Captive Insurance Companies

Since its release in 2006, Jay Adkisson's book on captive insurance companies has become the all-time captive insurance bestseller, providing a basic introduction to captives and related structures and how they are properly utilized within the context of the client's overall business and estate planning. Available now from: Amazon and Barnes & Noble

A captive insurance company is, in a nutshell, an insurance company formed by a business owner to insure the risks of the operating business. The operating business pays premiums to the captive, and the captive insures the risks of the operating business. A captive is much more than an exotic form of self-insurance: It is the creation of a new insurance company that has the potential to grow from being a mere captive into a full-blown insurance company seeking to profit from underwriting the risks of others.

A captive insurance company is simply an insurance company owned by the parent that underwrites the insurance needs of the parent's subsidiaries.

In just the last decade, the captive industry has grown substantially. From an estimated 1,000 captives in 1980 to over 5,000 by 2006, captives now account for more than 10% of all commercial insurance premiums collected worldwide. In the U.S. alone, captives were responsible for over $9 billion in premiums in 2005.

The U.S. dominates the captives market. Fully 30% of all captives are domiciled in the U.S., and even most of the offshore captives have U.S. parents. Doubtless, this is due to the peculiarities of the U.S. tax code which disallows an ordinary company from accruing reserves against future claims, but allows another company within the same economic family (the captive) to do precisely that. The point is that captives are a recognized and established planning tool for U.S. businesses.

In 1958, an engineer by the name of Fred Reiss created American Risk Management for the purpose of assisting U.S. corporations in setting up their own insurance companies. Because at the time the U.S. insurance commissioners did not differentiate between captives and ordinary insurance companies, most captives were formed outside the United States, usually in a debtor haven where no or low taxes were charged locally. After the U.S. passed the Tax Reform Act in 1962, which for the time being eliminated the benefits of captive arrangements for U.S. companies, Reiss moved to Bermuda and formed International Risk Management. Thus, Bermuda and the other offshore domiciles would dominate the worldwide captive market for the rest of the century.

Several IRS rulings and court cases decided in the 1970's and 1980's started to define situations in which captive arrangements would be respected in the U.S. More and more major U.S. corporations started forming captives. By 1981, Vermont passed its captive legislation and the domestic captive sector began to grow. All of this lead to more court cases, more challenges by the IRS, and more defining of when captives were or were not permissible.

Eventually, by the mid-1990s the tax laws relating to captives had matured to the point that tax planners could be comfortable knowing that premium payments to the captive would be deductible in appropriate instances. The captive business literally exploded as even mid-sized and privately held businesses started forming captives to manage their insurance risks. The number of captive domiciles also exploded, and today more than half of the U.S. states now have captive enabling legislation.

Captives are great planning tools and there is now a whole industry that supports them. Yet, captives are poorly understood by both business owners and business planners. Those who know the most about captives are doing planning for large multi-national corporations. But the planners who are advising the smaller businesses and their owners who might benefit from a captive usually know very little if anything about them.

There are some insurance brokers who now set up captives, but their knowledge is limited to the insurance issues and many of the potential tax and wealth transfer advantages of a good captive structure are simply missed. The tax and estate planners who could do this ancillary structuring to make the captive really work usually know little or nothing about captives or the insurance issues that are involved. Because of this, there are very, very few planners (a handful nationwide) who really offer the "whole package" to clients that fully exploit all the potential advantages of a captive.

I came into the captive business from the business and estate planning side, and not from the commercial insurance side. I had been practicing law in Oklahoma and Texas for nearly a decade, mostly in commercial litigation and asset protection planning, when I had the opportunity to move to California and join a new consulting company being formed to create small captives for small- to medium-sized businesses. My partners, another lawyer and a CPA, had substantial experience in insurance and taxes respectively, which gave me the great luxury of learning the intricacies of the captive business for the next five years while integrating captives into my own unique estate and asset protection planning. Many of the strategies that we came up with remain unique and unparalleled within the captive and estate planning worlds.

Whether or not you are ever involved with captives, they are an interesting business topic. The purpose of this book is to provide readers with a general overview of captives and their benefits, plus a description of the captive formation process and the main captive domiciles. While captive formations are extremely complicated and must be left to planners who are experienced with them, readers should be able to take away a feeling of what captives are all about and how they can help certain businesses and their owners. I have also sought to familiarize readers with some of the unique terminology of the captive business.

