Over the past 20 years, many small businesses have begun to insure their very own risks by way of a product called "Captive Insurance." Small captives (also referred to as single-parent captives) are insurance companies established by the owners of closely held businesses seeking to insure risks which are either too costly or too hard to insure through the original insurance marketplace. Workers Compensation Insurance Brad Barros, a professional in the field of captive insurance, explains how "all captives are treated as corporations and must certanly be managed in a method in line with rules established with the IRS and the correct insurance regulator."

According to Barros, often single parent captives are owned by way of a trust, partnership and other structure established by the premium payer or his family. When properly designed and administered, a small business could make tax-deductible premium payments for their related-party insurance company. According to circumstances, underwriting profits, if any, may be paid out to the owners as dividends, and profits from liquidation of the organization might be taxed at capital gains.

Premium payers and their captives may garner tax benefits only once the captive operates as a real insurance company. Alternatively, advisers and business owners who use captives as estate planning tools, asset protection vehicles, tax deferral and other benefits not related to the actual business intent behind an insurance company may face grave regulatory and tax consequences.

Many captive insurance companies are often formed by US businesses in jurisdictions outside the United States. The reason for this really is that foreign jurisdictions offer lower costs and greater flexibility than their US counterparts. Usually, US businesses can use foreign-based insurance companies provided that the jurisdiction meets the insurance regulatory standards required by the Internal Revenue Service (IRS).

There are many notable foreign jurisdictions whose insurance regulations are recognized as safe and effective. These generally include Bermuda and St. Lucia. Bermuda, while higher priced than other jurisdictions, is home to many of the largest insurance companies in the world. St. Lucia, a more inexpensive place for smaller captives, is noteworthy for statutes which are both progressive and compliant. St. Lucia can be acclaimed for recently passing "Incorporated Cell" legislation, modeled after similar statutes in Washington, DC.

Common Captive Insurance Abuses; While captives remain highly beneficial to numerous businesses, some industry professionals have begun to improperly market and misuse these structures for purposes besides those intended by Congress. The abuses include the next