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Setting up an 831(b) captive in 2021

Updated: Feb 15, 2021


Setting up a captive insurance company is powerful and popular for savvy business leaders. Factors generally include mitigating business risks (and you can combine multiple LLCs), adjudicating claims, protecting assets and building wealth - all by using tax-advantaged premiums formed by a third-party actuarial study.

If the process can feel daunting, rest assured it is simple, straight forward and can take as little as 10 minutes. To help you prepare, here’s an overview of the steps involved.

 

Perform a Feasibility Study

Before setting up a captive insurance company, many business leaders seek feedback, insights from Captive Manager representative. A feasibility study can help you assess your business' candidacy relative to this powerful and flexible platform. Some organizations - like Reinsurance Specialties - provides one-on-one consultation complimentary (no charge). Feasibility studies will help you understand recommended structure, testimonials from peers within your industry and more.

 

Choose a Service Provider to Help With Setting Up a Captive Insurance Company

Typically, you need a service provider to help with the details so that you can focus on running your business. If possible, get quotes from a few different companies, but also get detailed information on their services, deliverables and cost structures so you know you’re comparing apples to apples. Talk with each company so that you get an accurate picture of what your future will be like together.

 

Select the Type of Captive Insurance Plan

Captive insurance plans fall into a few different categories. One of the most conservative and compliant form of the 831(b) election is a PORC (producer owned reinsurance company aka privately owned reinsurance company). How large does your business need to be to enjoy benefits of a captive? There are no strict rules, but generally speaking, companies who can remit $10,000 per month or more into their insurance company will appreciate the value, flexibility and direct benefits. Reminder: Each 831(b) structure caps at $2.3M annually (adjusted for inflation) but you can have multiple structures as the business (or the insured) requires.

 

Leverage an Actuarial Study

The top service providers understand that a third-party actuary unrelated to the client's business is the strongest (most compliant) route to establish an organizations policy/premium. Licensed actuaries will use decades of actuarial data on a per-industry basis to build lines of risks associated with each business. This can include regulatory risks, reputational risks, loss of records, director and officer risks, property risks, warranties, malpractice, errors and omissions and many other risks based on the specific business environment. The IRS likes to see that 831(b) micro-captives are formed (via policy and related premium) based on a third-party and professional actuarial study.

 

Begin the Formation Process

Once you’ve selected the type of captive and the service provider, you can pursue company formation. During the formation process, your organization will be domiciled either domestically or with a foreign entity. Ensure you have the minimum required start-up capital which varies based on your type of captive, ownership structure, the service provider you hire, and other details.

Limited paperwork often involves owner name(s), social security #, prospective name of new entity, a criminal background checklist, etc. Often, there is a limited power of attorney form involved in this part of the process.

 

Complete the Final Steps of Setting Up a Captive Insurance Company

Your service provider will make the next few and final steps easy and straightforward. These include obtaining your EIN and Tax IDs, opening your bank account and assigning 'signers' relative to your dedicated account. Once these items are complete, you can start remitting premium to mitigate business risk/adjudicate claims with respect to your policy.


To learn more about setting up a captive insurance company, contact us today. At Reinsurance Specialties, we help businesses leaders mitigate business risks, adjudicate claims, protect assets and build wealth through tax-advantaged premium.

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