The Case for Micro Captives

You’ve heard of captive insurance companies before. Or, you at least have a sense of what they are. From what you understand, they are much better than the big commercial firms other businesses use.

And that’s true because a captive is run by the policyholders. They have direct say on the programs offered and the premiums set. In addition, they are also investors in the captive. Therefore, they receive dividends at the end of each quarter.

The “But” of Captives

However, not every business can create their own captive. It’s not due to their desire to establish one. Rather, it’s the initial amount of funds needed to start one. Not only do you need to underwrite claims but you also need to hire a management firm like Captive Resources to make sure it runs properly.

If you’re a small to mid-sized business you may not have this available capital. Luckily, there are a few solutions to get you into the captive world.

Micro Captives

Micro captives are small captive insurance companies that may be taxed by the IRS. As long as they don’t underwrite more than $2.2 million per year, income tax is only paid on investment income. This has become a popular form of captive over the last few years.

Group Captive

Another option is the group captive. Similar companies join together under one management organization to gain the benefits of a captive. Because multiple businesses are involved, the initial investment may be lower.

Determining Your Captive

The first thing to do is contact a captive consulting firm. They will collect your financial data to determine if you can form a single or micro captive or need to join a group. Once that’s done, they will help you get approval for the captive, plan your board, and set things in motion to build policies.

During this entire process don’t be shy in asking questions. Though less complicated than standard insurance, captives have their own idiosyncrasies. Make sure all questions are answered before you start investing any money into the program.

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