Micro Captive Insurance

What is Micro Captive Insurance?

Micro Captives Insurance is a form of self-insurance where an organization creates its own insurance company, known as a captive, to finance its risks, provided the insured anticipates paying annual premiums of $2.3 million or less. These captive companies are regulated like traditional insurers and must adhere to specific rules. A “Micro Captive” can take advantage of the 831(b) section in the US tax code, allowing them to pay tax only on their investment income, not their underwriting income, providing potential tax benefits. For this reason, Micro Captives are also known as “831Bs.”

What Specific Insurance are Micro Captives set up to Cover?

Micro Captive Insurance can cover a broad range of risks. The specifics depend on the needs and risk profile of the organization setting up the captive. For healthcare and senior living facilities, micro captives may cover professional liability, general liability, business interruption, employee benefits, and even some more unusual risks that traditional insurers might not cover.

What Kind of Organizations is Micro Captive Insurance Suited to?

Micro Captive Insurance is particularly suited to mid-sized organizations with estimated annual premiums of $2.3 million or less and a willingness to take on the responsibility of managing their own insurance. Micro-captives are not suitable for growing organizations who anticipate their premiums to exceed $2.3 million annually, within five years or less. That would require the insured to set up a different form of Captive after a short time, as they would no longer be covered by the 832(b) taxation clause. 

Healthcare and senior living facilities, which often face diverse and significant risks, can benefit significantly from the flexibility and potential cost savings that a micro captive can provide. It’s particularly advantageous for organizations that have a good risk management strategy in place and are willing to invest in reducing their risks over time

What are the Benefits of Micro Captives?

Micro Captive Insurance offers several significant benefits, making them an attractive option for many organizations, particularly healthcare and senior living facilities.

Cost Savings

By self-insuring, organizations can potentially save on insurance costs over the long term. The tax benefits associated with micro captives under the 831(b) election can also contribute to these cost savings. Since the captive is owned by the parent organization, any underwriting profits or interest-earning money can be retained within the organization.

Improved Risk Awareness and Management

With micro captive insurance, organizations assume responsibility for their own risks, which often results in a heightened awareness of those risks. This can lead to a more proactive approach to risk management, with an emphasis on reducing losses rather than simply insuring against them. The conversation shifts from “how much will risk management programs cost” to “how much can they save us in claims.”

Better Safety Outcomes

By placing a greater focus on risk management, micro captives can lead to improved safety outcomes. For healthcare and senior living facilities, this can translate to safer environments for patients and residents, reduced incidences of harm, and ultimately fewer claims.

Greater Control and Flexibility

Because micro captives are owned and managed by the parent organization, they offer a high degree of control and flexibility. Organizations can customize their insurance programs to meet their unique needs, cover risks that traditional insurers might not, and adapt quickly to changes in their risk landscape.

The Specific Tax benefits of Micro Captives

The tax benefits of setting up a micro-captive can be substantial, but they are also subject to complex regulations and scrutiny. In the United States, the most commonly cited tax advantage is outlined under Section 831(b) of the Internal Revenue Code.

Here’s a breakdown of some of the key tax benefits:

Premium Income Exclusion

Under Section 831(b), a micro-captive can receive up to $2.3 million in annual premiums without paying federal income tax on those premiums. This allows the captive to accumulate reserves more rapidly, providing enhanced financial stability and potential for investment growth.

Deductible Premium Payments

The premiums paid by the parent company (or other insured affiliates) to the micro-captive are generally tax-deductible as an ordinary business expense. This can help offset the taxable income of the parent company, leading to overall tax savings.

Favorable Investment Taxation

Although the micro-captive is taxed on its investment income, the absence of tax on premium income allows for a larger pool of funds to be invested. This potentially enhances the yield from these investments even after taxation.

Estate Planning Benefits

Ownership of the micro-captive can be structured in a way that offers estate planning benefits. For example, shares in the captive could be owned by a trust, facilitating an efficient transfer of wealth between generations with potential tax advantages.

Flexibility in Profit Distribution

Profits from the micro-captive can be distributed in a tax-efficient manner, such as through dividends, which may be subject to a lower tax rate than ordinary income for individual shareholders.

State-Level Benefits

Some states offer additional tax incentives for captives domiciled within their jurisdictions, providing further financial advantages for the micro-captive and its owners.

When helping set up a micro captive, Westwood will typically consult with legal and tax advisors who specialize in captive insurance to ensure compliance with all regulations. The Internal Revenue Service (IRS) closely scrutinizes micro-captives to ensure they are not merely tax shelters masquerading as insurance companies. Proper underwriting, risk distribution, and claims handling procedures must be in place to stand up to regulatory scrutiny. Failure to meet these criteria could result in the loss of tax benefits and potential penalties.