Caution: Be reasonable and conservative when designing your captive

By February 6, 2015 Uncategorized No Comments

More and more small family owned businesses today want their own captive insurance company. Congressionally approved tax incentives in existence since the 1980s encourage use of small insurance companies to build investment reserves to protect against insurable losses. The IRS does not like the growth in use of micro-captives. They are taking action to stop captive managers who do not do captives for primarily legitimate risk management reasons, and who fail to take required underwriting and actuarial work seriously, thus essentially promoting captive’s as tax shelters to convert income tax liabilities into investment reserves held within a captive insurance company.

It is critically important to properly design and operate your small business captives today and to integrate the captive’s coverage with commercial insurance portfolios when possible. It is also important not to write inflated policy premiums, as many captives have done when no losses occur for several years yet they continue to keep premium levels at very high solvency confidence levels without even doing any additional underwriting and actuarial work after the formation year.

Read this February 2015 IRS release giving clear notice that they intend to object and take corrective action against abusive applications of captive insurance companies.