A provision under IRC Section 831(b) that allows qualifying small insurance companies to be taxed only on investment income, not on underwriting income. The premium limit for 2026 is $2.9 million.

The process of using actuarial methods to determine appropriate premium levels based on expected losses, expenses, and profit margin. Essential for IRS compliance.

An insurance company licensed to do business in a particular state, subject to that state's insurance regulations and guaranty fund requirements.

The maximum amount an insurer will pay for all claims during a policy period. Contrasted with per-occurrence limits.

A standard requiring that transactions between related parties be conducted as if they were between unrelated parties. Captive premiums must reflect market rates.

A Tax Court case where the IRS prevailed against a captive arrangement lacking economic substance and proper risk distribution.

The governing body of a captive insurance company responsible for oversight, policy approval, and strategic direction. Must meet regularly and document decisions.

Unrelated companies that participate in a risk pool arrangement to achieve risk distribution for captive insurance purposes.

Coverage for lost income and extra expenses when business operations are disrupted by a covered event. Often excluded from commercial policies for pandemics.

The initial funding of a captive insurance company, typically through cash contribution from the parent. Must be adequate to support the risks being insured.

An insurance company created and wholly owned by one or more non-insurance companies to insure the risks of its owner(s). Captives allow businesses to self-insure while gaining tax and risk management benefits.

A professional firm that provides day-to-day management services for captive insurance companies, including accounting, compliance, and regulatory filings.

A captive structure where multiple participants share a single licensed entity but maintain separate 'cells' with segregated assets and liabilities.

The process of receiving, investigating, evaluating, and settling insurance claims. Proper claims handling is essential for captive legitimacy.

An insurance policy that covers claims made during the policy period, regardless of when the incident occurred. Requires tail coverage upon termination.

The sum of the loss ratio and expense ratio. A combined ratio under 100% indicates underwriting profit; over 100% indicates underwriting loss.

A foreign corporation where U.S. shareholders own more than 50% of the voting power or value. Offshore captives may be subject to CFC rules.

Coverage for losses resulting from data breaches, ransomware attacks, and other cyber incidents. Includes first-party losses and third-party liability.

The total premium charged by an insurance company before any reinsurance cessions. Used to determine 831(b) eligibility.

Coverage protecting corporate directors and officers from personal liability for decisions made in their official capacity.

A distribution of profits from the captive to its shareholders. Subject to regulatory approval and tax implications.

The jurisdiction where a captive insurance company is incorporated and regulated. Popular domiciles include Vermont, Delaware, and offshore locations like Cayman Islands.

The portion of premium that corresponds to coverage that has already been provided. Recognized as revenue over the policy period.

A judicial doctrine requiring that transactions have meaningful economic purpose beyond tax benefits. Captives must demonstrate real risk transfer and business purpose.

Coverage for claims by employees alleging wrongful termination, discrimination, harassment, or other employment-related issues.

A type of reinsurance that covers losses above a specified retention amount, protecting against catastrophic claims.

The anticipated ratio of losses to premiums, used in pricing insurance policies. Typically ranges from 50-70% for captive arrangements.

A method of adjusting premiums based on the insured's actual loss experience compared to expected losses.

A measure of the risk being insured, such as revenue, payroll, or number of employees. Used to calculate premiums and analyze loss experience.

An analysis conducted before forming a captive to evaluate whether the structure is appropriate, including risk assessment, financial projections, and regulatory requirements.

IRS form used to disclose reportable transactions, including certain micro-captive arrangements designated as transactions of interest.

The IRS test for determining whether an arrangement constitutes insurance for tax purposes: (1) risk shifting, (2) risk distribution, (3) insurance risk, and (4) meeting common notions of insurance.

A structure where a licensed insurer issues policies and then reinsures most or all of the risk to a captive. Used when direct captive insurance is not permitted.

A captive insurance company owned by multiple unrelated companies, typically in the same industry, that pools risks among members.

A reserve for claims that have occurred but have not yet been reported to the insurance company. Important for accurate financial reporting.

The total of paid losses plus the change in loss reserves during a period. Used to calculate loss ratios and evaluate performance.

