A Captive Insurance Company is an insurance company that primarily insures the risks of businesses which are related to it through common ownership usual a parent company. The entity can be domiciled and licensed in a wide number of jurisdictions both domestically or offshore. It is estimated that about 80% of the Standard and Poor 500 companies own one or more captive insurance companies.Using a captive is commonly accepted risk management technique.
Reasons for forming a captive insurance company include:
1. Instances when insurance cannot be purchased from commercial insurance companies for a business risk. In many instances companies within an industry form a joint captive insurance company for that reason.
2. In very specific cases, premiums paid to a captive insurance company may be deductible as a business expense for tax purposes according to the Internal Revenue Service. It is important to note that the IRS has established very strict guidelines to qualify for tax benefits and the use of a professional is critical. The rule of thumb is that the insurance company will need to be adequately capitalized and offer sufficient third party (non-related) insurance to qualify.
3. Insurance can be obtained through the international reinsurance market at a more favorable premium, with higher limits of coverage.
4. Investment returns can be obtained directly on its invested capital.
Jurisdictions of Preference:
- Bermuda
- St. Vincent & the Grenadines
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