Self-insuring is an alternative method of transferring risk and providing insurance. A captive insurance company is designed to insure the risks of its owners while providing them the ability to profit from the premiums they pay to insure themselves.
Owners of a captive insurance company pay insurance premiums in exchange for being insured and these premium payments are held by the captive insurance company, so unlike traditional insurance agreements where an outside insurance company profits from the premiums paid for coverage, the owners of the captive insurance company are the ones that stand to benefit from the arrangement.
A captive insurance company may elect to be classified as a domestic insurance company pursuant to Section 953(d) of the Internal Revenue Code. Owners of the captive insurance company pay premiums in exchange for insurance coverage and receive a tax deduction on their paid premiums and the captive insurance company receives its first $2.2 million of paid premiums tax-free. Each year, the captive insurance company must file a U.S. tax return, however premium income up to the first $2.2 million is exempt from taxation. This means that in 3 years the captive insurance company would be able to deduct a total of $6.6 million in premiums, because of the $2.2 million yearly premium deduction.
Offshore tax havens with an established insurance statutory framework are the prime locales to form a captive insurance company. Aside from the tax benefits, a captive insurer can help you provide self-insurance on risks otherwise not covered by traditional insurers, significantly reduce the cost of insurance premiums and enhance insurance risk management practices. Whenever traditional insurance policies are not available or are priced out of your reach, the captive insurer may be your only viable option. In the U.S. insurers frequently increase rates for coverage or deny coverage without warning. By owning your own offshore captive insurance company, you can insure any risk and have direct access to reinsurance markets.