Increase Control, Reduce Costs
Captive insurance refers to a subsidiary corporation established to provide insurance to the parent company and its affiliates. A captive insurance company represents an option for many corporations and groups that want to take financial control and manage risks by underwriting their own insurance rather than paying premiums to third-party insurers. The advantages of going captive are:
- Coverage tailored to meet your needs
- Reduced operating costs
- Improved cash flow
- Increased coverage and capacity
- Investment income to fund losses
- Direct access to wholesale reinsurance markets
- Funding and underwriting flexibility
- Greater control over claims
- Smaller deductibles for operating units
- Additional negotiating leverage with underwriters
- Incentives for loss control
- Alternatives to the costly practice of trading dollars with underwriters in the working layers of risk
The Vermont Regulatory Advantage
Over 1,300 companies have already realized the advantages of captive insurance operations licensed in Vermont. In fact, for several years now, Vermont has ranked as the number one captive domicile in the United States and in 2022 became the number one-ranked domicile internationally.
Vermont’s success to date can be attributed to a combination of factors, not the least of which is the ongoing leadership of Vermont’s Governors, both past and present, and both houses of the State Legislature who continue to uphold Vermont’s longstanding tradition of providing solid support for this state’s captive industry. This fact ensures that as captive industry needs change, captive legislation in this state evolves and is further enhanced with timely and meaningful changes made to Vermont captive law.
Vermont continues to be recognized as a quality domicile by captive owners, brokers, regulators, and others in the industry due to its high level of professionalism. An ever-increasing number of companies are further recognizing Vermont as their captive insurance domicile of choice.
The Benefits of Vermont's 1981 "Special Insurer Act" and the Changes Beyond
In 1981, Vermont realized the potential benefits of attracting captive insurance companies and passed legislation providing the appropriate regulatory and taxation environment. The objective of the legislation was to establish a business friendly climate for companies forming captive insurance operations in Vermont. The law permitted:
- Creation of single parent, association and group captives
- Reasonable capitalization requirements that may be met with a letter of credit
- Coverage of nearly all commercial lines, including excess workers' compensation, directors and officers liability, plus property and casualty insurance
- No approval of rates and forms required
- No minimum premiums required
- No investment restrictions for pure captives
- Favorable premium tax structure
Over the succeeding years, many changes were made to Vermont captive law to both enhance it and to meet the evolving needs of the captive industry.
Numerous amendments were adopted through 2003, when the entire body of Vermont captive law was recodified to streamline pertinent amended statute and to make it more cohesive as well as a more easily accessible body of law. Recodified changes: adopted the Liability Risk Retention Act; permitted fiscal year reporting; added employee benefits and life and health to permitted lines of business, and, for the second time since captive law was adopted, allowed for a significant reduction in captive premium taxes. Other changes permitted reciprocal captives, gave pure captives the ability to insure controlled unaffiliated businesses, increased confidentiality of captive financial records, allowed branch captive formation, and, permitted sponsored captives and the licensing of branch offices of offshore captives.
Fine-tuning Continues
More recent refinements to Vermont captive statute since the 2003 recodification:
- Permitted captives to form as limited liability corporations
- Streamlined the process to convert a for-profit captive to a non-profit captive
- Established requirements and guidelines to form and operate special purpose financialinsurance companies to facilitate securitization transactions and other risk financing structures, including financing Triple-X and AXXX reserve requirements
- Clarified the rules for consolidating captives for premium tax purposes
- Expanded the definition of persons qualified as sponsors of sponsored captive insurers.
Two “housekeeping” bills, one in 2008 and another in 2009, further fine-tuned various sections of captive statute. The 2008 bill created a more flexible approval process for the use of letters of credit for captive capitalization, set more appropriate financial security standards of the “attorney in fact” of a reciprocal captive company, streamlined the process for the merger or conversion of existing captives to preclude required filings of redundant or unnecessary information, and made additional improvements to the Special Purpose Financial Insurance Company statutes.
While 2009 saw adoption of a premium tax credit for new captives formed in the latter half of 2009, and throughout 2010, the permitted use of International Financial Reporting Standards, and enhancements to the statutes governing sponsored captives.
Vermont will continue to strive to improve and enhance the captive insurance company operating environment through both its innovation and deep understanding of captive insurer risk transfer needs.
Learn more from the Vermont Agency of Commerce and Community Development of the benefits of becoming a Vermont Captive.
