Payments to the captive entity have two components: (1) an investment component helping fund the equity of the entity and (2) an insurance premium component paid in return for insurance coverage for the period. Generally, in this type of structure, the entity has rights indicating significant influence over the captive's operations. If so, the equity method is appropriate for the capital infusion component. This may result in offsetting some of the benefit of the entity’s claim ...
What are captives in commercial insurance?
In addition, captives provide an opportunity to insure against liabilities that may be generally uninsurable or that are difficult to insure because coverage is unavailable in the commercial market or is excessively priced. When a company purchases commercial insurance, it pays a third - party company to take on a certain amount of its risks.
What are the requirements for a captive insurance policy?
In addition to risk shifting and risk distribution, according to the IRS, the insurance policy issued by the captive must be insurance in a typical sense. Thus, there must be fortuity or uncertainty as to the risk underwritten.
How do captive insurance entities distribute risk?
In the majority of cases, captive insurance entities pool their funds with like - kind entities and similar risk profiles so they will not face catastrophic losses, and can typically expect to receive the bulk of the reinsurance premiums back in a refund. This is the fundamental insurance concept of risk distribution.