experience and any surplus in the insurance program. Third, the insured business can achieve potential tax advantages by deducting premiums paid to the captive as ordinary business expenses, subject to meeting certain IRS requirements. Lastly, the captive allows the insured business and its shareholders to retain and invest underwriting profits that would otherwise be
paid to external insurers. 2) Single-Parent Captive
The single-parent captive denotes an insurance firm that is exclusively owned by a solitary corporation, commonly the one being insured. Its purpose is to facilitate the transfer of risks or provide financial support for a specific category of coverage within the corporation. Typically, it lacks the authorization to underwrite insurance for entities beyond its own risks within a specific jurisdiction. A single-parent captive is frequently employed to directly provide coverage, if permitted, or to act as reinsurance for traditional primary insurers. It is commonly used for reinsuring workers’ compensation programs and increasingly for property insurance, directors’ and officers’ liability, and terrorism. As the captive functions as a corporation, careful attention must be given to the selection of owners, directors, and officers. Most domiciles allow the standard C-type corporation as the acceptable form, although some domiciles permit limited liability structures, and a few may even allow a structure resembling an S-corp. Oftentimes, the parent company itself possesses the shares. Here are 4 components typically involved in the single-parent structure: 1. Parent company a. The parent company is the entity that forms and owns the captive insurance subsidiary. It sets up the captive as a subsidiary to provide insurance coverage for the risks faced by the parent company and its affiliated entities. The parent company has the ultimate control and oversight over the captive and its operations. 2. Captive insurance company a. The captive insurance company is a separate legal entity created by the parent company. Its primary purpose is to provide insurance coverage exclusively to the risks of the parent company and affiliations. By establishing a captive, the parent company retains more control over its insurance program, including customizing coverage, setting premiums, and managing claims. The captive allows the parent company to retain underwriting profits and gain more flexibility in risk management. 3. Affiliated entities a. Affiliated entities are other organizations or subsidiaries related to the parent company. In a captive arrangement, the captive insurance company provides insurance coverage to these affiliated entities as well. This can include subsidiaries, divisions, or other entities that have a relationship with the parent company. By including the affiliated entities in the captive arrangement, the
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