Tax deferral today to address tomorrow's risks. A captive lets successful businesses own their insurance — and benefit from its underwriting profits.
A "captive insurer" is an insurance company that is wholly owned and controlled by its insureds. Its primary purpose is to insure the risks of its owners — who, in turn, benefit from the captive's underwriting profits.
Any business that purchases captive insurance must be willing and able to invest its own resources. In exchange, the insured gains not only ownership in and control of the company, but also a direct stake in its profitability. It is, in effect, a way for a successful business to formalize and capitalize the self-insurance it is already doing informally.
IRC Section 831(b) allows qualifying mid-sized businesses to grow their balance sheets more quickly to support the risks of their owners. This provision fueled rapid growth in captive insurance among mid-sized companies seeking both risk management and strategic tax deferral.
Captive structures make it possible for any successful business to access the same risk-mitigation tools long used by the largest corporations. Traditional insurance often comes with high deductibles, exclusions, and coverage limitations that leave businesses exposed. A captive can wrap around those gaps.
Captive programs can be built around a wide range of real, insurable business risks, including:
A safety net that wraps around existing policies to cover deductibles, exclusions, and otherwise uncovered perils — keeping operations and cash flow resilient when gaps would otherwise appear.
Allows companies to accumulate tax-deferred reserves to fund the deductibles they would otherwise absorb out of operating cash.
Custom warranty and contract-default liability programs let businesses formally manage risks tied to the specific products and contracts they offer.
Bolt-on programs — from storage and tenant assurance to medical and dental protection plans — stabilize risk in specialized industries.
831(b) plans carry real compliance obligations. Thornwood works with an experienced plan administrator whose services span initial plan design, preparation of plan documents and policies, transaction approvals, solvency testing, compliance filings (Forms 8886, 1099-D, and meeting minutes), tax-return preparation, and audit support. A well-run captive is, first and foremost, a well-administered one.
