A captive insurance company is a subsidiary established by one or more commonly-owned businesses to insure the risks of the controlling entity and/or its affiliates or its individual owners. Businesses have been using captives for decades as a risk management tool. There are in excess of 5,000 captives, including group and cell captives, established in various domiciles throughout the world for the benefit of all types of industries.
Like any other insurance company, self insurance is subject to regulation. A captive will be subject to the same corporate governance matters as other subsidiaries in the consolidated group, including establishing a sound business plan.
One of the primary goals of a captive insurance company is to provide improved risk management for an organization. Some of the risk management benefits that a captive insurance company can achieve:
The captive insurance company must be capitalized. In order for the captive to have an impact on the corporate group, it requires a material amount of capital and premium funding. As a result, there may be an opportunity cost associated with lower yield captive investments vs. higher parent “hurdle” rate (ROI).
The following are characteristics of companies where a captive insurance company may be beneficial to the organization:
The tax status of the captive insurance company for U.S. federal income tax purposes is an important consideration. If the captive qualifies as an insurance company for U.S. federal income tax purposes, then premium paid to the captive is tax deductible by the insured entity, and the captive is allowed favorable tax treatment under Subchapter L of the Internal Revenue Code.
Successful captive operations need to be thoroughly researched and properly planned. Every client has different needs; consequently every captive structure is different. Maximizing the benefits to be gained from your captive means understanding and responding to the various business needs and concerns within your organization. To do this effectively, you need a service provider with a broad range of skills.
PwC has a proven track record of delivering high-quality captive insurance solutions throughout the Captive Lifecycle. What differentiates us is a multi-disciplinary team that can provide access to risk management, actuarial, tax (US federal, state and international), regulatory and accounting professionals. We can assist you with all aspects of the captive establishment process including:
While the Internal Revenue Service has accepted the use and role of captive insurance arrangements as an integral part of a comprehensive risk management strategy, they continue to challenge captive insurance arrangements which fail to comply with the principles and guidelines established by the courts in defining "insurance" for US federal income tax purposes. In response, PwC has developed a comprehensive Captive Health Check to assist companies in assessing how their captive insurance arrangements stand up against these principles and guidelines and to serve as a platform for identifying best practices and possible enhancements to improve the captive's financial benefits.
First – most corporations change over a period of 5 or 10 years. They acquire companies, dispose of companies, start and end lines of business. Their structures and operations change over time. These changes can provide new opportunities for enhanced risk management and tax benefits.
Second - substantial changes have occurred in the tax landscape dealing with captive insurance companies. The Service has issued a number of Revenue Rulings setting out what it believes are the requisite fact patterns for a valid captive insurance arrangement, and more recently the Tax Court has examined captive insurance arrangements and further clarified the requirements for a valid captive insurance arrangement.
The Captive Health Check provides the captive owner with an experienced overview of the structural and functional aspects of their captive insurance company and is designed to provide the captive owner with a range of benefits, including:
Many companies seek to rationalize their captive arrangements and release capital or simply seek to exit third party lines of business to enable their captive insurance affiliates to focus on core group insurances.
Restructuring and rationalization of captive arrangements can mitigate exposures to legacy liabilities, generate cost savings and financial value through:
PwC can assist clients in reorganizing their captive insurance arrangements in the following ways:
Our Captive Practice is geared to meeting the needs of our clients and their stakeholders. Our leading insurance industry expertise and captive specialization allows our professionals to focus on helping you resolve your business issues. We can help you make it all work. We have excellent working relationships with the major domicile regulators and captive management companies and are accustomed to helping you meet the demands of corporate timetables and objectives.
Partner and National Captive Leader, PwC US
Tel: +1 (202) 414 1702
Director, PwC US
Tel: +1 (314) 206 8175
Partner, Tax Services, PwC US
Tel: +1 (441) 299 7136