2020 taught us that threats to growing a business continue to evolve, and it’s hard to be ready for whatever might come next. Insurance companies provide a level of risk mitigation, but more companies are starting to look at doing this internally. A captive insurance company is an affiliated company with common ownership established to provide insurance, or risk mitigation services, to its operating company. In some cases, a captive insurance company can be more equipped to help its operating company face emerging threats than a third-party insurance provider. A 2021 report on the state of the captive insurance industry found that the formation of captive insurance companies almost doubled in 2020. While there are downsides to this strategy, the upsides are worth considering.


Captive insurance companies date as far back as the 1950s and have since become commonplace for the vast majority of Fortune 500 companies, as well as thousands of mid-sized companies. Generally speaking, the companies we see considering a captive insurance program have $10M+ in revenue / $3M+ in profit, carry significant risk, and have high current insurance expenses. Companies with low to no risk or less than $1M in profits would likely not benefit from this structure. Most businesses look into setting up a captive insurance program to address the following needs:

  • Better insurance coverage for the parent company’s unique risks
  • More affordable insurance, tailored specifically to their needs
  • Tax savings created by premiums being paid to the captive insurer vs. an outside firm
  • Solution for the lack of insurers in the market that will insure certain types of risk


While the primary goal of a captive insurance company is to better meet the insurance needs of the parent, there are also economic benefits to consider.

Parent companies get a tax deduction at ordinary tax rates for the premiums paid to the captive, and the captive does not pay tax on the premiums as they are received. There is also no tax on underwriting income, leaving only investment earnings currently taxable for the captive. The premiums received are only taxed when the captive is shut down and the funds are distributed, at which point they are taxed at capital gains rates. This allows for the time value of money and a tax rate arbitrage.

In order to take advantage of these benefits for federal tax purposes, the captive must qualify as an insurance company by IRS standards. The IRS uses four criteria in this determination:

  1. Is there risk shifting?
  2. Is there risk distribution?
  3. Is there insurance risk?
  4. Do the commonly accepted notions of insurance apply?

For this and many other reasons, it is crucial to approach the establishment of a captive with professionals who are well-versed in the creation and management of these entities. There will be necessary up-front costs for items like feasibility studies, risk management studies, tax structuring advice, actuarial services, and regulatory concerns, to name a few. There will also be ongoing costs for the continued management which will need to be included in future budget planning.


While they may not be considered “disadvantages” of captive insurance, there are some potential drawbacks to consider:

  • ENTRY/EXIT: As noted above, starting a captive insurance company can be expensive and complicated due to the regulations surrounding the industry. And leaving a captive brings its own set of challenges, such as finding replacement coverage.
  • QUALITY: The quality of service provided by the captive relies heavily on substantial experience in day-to-day management, risk assessment, and adjudicating claims.
  • RISK: As with any investment, there is a financial risk to the parent company as there is capital to be lost. However, these risks are typically managed through reinsurance with bigger pools.

For many organizations, the benefits of greater control, lower costs, and increased stability/transparency outweigh the risks. Working with professionals experienced in risk management strategy can help you determine if captive insurance is a viable option for your organization. Ready to learn more about captive insurance and the tax benefits? Contact us today.