Captive insurance companies have a long history worldwide and in the United States. A majority of states have captive insurance legislation in place and onshore jurisdictions such as Vermont, Utah, Delaware, Tennessee, Arizona and Connecticut promote their captive legislation as an economic engine to attract new businesses.

In general, a captive insurance company is a wholly owned subsidiary that insures or reinsures only the risks of its parent company and its affiliates. Captives can take other forms, such as protected cell, association or group captives — but all offer the owner an opportunity to stabilize premium payments, address policyholder needs and address cost prohibitive or unavailability insurance coverage.

The ownership of captive insurance companies is no longer confined to Fortune 500 companies. In 2013, protected cell captives and small captives, also known as 831(b) captives, experienced strong growth. The expanded use of small captives allowed middle market companies to reap the benefits of a captive arrangement on a cost effective basis.

Risk managers should compare a captive arrangement to the more traditional forms of risk management, such as retail insurance or self-insurance. Retail insurance provides protection from risk and tax deductible premiums while self-insurance provides for lower insurance cost and policy design flexibility. However, a captive arrangement provides for all of the above as well as permitting a business owner to exercise control over claims, receiving underwriting/investment income and tax planning, asset protection and estate planning benefits. Any business owner considering risk retention/risk management options that allow for greater ownership, flexibility and control over its risk management program needs to determine if a captive arrangement is a viable option.

A feasibility study will assess the viability of a captive arrangement either as a supplement or the foundation of a risk management program. The study will address the risk that can be placed in the captive, assure the captive will be treated as an insurance company for federal income tax purposes, demonstrate how the captive will operate from a financial perspective and recommend a domicile with a regulatory structure best suited for the business owner’s view of success.

Ohio will be the next onshore jurisdiction to authorize the formation and redomestication of captive insurance companies. Two captive bills authorize the formation of pure, protected cell and special purpose financial captive insurers. Having passed the House and the Senate, the Ohio captive bills now await Governor John Kasich’s signature.