, and a genuine risk-financing reason, plus anyone who has been pitched a captive and wants to test the pitch.

What you will understand

  • Trace the money: premium, reserves, reinsurance, fronting, collateral, surplus
  • Separate the four structures: single-parent, group, cell, and risk retention group
  • Price the load you would be keeping, against the cost of running the company
  • Apply the tax test courts actually use: risk shifting and risk distribution
  • Recognize a promoter-driven structure before you fund it

Prerequisites

Common misconception

"A captive is a tax strategy." A captive is a risk-financing structure that has tax consequences. The distinction is not academic: the deduction only exists if the arrangement is insurance for federal tax purposes, and courts have repeatedly held that arrangements built for the deduction are not.[1][4] The working diagnostic is simple and unforgiving. If the tax treatment were exactly neutral, would you still form it? If no, you are not looking at a captive. You are looking at a deduction with paperwork.