About the Author

Few people know more about structuring captives than Jay Adkisson. As one of the founders of Manchester Strategic Advisors, one of the original captive consulting firms, and as an owner of Trafford Insurance Services, an insurance management firm in the British Virgin Islands, Jay has been intimately involved in the formation and management of literally dozens of captives from 1998 until 2003, when the partners of Manchester and Trafford decided to go their own ways and those firms were wound up.

Following the 2004 publication of their best-selling book, "Asset Protection: Concepts and Strategies" by the McGraw Hill Companies, Jay and Chris Riser formed the law firm of Riser Adkisson LLP, which provides business, tax and estate planning services to business owners and affluent individuals. Even before Jay became involved with captives, he had a national reputation as an asset protection planner and this reputation has continued today. Jay is a regular speaker at events of the American Bar Association and various state and county bar associations. He is also regularly quoted by such publications as the Wall Street Journal on asset protection and related topics.

In addition to his law practice, Jay is a registered options principal for Securities Equity Group, a securities broker-dealer. He is also the Director of Private Client Services of Select Portfolio Management Inc., a registered investment advisory firm. A regular speaker at events sponsored by financial and insurance companies, Jay is also the author of "Equity Indexed Annuities: The Smart Consumer's Guide". He also has a life agent license in California.

Notwithstanding all the foregoing, Jay is probably best known internationally as the creator of Quatloos.com, a very popular website that educates the public about tax and financial scams and frauds. Jay has been the feature of an article in Forbes and has appeared on ABC's 20/20. He is also a regular lecturer to the Internal Revenue Service about tax frauds.
Jay earned his Juris Doctor degree from the University of Oklahoma, and is admitted to practice law in Oklahoma and Texas, and before various federal district and appellate courts nationwide. He currently lives in Southern California, and is an avid private pilot.

Jay regularly consults with new clients nationwide on captive insurance structuring and creation. He can be contacted at the following:

Nationally Toll-Free at 949.629.1176       
Orange County, California: 949-607-0952       
Dallas, Texas: 214-459-6272       
E-Mail: jay [at] captivebook.com
URL: http://captiveinsurancecompanies.com
Postal Mail: P.O. Box 7088, Laguna Niguel, CA 92677

Jay is also a regular speaker on captive insurance topics, in addition to general business, estate and asset protection planning topics, to both public and private groups.

Book Table of Contents

Ch 1 - Captive Benefits

Stabilize Insurance Budgets
Reduce Insurance Admin Costs
Negotiation Tool
Utilize Own Experience
Premium Flexibility
Policy Terms
Increased Claims Control
Recapture Underwriting Profits
Accept Greater Deductibles
Access to Reinsurance Markets
Customized Coverage
Underwrite Exposed Risks
Enhance Loss Prevention
Profit Center
Liability and Wealth Transfer

Ch 2 - Wealth Transfer,   Accumulation And Preservation

Wealth Transfer
Wealth Accumulation
Wealth Preservation
Example: Property Developers

Ch 3 - Basic Concepts

Insurance Companies as Banks...
Control and Capitalization
Reserves and Surplus
Limitations of Captives
Captives and Bad Risks
Minimum Costs and Break-Even
Reinsurance
Premiums Withheld Reinsurance
Fronting

Ch 4 - Types of Captives

Pure Captive/Single-Parent Captive
Corporate Captive
MicroCaptives, MiniCaptives,CHICs
Group Captive
Agency Captives and PORCs
Branch and Sponsored Captives
Rent-A-Captive
Risk Retention Groups (RRG)
Physician Groups

Ch 5 - Captive Taxation

The Percentage Safe Harbor
The 11 Insureds Safe Harbor
Insurance Co. for Tax Purposes?
The 953(d) Election
501(c)(15) MicroCaptives
831(b) MiniCaptives

Ch 6 - Formation and Licensing

Team
Feasibility Study
Actuarial Study
Application
Meeting with Ins. Commissioner
Formation and Licensing
Capitalization
Ancillary Structuring
Ongoing Management

