2015 August

How to pick the right captive manager

By | Captive Formation and Management, Captive Managers | No Comments

Selecting the right captive manager for your project is perhaps the most important decision you can make when deciding to form an affiliate captive insurance company. The range of quality between managers varies greatly. In the micro-captive industry, paying more does not assure you of quality either.

We recommend requesting a free preliminary captive assessment, or pre-feasibility study. This can provide you not only with an exact proposal of start-up and ongoing operational expenses of your captive, but will give you some ideas to the quality of analysis and responsiveness of communications with a manager.


Click here for information on the typical fees charged by experienced mid-sized to large captive managers.


If 3rd party risk pooling is a required part of your captive design to follow IRS guidance for qualifying your captive as an insurance company for federal income tax purposes, and/or to reduce risk of high severity losses retained solely by your captive, and thereby reducing volatility of losses in your captive program, be sure to inquire of your prospective manager the type of risk pooling facility they utilize, the associated costs, and the collateral elements of the risk pooling facility program. You can learn more about risk pool programs by visiting www.CaptiveRiskPool.com.


A written engagement agreement controls every captive management relationship. No two managers have identical engagement agreements; in fact they vary widely and it is very unreliable to compare management service price quotes until you get confirmation in writing of exactly what services and outside costs are included. Also it is important to discuss a manager’s operating policies and procedures and the timing of those activities. You may find when talking to a captive management firm’s business development team that they do not really know that much about the details of operations post formation as typically they do not have any related hands on experience.

Here is a list of the main management functions typically needed after formation (formation stage essentially entails the captive design, creation and licensing):

  • insurance contract management (invoice, prepare policies, and manage policies)
  • captive accounting (creation and maintenance of accounting system)
  • bank and investment account review (assist with opening bank and investment accounts, and reconciling such accounts monthly)
  • claims management (whether directly or with involvement of a TPA, most management agreements include claims investigation, processing and payment)
  • fronting, surplus, pooling, reinsurance arrangements (managers typically coordinate involvement with other insurance companies and captives that may be part of your captive program)
  • investment guidance
  • regulatory reporting and exams (filing required reports with domicile regulators and assisting with any examinations)
  • actuarial assistance (engaging and working with actuaries)
  • financial audit assistance (identifying and working with outside financial auditors)
  • tax preparation (identify and assist with completion of income and other required tax returns by a 3rd party tax preparer)
  • corporate secretarial services (assisting with board and shareholder meetings and maintenance of a corporate book)
  • distributions and unusual transactions (sometimes managers assist with loans, capital financing arrangements, dividend approval, and wind up of captives but often for extra fees or with involvement of outside legal service providers)


These three (3) basic types of captive managers.

Broker/managers, the largest group by number of captives, have resources for integrating traditional insurance products, fronting, reinsurance, and third-party administration (TPAs) into the program. Fees can be difficult to compare and determine as brokers tend to spread costs internally without revealing them.

A few lawyers, banks, accounting firms, and claims firms have become managers in order to feed their other lines of business. These structures can be restrictive to the captive’s operations and often result in added costs for services typically included by full service independent firms.

Independent firms also come in a variety of shapes, sizes, and competencies.

Each form of manager has its own strengths and weaknesses. One is not necessarily better than another based purely on whether they offer a basket of products and services. So as to not be surprised, and to better understand the focus of your management firm, be sure to ask what related services they offer and whether or not they subsidize formation and management fees expecting to make money elsewhere in the relationship.

For more information visit www.UScaptive.com and www.CaptiveExperts.com.

831(b) Qualifying captive insurance companies – design & tax planning guidance

By | Captive Taxation | No Comments

Disclaimer: Nothing herein is legal, tax, financial, insurance, accounting or investment advice. The information herein may be dated. No obligation to update or make corrections is intended or implied.

