Captive Insurance Programs - Captive 101

Captive Insurance Introduction


Captive Insurance Company:
One which is owned by the insured.

For years, large companies have used alternative risk transfer strategies to reduce insurance costs, lower their risk profiles, and optimize tax savings. Thanks to Roundstone’s captive management services and group captive programs, these benefits are now available to agencies, middle market companies, and groups & associations.

An organization can realize many benefits by using a captive but each one comes down to a greater degree of control. When you establish a captive, YOU control costs, YOU control cash flow, YOU control claims, and YOU control risk.

History Of Captives

Captive Insurance Programs

A Short History...

In the early 1500s, ship owners retained, shared, and transferred the cost of risks associated with their ships. Fast forward 300 years to a group of New England textile manufacturers who formed a group captive in response to the high fire insurance rates of the period.

In 1935, Mahoning Insurance Company was established by Youngstown Sheet & Tube Company. At about the same time the U.S. manufacturer of Lifesavers candy determined that a wholly owned offshore risk-funding company could provide significant benefits to its parent; and it created that company in Bermuda.

In the 1960s, Bermuda became an offshore financial center where many companies formed captives to take advantage of the Exempted Undertaking Tax Protection Act of 1966. By 1978, Bermuda had formalized its captive licensing and oversight process in The Insurance Act.

The hard market of the 1980s resulted in the unavailability or drastic price increase of certain lines of insurance for major corporations, large cities, and not-for-profit organizations. This market hardening created the captive movement as we know it today. Hundreds of captives were created in the late 1980s, and that trend continues in spite of a commercial market that has never been softer.

Today, the number of captives and/or cells in existence worldwide is approximately 5,000, with more than $60,000,000,000 in premiums, domiciled in more than 70 marketplaces and used by almost 50% of the Fortune 500. Over 90% of Fortune 1000 companies have captives and an estimated 50% of all property and casualty premiums are written through captives.

Introduction |   History  |  Types of Captives  |  Steps in Forming  |  IRS Rulings


Types of Captives

Captive Insurance Company:

Very simply, a captive is a closely held insurance company whose insurance business is primarily supplied and controlled by owners, and in which the original insureds are the principal beneficiaries. The insureds have direct involvement and influence over the company's or group's major operations, including underwriting, claims, management policy, and investments. There are currently over 4,000 captives licensed worldwide serving their parents' risk financing needs. In Vermont, that figure is 754 (as of December 2005).

Single-Owner Captive:

Also referred to as "pure captive," a single-owner captive insures only the risks of the owner or the owner's subsidiary operations.

Group Captive:

A group captive is owned by multiple, non-related organizations and is designed to insure the risks of these different entities.

Association Captive:

An association captive is owned by members of a common industry or trade association in order to share the risks of that industry among its members.

Agency Captive:

An agency captive is owned by one or more independent insurance agents to write business they control or wholesale.


A composite is created when an insurance company writes a combination of long term (or life) business and general business.

Risk Retention Group:

A risk retention group is an entity created under the federal Liability Risk Retention Act and licensed in any one state to write liability insurance. It is regulated as a captive insurance company and may operate nationwide, provided it properly registers with each state in which it proposes to solicit or write insurance.

Health Care Captive:

A health care captive is owned by a hospital or health maintenance organization and writes the risk of its owners and/or affiliates.


A reciprocal captive is an unincorporated association. Reciprocal insurance is that which results from an interchange among subscribers of reciprocal agreements of indemnity, where the interchange is effectuated through an attorney-in-fact common to all subscribers.


A Rent-A-Captive is owned by unrelated persons who provide captive facilities to others for a fee.

Sponsored Captive:

A sponsored captive is one that uses the capital provided by an insurer or reinsurer while providing fronted insurance coverage to discrete and usually unrelated entities. The sponsored captive can be either a licensed insurer, an authorized reinsurer, or a fronted captive insurer (but not a risk retention group).

Branch Captive:

A branch captive is a unit of an existing offshore (alien) captive, currently licensed in Vermont to write employee benefit business for its owners and affiliates onshore. The branch is regulated as a pure captive, is taxed only on the branch writings and is required to use an onshore trust for the protection of US policyholders and ceding insurers.

Direct Write:

Captive where admitted coverage is not required. Captive issues policies, administers claims, and retains risk.

Introduction |   History  |  Types of Captives  |  Steps in Forming  |  IRS Rulings


Steps in Forming

Captive Insurance Company Start-Up & Management Services

Step 1: Call Roundstone!

