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Captive Insurance Company

Captive Insurance Company

What Is a Captive Insurance Company?

A captive insurance company is an entirely possessed subsidiary insurer that gives risk-moderation services to its parent company or a group of related companies. A captive insurance company might be formed in the event that the parent company can't find a suitable outside firm to guarantee them against specific business risks, if the premiums paid to the captive insurer make tax savings, in the event that the insurance gave is more affordable, or on the other hand assuming it offers better coverage for the parent company's risks.

A captive insurance company ought not be mistaken for a captive insurance agent, who is an insurance agent who just works for one insurance company and who is restricted from selling contenders' products.

Understanding the Captive Insurance Company

A captive insurance company is a form of corporate "self-insurance." While there are financial benefits of making a separate entity to give insurance services, parent companies must think about the associated administrative and overhead costs, like extra staff. There are additionally complex compliance issues to consider. Accordingly, larger corporations dominatingly form captive insurance companies, yet may likewise depend on third-party insurers to protect against certain hazards.

Tax Issues of Captive Insurance Companies

The tax concept of a captive insurance company is generally simple. The parent company pays insurance premiums to its captive insurance company and looks to deduct these premiums in its nation of origin, frequently a high-tax jurisdiction. A parent company will find the captive insurance company in tax havens, like Bermuda and the Cayman Islands, to stay away from adverse tax suggestions. Today, several states in the US permit the formation of captive companies. The protection from tax assessment is a pursued benefit for the parent company.

Whether the parent company understands a tax break from the creation of a captive insurance company will rely upon the classification of insurance the company executes. In the United States, the Internal Revenue Service (IRS) requires risk distribution and risk shifting to be available for a transaction to fall into the category of "insurance." The IRS publicly declared that it would make a move against captive insurance companies associated with abusive tax evasion.

A few risks could bring about substantial expenses for the captive insurance company that are unaffordable. These sizable risks could lead to bankruptcy. Single occasions are less inclined to bankrupt a large private insurer in light of a diversified pool of risk they hold.

Instances of Captive Insurance Companies

A notable captive insurance company stood out as truly newsworthy in the wake of the 2010 British Petroleum oil spill in the Gulf of Mexico. Around then, reports coursed that BP was self-safeguarded by a Guernsey-based captive insurance company called Jupiter Insurance and that it could receive as much as $700 million from it. British Petroleum isn't the only one in this practice, and to be sure numerous Fortune 500 companies have captive insurance auxiliaries.


  • Numerous larger companies will form a captive insurance company fundamentally due to the tax benefits that it might give.
  • A captive insurance company is completely claimed subsidiary of a larger firm that is entrusted with composing insurance policies for the parent, and furthermore protects no other company.
  • Forming a captive insurance company can bring down a company's insurance costs and give more specific coverages, yet in addition accompanies the extra overhead of running a distinct insurer.