A captive turns a business from an insurance buyer into an insurance owner. It is a powerful tool for the right company — and the wrong move for most.
Most businesses transfer risk by paying premiums to a commercial insurer. A captive flips that relationship: the business forms its own licensed insurance company to insure its own risks. Instead of premiums leaving the building permanently, they fund an entity the business owns — one that can retain underwriting profit, build reserves, and give the owner far more control over how risk is financed.
That control is real, and so are the requirements. A captive is a regulated insurance company with capital, compliance, and governance obligations. It rewards businesses with the size, stability, and discipline to run one — and punishes those that treat it as a tax shortcut.
What Is Captive Insurance?
Captive insurance is a form of self-insurance in which a business creates and owns a licensed insurance company — the “captive” — to insure the risks of its parent or a related group. The captive collects premiums, holds reserves, pays claims, and is regulated like any other insurer in its domicile.
The appeal is straightforward. A profitable business with good loss history is, in effect, paying commercial insurers more in premium than it gets back in claims — the insurer keeps the difference as underwriting profit. A captive lets the business capture that margin itself, customize coverage to risks the commercial market handles poorly, and access reinsurance markets directly.
How Does a Captive Work?
In its simplest form, the parent business pays premiums to its captive for defined coverages. The captive holds those premiums as reserves, pays claims as they arise, and retains what is left after losses and expenses. The captive is capitalized up front, managed to regulatory standards, and typically supported by a captive manager, actuary, and domicile regulator.
Done correctly, the captive must operate as a real insurance company — genuine risk transfer, proper risk distribution, arm’s-length pricing, and actual claims activity. A captive that exists only on paper to move money invites exactly the scrutiny discussed below.
What Types of Captives Exist?
- Single-parent (pure) captive. Owned by one business to insure that business and its affiliates. The most common structure for a company large enough to go it alone.
- Group captive. Owned by multiple unrelated businesses, often in the same industry, that pool risk together. A path for mid-sized companies that aren’t large enough for a single-parent captive.
- Cell captive (protected/series cell). A “rented” structure where a business operates its own segregated cell inside a larger sponsored entity — lower cost and complexity to enter.
- Micro-captive (831(b) captive). A small captive that makes a specific federal tax election, discussed next, with strict premium limits and heightened compliance requirements.
What Is the 831(b) Election?
Under Section 831(b) of the Internal Revenue Code, a qualifying small insurance company can elect to be taxed only on its investment income rather than its underwriting profit. For the 2026 tax year, the IRS set the annual written-premium limit for this election at $2,900,000, up from $2,850,000 in 2025; the limit is indexed for inflation and adjusts in $50,000 increments (Rev. Proc. 2025-32).
The 831(b) election can be legitimate and valuable for a genuine insurance arrangement. It has also drawn sustained IRS scrutiny, with micro-captive structures appearing on the IRS’s list of transactions it examines closely. The election is not a tax strategy with insurance attached; it is an insurance strategy that carries a tax treatment. The distinction is exactly what regulators look for, and structuring one requires qualified tax and legal counsel alongside an insurance advisor.
Is Your Business a Candidate for a Captive?
A captive tends to make sense when most of the following are true:
- Consistent profitability and stable cash flow — enough to capitalize the captive and absorb claim volatility.
- Favorable loss history — the business is paying meaningfully more in premium than it receives in claims.
- Meaningful annual premium spend — generally several hundred thousand dollars or more across the lines a captive could cover.
- A long-term horizon — captives reward patience; the benefits compound over years, not months.
- Risk-management discipline — an owner willing to run a real insurance company, not just chase a tax outcome.
For a business that fits, a captive can lower the long-run cost of risk, smooth volatility, and build a balance-sheet asset. For one that doesn’t, it adds cost, complexity, and regulatory exposure with little upside. The diagnosis matters more than the enthusiasm.
Why Captives Fit the Profit and Value Conversation
A captive is where insurance stops being purely an expense and becomes part of how a business manages capital and builds enterprise value. Retained underwriting profit accumulates inside an entity the owner controls. Reserves can be invested. And the discipline a captive demands — clean loss data, formal risk management, real governance — is exactly what makes a company more valuable when it is eventually sold or passed on.
It is not a first step. It is a strategy a business grows into once its insurance program, loss history, and financial profile justify it — which is why the right starting point is an honest assessment of whether the business is there yet.
Schedule a Strategic Insurance Review
Wasatch Preferred offers a complimentary Strategic Insurance Review — a 30–60 minute working session where our team examines your current insurance program and loss history, evaluates whether your business profile fits an alternative risk-financing structure such as a captive, and maps the more conventional steps that may come first. No pressure. No generic proposals. Just clarity. Email partner@wasatchpreferred.com or call 801-676-7101 to schedule.
Insurance products and services are offered through Wasatch Preferred. Coverage availability and eligibility vary by carrier and state. This content is for educational purposes only and does not constitute a binding coverage offer, tax advice, or legal advice. Captive insurance and tax elections such as Section 831(b) should be evaluated with qualified tax and legal counsel. License information available upon request.
Frequently Asked Questions
What is captive insurance?
Captive insurance is a form of self-insurance in which a business forms and owns a licensed insurance company — the captive — to insure its own risks. The captive collects premiums, holds reserves, and pays claims, allowing the business to retain underwriting profit and customize coverage rather than transferring all of its risk to a commercial insurer.
How much premium do you need for a captive to make sense?
There is no fixed minimum, but captives generally become worth considering when a business spends at least several hundred thousand dollars a year in premium across the lines a captive could cover, has consistent profitability, and has a favorable loss history. Below that, the cost and complexity often outweigh the benefit.
What is an 831(b) or micro-captive?
An 831(b) captive, or micro-captive, is a small captive that elects under Section 831(b) of the Internal Revenue Code to be taxed only on its investment income. For 2026 the annual written-premium limit for the election is $2,900,000, indexed for inflation. The election can be legitimate but has drawn significant IRS scrutiny and requires qualified tax and legal counsel.
What types of captives are there?
Common structures include single-parent (pure) captives owned by one business, group captives owned by several unrelated businesses pooling risk, cell captives that let a business operate a segregated cell within a larger sponsored entity, and micro-captives that make the 831(b) tax election. The right structure depends on the company’s size, risk profile, and goals.
Is captive insurance a tax shelter?
No. A properly structured captive is a genuine insurance arrangement with real risk transfer, risk distribution, and claims activity; favorable tax treatment can follow but is not the purpose. Structures designed primarily to capture a tax benefit invite IRS scrutiny, which is why captives should be evaluated and built with qualified tax and legal counsel alongside an insurance advisor.