Ch 7 - Policies

Business Liability
Business Casualty
Excess Insurance
BondsBook Table of Contents

Ch 8 - Domiciles

Permitted Assets - A Moving Target
Records and Meetings
Licensing Fees, Annual Fees and Premium Taxes
Offshore or Onshore

Ch 9 - Domestic Domicles

Vermont
South Carolina
Hawaii

Ch 10 - Offshore Domicles

Junkanoo
Bermuda
Cayman Islands
British Virgin Islands

Appendicies

A. Risk Retention Statute
B. Vermont Captive Statute
C. South Carolina Captive Statute
D. Cayman Islands Insurance Law
E. 26 U.S.C. § 831
F. Revenue Ruling 2001-31
G. Revenue Ruling 2002-89
H. Revenue Ruling 2002-90
I. Revenue Ruling 2002-91
J. Notice 2003-34
K. Revenue Ruling 2005-40
L. Humana Inc. v. C.I.R.
M. Gulf Oil Corp. v. C.I.R.
N. AMERCO, Inc. v. C.I.R.
O. Sears, Roebuck and Co. v. C.I.R.
P. Ocean Drilling & Exploration v. U.S.
Q. Malone & Hyde, Inc. v. C.I.R.
R. Kidde Industries, Inc. v. U.S.
S. United Parcel Service v. C.I.R.

Captive Insurance & Risk Retention Groups

Comprehensive information about captive insurance companies (captives) and arrangements, including risk retention groups. While our focus is on the uses of these structures for U.S. companies and business owners, many of these concepts may be useful to others.

This topic is broken into the following major sections:

Captive Insurance Companies Cases
A selection of Landmark Cases regarding the use of captive insurance arrangements is included.

Risk Retention Groups
Explains these pseudo-insurance company arrangements that are uniquely formed pursuant to federal law, and their use as fronting companies.

Captive Jurisdictions
Overview of the major captive jurisdictions, foreign and domestic, including the insurance company statutes of those jurisdictions.

Litigation Expense Policies
An insurance policy issued by a licensed offshore insurance company, which is not subject to U.S. jurisdiction.

Captive Insurance Company

Rev. Rul. 2005-40
Tax on Insurance Companies other than Life Insurance Companies

Captive Insurance Tax Mistakes
Captive insurance company tax mistakes, risk spreading and risk shifting

Workers' Compensation Captive Insurance
Workers Compensation Captive Insurance Companies to reduce insurance costs.

Additional Information

IRS Guidance on Insurance Company Taxation

Correctly Running A Captive
Overview of what it takes to properly run a captive insurance company and keep it in compliance with the local regulators and the IRS. "Know before you leap!"

Captive Insurance Terms

• Captive Insurance Company (“Captive”)
  Slang for an insurance company used predominantly to underwrite the business risk of other subsidiaries of the parent company or owner. The term “captive” is not used in any insurance statutes or in the Internal Revenue Code, but is rather a practice term used to describe an insurance company fulfilling the described role.

• Closely Held Insurance Company (CHIC)
  A privately-held insurance company that is typically owned either by the owner’s children or an irrevocable trust formed for the owner’s children, to provide additional tax and succession benefits in addition to those of the captive arrangement.

• Insurance Manager
  A person or entity that has obtained a license from the local insurance commissioner to manage insurance companies in that jurisdiction.

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About AssetProtectionBook.com

This website is by far the largest and most comprehensive creditor-debtor and asset protection resource available anywhere. This website hosts thousands of pages of articles, cases, statutes, analysis, and many other resources to assist planners and judgment collection professionals in researching contemporary creditor-debtor issues.

While the articles and analysis on this website are most often drafted from a planner's point of view, creditor attorneys and judgment collection professionals will also find many of these resources to be highly useful. We have tried whenever possible to be balanced in our analysis by pointing out strengths and weaknesses in different structures and strategies from both the planner's and creditor's viewpoint.

This website was primarily created to support our book Asset Protection: Concepts and Strategies (McGraw-Hill 2004). Because of the publishing agreement with McGraw-Hill Companies, Inc., certain articles which were used as the basis for that book have been withdrawn from internet publication. It is suggested that the book be used as the primary resource, and that the other materials on this website should be used as supporting materials only as needed.

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