History of Captive Insurance Companies
The concept of establishing an insurance company to handle some of the insurable risks of a small group of business entities is not a new idea, whether you look at the United States or foreign locations. In fact, Allstate Insurance Company was originally created to operate as a captive insurance company for Sears, Roebuck & Co. back in 1931. Most of the Fortune 500 companies have already established captives and have been operating them successfully for many years. The same is true for European countries and Caribbean nations.
A legislative change occurred which made the captive insurance company concept attractive to much smaller business groups. This was the enactment of Internal Revenue Code Section 831(b) as part of the Tax Reform Act of 1986. This provision allows “small” property and casualty insurance companies to “elect” to be exempt from taxation on its insurance premiums as long as its premium income for the year does not exceed $1,200,000. Such an electing entity will be subject to regular corporate tax on its investment income only.
This highly favorable tax provision has been the impetus for the creation of a type of insurance company known as an “831(b) captive” or “mini-captive”. Since enactment, Congress has discussed the possibility of increasing that $1.2 million exemption, however that has not yet occurred.