Captive Insurance

Captive insurance is a form of self-insurance formalized as a real, regulated insurer that the insured business owns. Instead of paying premium to an unrelated commercial insurer, the parent company creates a captive, pays premium into it, and the captive pays the parent's claims. Because the captive is a licensed insurance entity (often domiciled in states like Vermont or offshore jurisdictions), premiums can be tax-deductible and the parent keeps the underwriting profit and investment income that a commercial carrier would otherwise retain.

For most small businesses, a standalone single-parent captive is too costly to justify, but group captives and cell captives have pushed the concept downmarket. These let mid-sized companies pool risks with similar businesses, share fixed costs, and gain more control over claims handling and pricing. The appeal is aligning cost with actual loss experience: a business with strong safety and few claims can recapture money that would otherwise disappear into a commercial carrier's premium, which relates closely to how self-insured retention and experience rating reward good loss history.

A practical nuance is that a captive is not a way to escape risk — it is a way to finance it. The parent still bears the losses it insures, and prudent captives buy reinsurance to cap catastrophic exposure above a chosen attachment point. Captives also carry real obligations: capitalization requirements, actuarial studies, annual audits, and regulatory filings. The IRS scrutinizes small 'micro-captives' aggressively, so a captive must have genuine risk distribution and legitimate business purpose, not merely tax benefits, to survive challenge.