Captive Insurance Companies

• In Event: Discussion Topics in Taxation

Abstract

Captive Insurance Companies
Abstract
Recent court decisions have again focused attention on captive insurance companies. Captive insurance companies “Captives” began to be used in the 1950”s by companies seeking to insure their risks without having to use outside insurance companies. The captive is a controlled subsidiary set up by the insured where premiums are paid to the subsidiary to insure the risk stated in the agreement. Their popularity has risen to where nearly 90 per cent of Fortune 1000 companies use a captive insurance company. The risks insured by the companies employing a captive insurance company vary as widely as the possible hazards that any business might encounter in the 21st Century. An insured party is allowed a deduction for premiums paid to a captive insurance company. This is in contrast to a self-insurance plan where a company establishes a reserve for potential insured losses. Under the reserve self insurance option the funds are not deductible as an expense until an actual loss is incurred and paid.

This paper will look at the IRS position on the “captives” and the affect of recent court cases affecting the use of captive insurance companies. Additionally, many states in the last decades have been aggressive in pursuing the use of captives, especially where the insured parent uses the captive as an abusive tax shelter with minimal substance as to the risks insured.

Author

• Frank Joseph Bevvino, ScD, CPA, Southern Connecticut State University