Using a Captive for Asset Protection and Risk Management

Among the myriad of wealth creation, protection, and tax reduction strategies lies a gem for high-net-worth individuals or business owners wanting to earn some equity in their risk management strategies called a “Micro Captive”. A Micro-Captive can be set up as a taxable, or non-taxable entity. It can insure against losses, and if losses are underwritten conservatively, the captive can be profitable. Rather than paying premiums in the commercial market, why not consider your own captive? The 2024 limit for a Micro captive is $2.8 million. Captive insurance companies, particularly those operating under Section 831(b) of the Internal Revenue Code, represent a sophisticated strategy for managing risks while also offering significant financial and operational efficiencies for some companies. For businesses considering incorporating a captive into their employee benefits program, understanding these advantages, as well as the key considerations for distinguishing a reputable captive from a less desirable one, is crucial.

A group Employee Benefit captive can be a viable long-term solution for employers who seek to gain better control and transparency over their current health care financing arrangement. However, not all captives are created equal! Each captive has its own unique marketing attributes to attract a buyer whose desire is to ultimately lower their health care spending. However, a buyer should truly vet out each captive because most, have some type of golden handcuffs tied to captive Retained Earnings (aka underwriting profits). The sad fact is, most employers do not know what questions to ask before they commit to a long-term buying decision.

Benefits of a “Direct Writer Captive” for Employee Benefits

Cost Reduction and Control: One of the primary benefits of a captive insurance company is the potential for cost savings on insurance premiums. By underwriting their own risks, companies can avoid the markup that commercial insurers charge for their services. This can lead to lower insurance costs, more predictable pricing, and the ability to tailor insurance programs to the specific needs of the business and its employees.

Improved Cash Flow: Single Parent Captives can offer more flexibility in how premiums are paid, potentially improving cash flow for the business. This can also include the ability to invest premiums until they are needed to pay claims, generating additional income for the company.

Access to Reinsurance Markets: Captives can access reinsurance markets directly, allowing them to spread risks more effectively and potentially secure better terms than they could through traditional insurance markets. Additionally, excess markets generally have a lower price point than the commercial market. The captive that “direct-writes” a policy and subsequently purchases excess should realize lower policy expense loads.

Enhanced Risk Management: Operating a captive encourages businesses to adopt a more disciplined approach to risk management. With more at stake, companies are incentivized to implement comprehensive risk mitigation strategies, leading to a safer workplace and potentially lower insurance costs over time. It's amazing how engaged employers can be when they are the direct beneficiary of insurance company underwriting profits.


Customized Benefits Programs: Through a captive, businesses can design employee benefits programs that are closely aligned with the needs of their workforce, offering a competitive edge in attracting and retaining top talent.

Tax Benefits

One of the key attractions of captives, especially those operating under Section 831(b), is their favorable tax treatment. Premiums paid to a captive are generally deductible as a business expense, just as they would be if paid to a traditional insurer. However, captives can also generate underwriting profits, which can be shielded from immediate taxation or taxed at a lower rate, depending on the specific tax regulations and the structure of the captive. The insured must keep in mind, any tax efficiency an 831(b) elected captive realizes is simply a tax deferral. When the insured distributes captive underwriting profits, they are generally taxed at long-term capital gains. Corporations electing C yield no tax arbitrage benefit. Regardless of the tax treatment, the insured must enter an 831(b) elected captive with little to no motivation for preferred tax treatment.

Asset Protection Benefits

Captives can also provide significant asset protection benefits. By segregating the assets used to fund insurance liabilities from the operating assets of the business, captives can protect these funds from creditors in the event of bankruptcy or other financial difficulties. This separation can ensure that funds are available to pay claims, even in adverse circumstances.

Discerning a Good Captive from a Bad One

While the benefits of captives are considerable, not all captives are created equal. Here are some critical questions to ask when evaluating a captive:

  1. Who controls the captive? Ensure that the captive is controlled by entities or individuals with a vested interest in the success of your business and who understand your industry and risks.
  2. What is the regulatory environment of the domicile? Captive insurance companies are subject to the regulations of the jurisdiction in which they are domiciled. Look for domiciles with a solid regulatory framework that supports captive operations while providing adequate oversight.
  3. How is the captive capitalized? Adequate capitalization is crucial for the captive's ability to meet its claims obligations. Ensure that the captive meets or exceeds the minimum capitalization requirements of its domicile. Regulators want to see the captive owner's commitment to long-term success. Posting the minimum capital is not a sound way to express commitment.
  4. What is the captive's track record? If you're considering joining a group captive, you must evaluate the performance of the captive, including its claims payment history and financial stability. A reputable captive should have a solid track record of meeting its obligations and managing its risks effectively.
  5. What are the management fees? Understand all the costs associated with participating in the captive, including management fees, and ensure they are reasonable and competitive. This will require you to look in two different places. If the captive is a reinsurance captive (i.e. Fronted), the insured needs to evaluate the bordereau report as well as the captive's financial statements.



Participating in a captive insurance company can offer businesses significant benefits, including cost savings, enhanced risk management, and valuable tax and asset protection advantages. However, the success of a captive arrangement depends on careful planning, adequate capitalization, and ongoing management. By asking the right questions and conducting due diligence, businesses can identify a captive arrangement that aligns with their risk management goals and financial objectives, ensuring a beneficial partnership for all stakeholders involved.

NOTE: I am not a CPA, nothing in the article should be construed as tax advice. Before determining the tax consequences for you, you should consult with a CPA knowledgeable in sections 831(a) and 831(b) of the IRC.

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