Most Common Captive Arrangements

The following is a summary of the most common types of captive arrangements.

Classic or "Pure" Captive

The classic form of a captive arrangement is an insurance company that is formed to insure or reinsure the risks of related parties.  Within a consolidated group, this type of arrangement is effectively a "self insured" group arrangement, whereby operating entities (i.e. the insureds) are insured by a brother-sister insurance company (i.e. a captive).  An example of a classic captive arrangement could include a consolidated group that chooses to have a captive insurance company provide coverage for the deductible of its group-wide general liability policy.

The Pure Captive is the mostly commonly seen type of 831(b) small captive.

Association Captive / Risk Retention Group

An association captive or risk retention group ("RRG") is a captive arrangement where the insureds are typically unrelated from an ownership perspective, but share a common trait, such as an industry or risk profile.  An example may be individual builders that pool their general liability risk in an association captive they own.

Agency Captive

An agency captive is a captive insurance company owned by an insurance agency or broker that directly insures or reinsures a portion of risk underwritten.  A broker may form an agency captive to share in the profits of the business that it sells or to demonstrate to commercial insurers or reinsurers confidence in the profitability of the policies it sells.

Cell or Rent-a-Captive

A "segregated cell captive" or "rent-a-captive" arrangement involves an insurer in which distinct "cells" are established to isolate the losses of one shareholder/cell from another.  Each insurer is a legal entity that has established an account, or cell name.  Each cell is funded by its participant's capital contribution and by "premiums" collected with respect to contracts to which the cell is a party.

The income, expenses, assets, liabilities and capital of each cell are accounted for separately from any other cell.  The insurer is usually a preferred stock shareholder, and generally holds no vote--it owns the balance sheet and risks associated with only its cell.  The Service recently issued guidance with respect to cell captive arrangements that suggest that there is a risk that such a program could be treated as a self insurance arrangement from a federal income tax perspective [see Rev. Rul. 2008-8 (2008-5 IRB 340)].