Receive Potential Tax Savings A captive potentially offers one unique avenue of savings, the early recognition of losses for federal income tax purposes. Income tax deductibility is a complicated subject, however, and not all premiums may be tax deductible. The IRS will require a captive to act like an insurance company by insuring exposures belonging to companies other than its parent. In the 12 years since the Tax Reform Act of 1986, there have been many rulings regarding the deductibility of premiums paid to captives. Whether premiums will be deductible when paid needs to be addressed by any corporation while deciding if a captive makes sense for them.
Reserves Managing a captive creates other financial advantages.
A captive insurance company creates a mechanism for a company to set reserves for the loss exposures it insures. The reserve level can be monitored through hard and soft markets and good and bad experience. This has the overall effect of smoothing surplus levels throughout a complete cycle. A captive yields corporate control over investment income. The assets that support loss reserves and captive surplus must be invested to gain a reasonable return.