What is a captive?
A captive insurance company is a form of alternative risk management. It is a privately owned insurance company organized by the owner or partners of an operating company or family of companies. The captive provides the owner or partners with an alternative source of managing certain commercial property and casualty risks.
Captive insurance companies are utilized to replace and/or expand the risk coverage of the operating company. The captive can be used to cover gaps, exclusions and deductibles in existing insurance policies. It can also issue policies for surplus and excess coverages that are often too costly or not readily available through standard commercial insurance providers.
Under a typical captive insurance arrangement the operating company pays premiums to, or purchases insurance from the captive. The captive insurance company issues policies insuring the risks of the operating company, and services claims filed by the policy holder.
Qualifying insurance premiums paid by the operating company to the captive insurance company are deductible for income tax purposes as ordinary and necessary business expenses under U.S. Tax Code section 162(a).