The development of insurance to enhance product acceptability is available prenatal planning insurance is a good example of this. Financial Captives provide the opportunity of converting specific reserves to insurance costs at the parent level thus converting posttax reserves to pretax expenses. Examples reserves against product reliability or subsidiary debt, guarantees, etc. The ability to transfer normally nonconvertible funds for exchange control purposes to a subsidiary as a genuine risk financing measure is generally available. Premium expense is generally deductible at the parent level, but income earned on investment at the captive level is not taxable.
Special rules apply for U.S. and Canadian companies.
The lack of regulation of investments at the captive level mean funds could, with prudence, be used to finance the needs of sister companies. Capital, reserves, and premiums are not taxed in most offshore locations. The success of a captive relies on good management not good luck. Top management must understand the long-term commitment to captive insurance. Bad risk assessment or a series of unlucky occurrences can cost a captive dearly in the early years.