Caution: As use of captives making the 831(b) election has proliferated in recent years, the IRS too is increasing its attention and review of these transactions. IRS Associate Counsel stated the IRS does not want to chill proper use of captives but are concerned about potential abuses. This scrutiny may be warranted. Some captive promoters and managers may not know how to or do not care to follow best practice standards, but rather focus nearly exclusively on the tax benefits of captive structures. Some may lack the requisite risk management experience to design and manage them first and foremost as legitimate and effective risk management vehicles. Shortcomings in some programs may relate to weak or questionable practices regarding risk assessment, policy selection, policy pricing, policy periods, and risk pools that may not be designed and operated correctly themselves.


Technically there is no such thing as an 831(b) captive. 831(b) is a reference to U.S. Code, Title 26, Subtitle A, Chapter 1, Subchapter L, Part II, section 831, subsection (b), of the United States Internal Revenue Code, titled “Alternative tax for certain small companies.” Therefore 831 (b) applies only to insurance companies that are US taxpayers. You can read this 831(b) statute on the Cornell University website by clicking here.

The following chart lays out the bigger picture of the tax impacts of a captive insurance company in “for profit” enterprise groups:

Captive Tax Impacts

IRC 831(b), providing for exemption from income tax of a qualifying small insurance company’s underwriting income, is a US tax code provision enacted as part of the 1986 Tax Reform Act by Congress during President Ronald Reagan’s 2nd term. At this time the US insurance markets were a very “hard” market, meaning affordable insurance was expensive and for many companies and professionals difficult if not impossible to find. Section 831(b) specifically created a powerful tax incentive for the formation and operation of small insurance companies.  It helps US businesses create loss reserves with formalized insurance programs under their control. This tax incentive is valuable to make sure US businesses will hopefully never again find themselves in the disastrous commercial insurance market conditions existing in the mid-1980s that left 1000s of US businesses without adequate protection from or liquidity to survive high severity operational risks.

This section 831(b) election is available to qualifying insurance companies who timely make the necessary election; otherwise applicable taxes dictated by section 831(a) applies to all insurance companies except life insurance companies. All US insurance companies, whether electing 831(b) benefits or not, must file IRS tax form 1120-PC (click here to see the form, or click here to see instructions).

Section 831(b) (2) (A) limits its application only to insurance companies if:

  • The greater of net written premiums or direct written premiums do not exceed $1,200,000 in the taxable year, and
  • Such company elects the application of section 831(b) for such taxable year.

There is some disagreement and confusion on the interpretation of “written premium” in a taxable year. Some believe it is measured on a cash basis reading the statute literally, others think accrual methods control particularly where tax returns are prepared that way. The author does not believe there is yet definitive guidance.

Various Names Used for Small Captives

Increasingly the term “micro-captive” was used to describe these small 831(b) election qualifying captives from 2009 into 2014, hence why it is incorporated into the title of this book. As of 2014 the term “enterprise risk captive,” coined by some of the leadership at SIIA, is emerging as the preferred description. Suffice it to say technically there is no such thing really as a micro-captive, or an 831(b) captive, or even an enterprise risk captive.

Captives are all unique (when designed properly) and are nothing more than an insurance company licensed under an enabling insurance statute in the US or abroad whether large or small and irrespective of the types of insurance coverage it is designed to issue. Being an insurance company for US tax purposes is distinct from being a licensed insurance company for insurance regulatory purposes. Just because your captive receives approval and a license to conduct its insurance business does not mean the IRS must agree it can avail itself of favorable tax incentives and treatment afforded an insurance company under the US Internal Revenue Code.

Learn more by reading this inexpensive eBook – “831(b) Enterprise Risk Micro-Captive Insurance Companies – Design and Tax Planning Guidance.”

Also visit these leading websites: www.UScaptive.com and www.CaptiveExperts.com

For information on best practice standards today in the micro-captive industry, read this article.

