3 Types of Captive Insurance Structures
Captive insurance programs and risk retention groups are insurance companies. They look and act like any stock insurance company. There are three main types of captive insurance structures.
Graphically, a single-parent captive insurance structure looks like this:
All captives must meet the IRS guidelines for risk transfer and risk distribution. An 831(b) or “micro” captive is no different in captive insurance structure. The 831(b) or mall insurance company exemption applies primarily to the premium size3 of the captive. As of 2017, any captive that receives less than $2.2 million in premium qualifies for the exemption. It pays no income tax on the underwriting profit, only on the investment income.
Not all companies meet the requirements for risk distribution/risk transfer. In that case, several business owners with similar business interests and attitudes may form a group captive or a risk retention group. In that case, the structure would look like this:Again, this insurance structure looks and acts like a classic stock insurance company. It is managed by a Board of Directors made of representatives of the stockholders.
There is a third captive structure called a protected cell captive. In the past, these are sometimes known as “Rent-a-Captives”. In this structure a company will own the managing entity or protected cell company. This entity will be responsible for many of the operational functions and for qualifying the individual cell owners. This provides economies of scale for smaller operating companies and reduces the overhead of operating the individual cells. That structure looks something like this:
Choosing Between the Captive Insurance Structures
The type of captive insurance structure that’s right for your business is dependent in a large part on the size of your company.
Larger, more complex businesses can take advantage of the single-parent captive insurance structure. They have the resources to assume more exposure, the management strength to participate in greater detail, and stability to withstand fluctuations in their loss experience.
Associations, or larger synergistic groups, may find that pooling their resources makes sense to optimize the group dynamic. It’s useful for some groups to share loss control, investment strategies or group buying strength by coming together for their common good.
Smaller firms that want to take advantage of their excellent loss experience to retain the underwriting profit, but don’t quite have the diversity to meet regulatory guidelines, may benefit the most from the protected cell captive.
It’s important to find a captive insurance management firm experienced in various captive insurance structures to help you determine which strategy is the best for your business. Trust Venture Captive Management to insure your business.