Captive Insurance Arrangements
I have not posted on captive insurance arrangements for many months. The last time I posted was when the IRS surprised me by basically leaving captives in place. I had thought the IRS would not let captives keep their tax-free status overall.
In this tough economy, companies and governmental entities are searching heavily for the most economical risk transfer strategies possible. Captives may be the answer to some but not all insurance situations. I used to think that employers had to be large enough to be self-insured before even initiating a captive analysis.
The rent-a-captive option now even allows companies that are not large enough to be self-insured under Workers Comp to possibly use captives as a very economical method to handle your Workers Comp risk and claims. I thought that I would examine rent-a-captives a little further. After reading the information on the IRS website on captives, my head was spinning.
In a rent-a-captive’s simplest form, a corporation will purchase insurance from a traditional insured and reinsure a portion of the risk and loss fund to a rent-a-captive structure. The corporation will typically have a contractual agreement with the captive that will provide the insured with the underwriting and investment profits on the program via some form of a dividend. The claims are paid by the fronting carrier and reimbursed by the rent-a-captive.
2021 Update – Rent-A-Captives remain very viable even with the risk of micro-captive audits by the IRS. Rent-a-captives are not standalone Captive arrangements. The arrangements should always be made at arms-length even though part of the insurance agreement is with a carrier.
Captives do contain a level of risk that should be considered when looking at alternative insurance arrangements.
I will cover the different types of rent-a-captives in my next few posts.