Why all 831(b) Micro-Captives Need a Strategic Review

By | Captive Best Practice Standards, Captive strategic reviews | No Comments


Feasibility studies are common in the captive industry as part of the formation process. “Refeasibility study” is a newly coined term meaning taking a fresh look to see if you would make the same decisions now. Frankly “refeasibility” is a silly term. Well managed captives following best practices do a “refeasibility” study at least annually anyway, as part of the “renewal” procedure we recommend and feel should be part of all base management fees. Annual renewals, done correctly, almost invariably lead to business plan changes resulting in modifications to lines of cover and policy rating.


Strategic reviews go beyond feasibility, refeasibility or annual renewal procedure studies. For one they should be conducted by a fresh pair of eyes. And they should have a scope beyond an actuarial peer review.

Strategic reviews should look at all existing documentation, including processes and procedures, financial condition, reports (financial, regulatory and tax), contractual relationships, everything available relating to the captive since inception, and identifies all weaknesses and areas needing improvement. A strategic review’s main objective is to identify any potential problem areas that might arise during a regulatory or tax examination of the captive.

The reason strategic reviews are not common is captive managers guard their processes and procedures and documentation very closely. They do so out of competitive spirit as well as insecurity.

Owners of captives should be the one making a decision to hire someone to do a voluntary strategic review, and demand the manager cooperate and provide all needed documentation if not already in the owner’s possession (as it should be via shared secure dedicated server or a cloud storage service facility).


The slowest time of year for most captive managers seems to be the June through August time period. This would be a good time to conduct a strategic review. This would also seem allow sufficient time to address any findings of concern by year end.


Every strategic review engagement is uniquely customized. The exact scope should be articulated in the engagement agreement.

We have done general “clean up” testing strategic reviews for captive managers which merely involved reviewing client databases to see if core documentation connected to formations was properly stored and easily retrieved in client files. Deficiencies are not uncommon from the early years as a manager since many managers in their early years lacked staff depth and expertise compared to today. Earlier year client project files are often not documented to the same degree of quality and scope as more recent captive project may be. This type of strategic review helps bring older client captive documentation standards up to current practice standards if possible. Many management firms have grown fast and are busy; full time internal staff often simply lack time, or expertise, to do this type of special project work.

We recommend every strategic review initiated by an owner (verses by the management firm to get a second and outside opinion on the quality of their program and staff work product) consider having part of its scope be development of a RFQ (Request For Quote) component if the owner is considering either changing managers (possibly creating a new captive and winding down an old one no longer deemed adequate for any of many reasons that may surface during a strategic review) or looking for engagement renewal negotiation strength.

For information on best practice standards today in the micro-captive industry, read this article.

For more information visit www.UScaptive.com and www.CaptiveExperts.com

Economic Substance Test of US Internal Revenue Code – Captive Insurance Impacts

By | Captive Taxation | No Comments

Due to the significant tax incentives afforded properly designed and operated insurance companies, the IRS is increasingly concerned many owners may have a primary tax savings, not risk management business objective, in forming small closely help captives. It is expected the IRS examiners will start to use the newly codified economic substance test and related penalties in audits of captives they feel are not designed and operated correctly or for the right business reasons. Click here to view the IRS website and form guidance on this new codified test.

Best Practice Standard Guidance for 831(b) Micro-Captives – CICA Guidance Press Release

By | Captive Best Practice Standards, Captive Claims Management, Captive Formation and Management | No Comments

On August 25, 2015, CICA, the leading US captive insurance association, issued a press release with additional guidance on how to do small 831(b) micro-captive programs right. Click here to review the press release and best practice guidance memo. Click here for information on purchasing CICA’s full practice standards guidance report.

Our captive programs meet or exceed all of these practice standard guidance. In fact our Managing Director helped establish these best practice standards when he worked at the executive level with several of the top US captive managers, and authored an article in 2014 published by Captive Review on best practice standards. Read his article by clicking here, as it has far more detailed guidance than the CICA guidelines. Click here to read an in depth article on claims handling best practice standards.

We at Captive Experts are thrilled to see this pro-active trend to improve practice standards by other managers to help protect the long-term viability and reputation of the micro-captive industry.

For more detail on Captive Experts’ turnkey captive design, formation and management best practice standards and procedures, click here.