How To Structure a Compliant Captive Insurance Company

Are you interested in forming a captive insurance company to mitigate risk and increase profits? If so, you’re certainly not alone. Business owners are becoming more invested in captive insurance than ever before.

But what exactly is captive insurance?

What is a Captive Insurance Company?

A captive insurer is an insurance company wholly owned and controlled by the insured holders within the company. This type of insurer can insure the risks of the company’s owners and provide underwriting benefits to the insured. A captive insurance company is usually a C corporation or LLC taxed as a C corporation.

Key Differences Between Captive Insurance and Mutual Insurance Companies

A captive insurer differs from a mutual insurance company in that it is controlled rather than owned by its policyholders. Policyholders are often asked to participate in matters surrounding the insurance company. Essentially, insureds risk their capital by starting their own insurance firm to reach financing goals.

The Modern Structure of Captive Insurance Companies

Captive insurance companies provide a unique form of coverage that isn’t available through more traditional forms, such as commercial property. In many situations, businesses will use captive insurance companies to manage risk or as one of several risk transfer concepts for their financial security. In many cases, a captive insurance company is best used as a supplement to already-established coverage.

So, how does the structure of a captive insurance company work? Let’s find out.

A Breakdown Of The Structure In A Captive Insurance Company

Captive insurance structure may seem a bit complicated, but after this breakdown, we bet you’ll have an excellent understanding of it.

If you're a business owner and decided that a captive insurance company may work for you, the following logical questions would be, “What's the typical structure? How is it supposed to be owned?”

Let’s look at how a typical captive insurance company is structured to make sure it's compliant.

Regulatory Compliance in Captive Insurance Company Formation

Let’s look at captive insurance law and the PATH Act. The IRS passed something called the PATH Act in 2015. The PATH Act states that the owner of the captive insurance company has to be the same as the owner of the underlying business about spouses and lineal descendants. Regarding captive insurance compliance and regulatory matters, it’s essential to comply with this act.

So, in contrast to our typical captive insurance companies today, you have a patriarch and matriarch that own the “cat,” so to speak. They own the business. They create a captive insurance company that insures that business. Thus, they own the captive insurance “prey.”

In the PATH Act days, there were structures where a patriarch and matriarch owned the business, and they had a captive insurance company owned by their children or a trust. Or, the patriarch would own the business, and the matriarch would own the captive insurance company, thus getting money from one generation past the estate and gift tax line.

The IRS didn't like that, so it went to Congress and passed a law requiring the business and captive insurance company owners to be the same regarding spouses and lineal descendants.

Today, our typical structure starts with the business owner. They own the business and have employees. There is also the captive insurance company. The business's shareholders are the same as the captive insurance company's shareholders. The business owners pay deductible premiums to the captive insurance company. The captive insurance company also issues policies to the business that insure it, whether it's General Liability, worker's comp, or health insurance covering the employees.

There are many different policies business owners can write. However, the typical structure nowadays is that the business owner and the captive insurance company owners are the same.

Flexible Ownership Options in Captive Insurance Companies

Are you still a little bit lost? Understandable. Let’s take a look at some examples.

There are two or three business owners, and only one wants to start or own a captive insurance company. They can own different percentages. So if Owner #1 and Owner #2 are partners in the business, and Owner #1 wants the captive insurance company and Owner #2 doesn't, Owner #1 could own 100% of the captive insurance company (and either owner can be captive insurance management partners) as long as they’re not a parent/child or a husband/wife.

Discover if a captive insurance company is right for your business.

Click the link below to start the assessment:

https://www.riskmgmtadvisors.com/captive-insurance-fit-assessment