COOPERS&LYBRAND NEWSLETTER FEBRUARY 1978 - Captive Insurance Companies - Advent of the Captive - Why and Wherefores

Sep 29, 2026

Newsletter issue February 1978 explains captive insurance companies as an alternative to commercial insurance and self-insurance for corporations seeking coverage and tax-efficient treatment of premiums. It describes why businesses increasingly move to captives amid inflation, higher insurance rates and deductibles, “social inflation” from legislation and court actions, and growing liability exposure. The report contrasts onshore and offshore captives, outlines key definitions and classifications, and summarizes major tax considerations affecting offshore structures, including Subpart F and withholding/excise tax themes.

LanguageEnglish

CategoryResearch & Report

FormatPDF

Pages13

Reading Time33 min

AccessFree to download

CAPTIVE INSURANCE COMPANIES

ADVENT OF THE CAPTIVE

Whys and Wherefores

What Is a Captive?

ONSHORE VS.OFFSHORE CAPTIVES

QUESTIONS AND ANSWERS

U.S. Taxation of an Offshore Company

Subpart F Income Rules

Withholding and Excise Taxes

Service Challenge and Rebuttal Arguments

Questions Unanswered by the Service

A VIABLE INSURANCE ALTERNATIVE

COOPERS&LYBRAND NEWSLETTER FEBRUARY 1978 COOPERS&LYBRAND Newsletter EDITOR:MORTON MEYERSON □ Copyright 1978 by Coopers&Lybrand # CAPTIVE INSURANCE COMPANIES□ Contents ADVENT OF THE CAPTIVE□1Whys and Wherefores□ 1What Is a Captive?□ 2 ONSHORE VS.OFFSHORE CAPTIVES□ 3QUESTIONS AND ANSWERS□ 4U.S.Taxation of an Offshore Company□ 4Subpart F Income Rules□4Withholding and Excise Taxes□6Service Challenge and Rebuttal Arguments□ 7Questions Unanswered by the Service□ 8A VIABLE INSURANCE ALTERNATIVE□8 # ADVENT OF THE CAPTIVE Corporate management has been increasingly confronted with the problem of howbest to obtain coverage to satisfy company insurance requirements.Traditionally,the choices have been either commercial insurance or self-insurance.In recentyears,however,a third course has gained many business adherents—the captiveinsurance company.Broadly,a captive insurance company is an entity created andcontrolled by a parent whose main purpose is to provide insurance for that parent.Captives are not to be confused with self-insurance;in the latter mode,no separateentity is formed and no premium monies change hands. Captives can be attractive because they offer an alternative to the commercialmarket,and because of certain taxbenefits that may be available.However,they arefar from an unalloyed boon.Their feasibility varies from company to company,andmore importantly,the IRS position could deny captives some of theirmost appealingtax advantages.In any case,before rushing to judgment,businesses facing an insur-ance decision would bewell advised to study carefully the pros and cons of captives.This report aims to assist in the analysis ofthe taxconsequences relating to captives. # Whys and Wherefores The move to captives is ultimately attributable to the current economic and socialenvironment.Swept along by the general inflation,insurance rates and deductibleshave steadily soared,reflecting the growing cost of making an insured whole for its losses.This economic inflation has been exacerbated by"social inflation"stemmingfrom legislative and court actions:Commercial insurers have from time to time beenrequired by statute to insure essentially uninsurable risks,and have passed the costsof doing so on to their customers.They are also hurting from mammoth damageawards in negligence cases.Adding to the malaise is the possibility of class actionfor product liability—a new threat that insurers must anticipate in their rates anddeductibles.As a consequence of these factors,some businesses have found thatcoverage with a commercial carrier may no longer be economically feasible. A captive insurer permits placement of risks that a commercial insurer may refuseto assume.Moreover,a captive may be able to insure selected risks at reduced costs,reflecting its anticipated favorable experience.Captives also provide some businessadvantages not offered by using commercial carriers,notably effective risk man-agement.And although premiums are paid to a separate entity,they neverthelessremain within the corporate group.In contrast to self-insurance,a captive affordsthe group direct access to reinsurance;a reinsurance company operates as theinsurer of other insurance companies.A captive also allows settlement of third-party claims without the insured's direct involvement—as self-insurance does not. Premiums paid to commercial insurers qualify as tax deductions from income be-cause they represent ordinary and necessary business expenses.On the other hand,self-insurance reserves generally offer no deduction.The captive,however,providesits insureds with a basis for deductibility,since premiums are in fact paid to a sepa-rate entity.In addition,as an insurer,a captive would calculate taxable underwrit-ing income only on an earned basis,while deducting losses and expenses,includingestimates of unpaid losses and loss adjustment expenses,as incurred. # What Is a Captive? The term“captive”has been applied to diverse entities—including,loosely,a

FAQs

What is a captive insurance company and how does it differ from self-insurance?

A captive insurance company is an entity created and controlled by a parent primarily to provide insurance for that parent and related affiliates. Unlike self-insurance, it involves a separate entity and premium payments.

Why are businesses increasingly considering captives instead of commercial insurance?

Businesses face rising insurance rates and deductibles driven by inflation and “social inflation,” including legislative and court requirements to cover uninsurable risks and increased negligence-related damage awards. These factors can make commercial coverage economically difficult.

What are the key differences between onshore and offshore captives?

An onshore captive is incorporated domestically and operates in the United States, while an offshore captive is incorporated in a foreign jurisdiction and operates from there, though it may insure U.S. risks. Offshore captives face complex tax rules that may tax certain income without waiting for repatriation.

Sep 29, 2026

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