FAQs
New Jersey's Captive Insurance Law provides opportunities for businesses to manage the costs of insuring their operations by forming a captive insurance company to assume some of their own risk. A captive insurance company can be an effective alternative to seeking insurance in the commercial market.
What are the advantages of captive insurance program? ›
Increased coverage and capacity. Investment income to fund losses. Direct access to wholesale reinsurance markets. Funding and underwriting flexibility.
Which of the following is a potential benefit of a captive insurer? ›
Reduced operating costs long-term. May produce underwriting profits and investment income. Provides direct access to reinsurance markets. Tax deduction for the parent company for the insurance premium paid to the captive.
What are the tax advantages of a captive? ›
Captive insurance can have legitimate tax benefits for business owners. Premiums paid to a captive insurer can be tax-deductible if the arrangement meets certain risk-distribution standards. Thus, the business gets a current year write-off even though losses may never occur.
What is the disadvantage of captive insurance? ›
Cons of a Captive Insurance Plan
Increased risk – With a captive, the owner-insureds put their own capital at risk. If a company experiences a high number of claims, that capital could be lost. This is why it's important to have robust risk management policies.
Why would a company create a captive insurer? ›
A company with a favorable claims history may be a prime candidate to establish a captive to avoid subsidizing other insured businesses with less favorable claims experience. Also, captive companies put greater emphasis on controlling claims costs since they benefit directly.
What is the need for captive insurance? ›
Because captive insurance inherently offers financial rewards for effectively controlling losses, safety and loss control get a higher level of attention. The underwriting profits and gains from the invested premiums that would otherwise be held by a conventional insurer are retained by the captive.
How do captive insurance companies make money? ›
Premiums are the main source of income for a captive. At the onset, it may be more desirable to take a conservative view in premium funding to build sufficient capital such that the captive is able to pay claims and withstand unforeseen events.
What is the main objective of forming a captive insurer? ›
A captive insurance company represents an option for many corporations and groups that want to take financial control and manage risks by underwriting their own insurance rather than paying premiums to third-party insurers.
What is the difference between captive insurance and regular insurance? ›
Traditional insurance plans are designed to cover as many people as possible. But these plans tend to be generic and their coverage can be limited to only certain types of risk. On the other hand, captive insurance provides increased flexibility and customization.
Under US tax law, every captive insurance company is taxed as a C corporation, regardless of the form of entity (for instance, an LLC is generally taxed as a 'pass through' entity by default, but not if it is an insurance company). This is often a surprise to those who are unfamiliar with captive insurance taxation.
Are captive insurance dividends taxable? ›
Investment income is taxable to the captive insurance company at graduated corporate rates. Dividends distributed from the captive, if any, should be taxed at long-term capital gains rates as a qualifying dividend. Please check with your independent tax advisor for your own specific circ*mstances.
Are captive insurance companies legal? ›
A captive may not be considered a legal insurance company by the IRS and may face consequences if it fails to underwrite coverage properly, charges excess premiums without justification, and shares limited or no risk with third parties through reinsurance. Reasonable risk and proper insurance contracts must also exist.
What are the benefits of a captive? ›
Reasons To Form a Captive Insurance Company
- Reduced Reliance on Commercial Insurance. ...
- Reduction of the Costs of Risk Management. ...
- Stabilization of Pricing. ...
- Provision of Cover Where Otherwise Unavailable. ...
- Access to Reinsurance Markets. ...
- Improved Cash Flow Benefits. ...
- Reduction of Government Regulations and Interference.
Marsh Captive Solutions was the world's largest captive insurance company manager in 2022, with 1,567 captives under management, according to a new Business Insurance survey.
How many Fortune 500 companies have captive insurance companies? ›
While 90% of the Fortune 500 have one or more captive insurance companies, less than 5% of the 10,000 or more successful smaller to mid-market US based companies have yet to learn about the benefits of captives.
What are the advantages of captive model? ›
The advantages of going captive are:
Reduced operating costs. Improved cash flow. Increased coverage and capacity. Investment income to fund losses.
What are the benefits of being a captive agent? ›
Captive agents are usually paid a salary and commission and are provided with benefits. The advantages of being a captive agent include the benefits of working for a company, such as administrative tasks, a national advertising budget, and a client list.
What are the benefits of captive shared services? ›
Further benefits are that operational costs are minimized due to economies of scale while ensuring data quality and ownership. As the services remain within the company, the firm can set and control its own quality standards. The captive solution also has the benefit of protecting the company`s organizational culture.
