Every so often I come across a financial strategy that sounds too good to be true. That was how I felt when I heard about the increased use of captive insurance companies by entrepreneurs and small-business owners.
A captive insurance company is essentially a private insurer that is a wholly owned subsidiary of another company. These captives, as they are called, accept the premiums that the company would have paid to a regular insurer and then cover any claims against the parent company.
If the claims are less than the premium, the captive has made a profit, just as a regular insurance company would. The difference is that the company that set it up benefits, not the insurer.
Fortune 500 companies and large nonprofit organizations, like hospitals and medical schools, have used captives for decades to self-insure against predictable risks, like workers’ compensation or malpractice claims. (The New York Times Company has a captive insurance company called Midtown Insurance Company.)
But in 2002, the Internal Revenue Service issued guidance on how to set up captives to comply with the tax code, and that gave way to a rush to form them, said Jay Adkisson, chairman of the American Bar Association’s committee on captive insurance companies and a former owner of such a company in the British Virgin Islands.Page 1 of 7 | Next Page