Captive insurance companies have long been a risk management tool for large corporations. Increasingly, small-to-medium size firms are realizing the benefits of small captives to fund their insurable risks, while seeking the potential economic benefits available to qualifying structures.
Small Captive Overview
What is a Captive?
A captive insurer is a legal entity formed primarily to insure the risks of one corporate parent company, or a number of affiliates, thereby reducing the parent company’s total cost of risk. Captives are usually domiciled in a specialized location, either onshore or offshore, and sometimes write business unrelated to their parent companies.
What is a Small Captive?
The term “small captive” refers to a captive insurance company typically created by midsize companies writing less than US$2.45 million in premium. Should the captive meet certain risk distribution and risk shifting elements and qualify as an insurance company for US federal tax purposes, they can then elect to be taxed only on investment income. Captives that make this election often insure risks that are characterized with historically high-severity and low-frequency losses.
Small Captive Facts
- Small captives have led to significant growth in various domiciles onshore and offshore.
- There are estimated to be more than 1,000 small captive formations by US companies.