Why deal with other captive management firms who charge high fees just to get started? There are NO upfront fees when you choose Roundstone's Captive8 turnkey program design. The captive organization process is not as complicated as some may lead you to believe—but you do need an experienced partner to guide you. Below you'll find information about Roundstone' s cost and fee structure, as well as an outline of the steps that we'll take to organize your captive.

Captive Start-Up Costs

So how much does it cost to organize a captive? The short answer: It's FREE with us.
The long answer:

Roundstone does not charge any start-up fees organize your captive. Some captive managers charge up-front organizational fees regardless of program implementation ($175 – $250,000). This approach allows other captive managers to make money regardless of the programs' implementation or success. Roundstone's approach aligns our organization's financial incentive with yours. We are fully vested in the success of the program as we do not get paid until premium is ceded into your captive facility.

Program Management

The captive participants cost-effectively gain access to our experience and expertise in developing and managing proprietary captive products. Our program management fees encompass the following services.

Captive Development Services
Client Consultation
  1. Determine the Insureds' current risk and existing coverages.
  2. Determine whether a captive strategy makes sense
  3. Determine the type of captive program that is most appropriate.
  4. Determine whether the Insured is better off in the standard market?

Feasibility Study
  1. Business Purpose
      a. Types of coverages
      b. Risk Takers/Reinsurers
        i. How much Risk?
      c. Structure (agency, association, single parent, group, etc.)
  2. Data Collection
  3. Data Review and Submission
  4. Actuarial Report

Carrier Submission
  1. Business Plan
      a. Coverage Lines, Limits, Deductibles, Rates, Forms, Filings, Reinsurance Treaties
      b. Fronting Carrier Requirements (eg. AM Best A, Level X or higher)
      c. Marketing of Program
        i. Provide Captive Sales Training
        ii. Provide Captive Marketing Materials
        iii. Provide Captive Sales Consultation as needed during to the presentation to the Insureds
      d. Underwriting Guidelines

Captive Insurance Company Start-Up & Management Services
  1. Services
      a. Executive Summary
      b. Description of Market Stress or Unique Offering
      c. Financial Performance Modeling
        i. Historical
        ii. Future
  2. Selection of Services Providers
      a. Claims
      b. Underwriting
      c. Policy Administration
      d. Loss Control
      e. Fronting/Primary
      c. Policy Administration
        i. Collateral Requirements (eg. stacking, attachment point, amount)
        ii. Expense Negotiation
      f. Specific and Aggregate Reinsurance a. Agreement Drafting and Execution
  3. Incorporating and Licensing
      a. Domicile Selection
      b. Facility Type Selection
      c. Prepare and File Plan with Regulators
      d. Pay all registration, application, licensing, annual report and regulatory fees
      e. Open Cell, Bank Account, and Investment Account
  4. Investment Strategy
  5. Participant/Shareholder Agreement Drafting and Execution
  6. Determine Financial Reporting Mechanisms

Introduction |   History  |  Types of Captives  |  Steps in Forming  |  IRS Rulings


IRS Rulings

What does all this 831(b) stuff mean?

An 831(b) is a small insurance company to be taxed on its investment income only, so long as the company receives less than $1.2 million in premium each year.

Read about Section 831(b) on the IRS website:

Read IRS Section 831

What does all this 953(d) stuff mean?

A 953(d) is a foreign insurer is treated as a domestic US corporation, as opposed to a a foreign corporation, for US tax purposes

Read about Section 953(d) on the IRS website:

Read IRS Section 953.

What does Revenue Ruling 2002-89 mean?

Guidance regarding the Risk Sharing and Risk Distribution between parent corporation and wholly-owned captive insurance subsidiary. More than 50% of risk must be derived from a Non-Parent and the books are run separately.

What does Revenue Ruling 2002-90 mean?

Guidance regarding the Risk Sharing and Risk Distribution between parent holding company (forms a wholly-owned captive) and insures the operating subsidiaries . Premiums charged to subsidiaries are arm's-length.

What does Revenue Ruling 2002-91 mean?

Guidance regarding Risk Sharing and Risk Distribution in Group Captives. Rule of 15%, No member can own more than 15% or have more than 15% of risk. At least 7 members are required.

Read about ruling 89-91 on the IRS website:

Read IRS Bulletin 2002-52.

What does Revenue Procedure 2002-75 mean?

Guidance on IRS issuing private letter rulings

Read about revenue procedure 2002-75.

What does the Liability Risk Retention Act mean?

A federal law created to help business and municipalities insure their liability coverages via Risk Retention Groups (risk taking entities) or Purchasing Groups (non risk taking entities). The federal law preempts state regulatory requirements.


Read the Liability Risk Retention Act


Introduction |   History  |  Types of Captives  |  Steps in Forming  |  IRS Rulings