Income earned from investing insurance company reserves and surplus, including interest, dividends, and capital gains. Taxable even under 831(b) election.

Coverage for financial losses resulting from the death, disability, or departure of essential employees whose skills are critical to business operations.

Costs incurred in investigating and settling claims, including legal fees, expert witnesses, and adjuster fees.

The process by which initial loss estimates change over time as more information becomes available. Used to project ultimate losses for reserving and pricing.

The ratio of claims paid plus reserves to premiums earned. A key metric for evaluating insurance company performance and premium adequacy.

A small captive insurance company that qualifies for the 831(b) tax election, with annual premiums not exceeding the statutory limit ($2.9 million for 2026).

An insurance company not licensed in a particular state but permitted to write certain coverages under surplus lines regulations.

IRS notice identifying certain micro-captive transactions as transactions of interest, requiring disclosure on Form 8886. Later partially invalidated by courts.

An insurance policy that covers claims arising from incidents that occur during the policy period, regardless of when the claim is made.

A jurisdiction outside the U.S. that regulates captive insurance companies. Popular offshore domiciles include Cayman Islands, Bermuda, and Barbados.

A U.S. state that has enacted captive insurance legislation. Vermont is the largest onshore domicile, followed by Delaware, Utah, and Tennessee.

Claims that have been settled and paid during a period. Distinguished from incurred losses which include reserve changes.

The maximum amount an insurer will pay for any single claim or occurrence. Part of the overall policy limits structure.

The 12-month period during which an insurance policy provides coverage. Captives typically operate on a calendar year or fiscal year basis.

A return of premium to policyholders based on favorable loss experience. Different from shareholder dividends.

The amount paid by the insured to the insurance company for coverage. Must be actuarially justified and at arm's length for captive arrangements.

Coverage for claims arising from injuries or damages caused by products manufactured or sold by the insured.

Coverage for claims arising from errors, omissions, or negligence in providing professional services. Also known as errors and omissions (E&O) insurance.

A corporate structure that allows the creation of legally separate cells within a single legal entity, each with its own assets and liabilities protected from other cells.

A Tax Court case where the taxpayer prevailed, establishing that properly structured captives with actuarial justification and arm's length premiums qualify as insurance.

A type of reinsurance where the captive cedes a fixed percentage of premiums and losses to the reinsurer.

The actuarial process of determining appropriate premium rates based on historical loss data, exposure analysis, and trend factors.

Coverage for legal costs associated with defending against regulatory investigations, audits, or enforcement actions.

Insurance purchased by an insurance company to transfer a portion of its risk to another insurer. Used to manage capacity and volatility.

Coverage for losses resulting from negative publicity, social media attacks, or other events that harm the company's reputation and customer relationships.

A significant Tax Court case addressing risk distribution requirements and the use of risk pools in captive arrangements.

Funds set aside by an insurance company to pay future claims. Includes loss reserves (for reported claims) and IBNR reserves (for incurred but not reported claims).

A premium adjustment mechanism where final premium is determined after the policy period based on actual losses.

The spreading of risk across a sufficient number of independent exposure units so that losses become predictable through the law of large numbers. Required for insurance treatment.

An arrangement where multiple unrelated insureds share risks to achieve the risk distribution required for insurance treatment.

The transfer of the financial consequences of a potential loss from the insured to the insurer. One of the four elements of the insurance test.

The shifting of risk from one party (the insured) to another party (the insurer) through an insurance contract. Essential element for legitimate insurance treatment.

The process of winding down an insurance company's operations, paying remaining claims, and eventually liquidating the entity.

The amount the insured must pay before insurance coverage applies. Similar to a deductible but with different claims handling implications.

A captive insurance company owned by one parent company that insures only the risks of that parent and its affiliates.

Certain types of income earned by controlled foreign corporations that must be included in U.S. shareholders' income currently, regardless of distribution.

The right of an insurer to pursue a third party that caused a loss to the insured, to recover amounts paid on the claim.

Coverage for losses when suppliers or vendors fail to deliver goods or services, causing business interruption or increased costs.

The excess of an insurance company's assets over its liabilities. Represents the company's net worth and capacity to absorb unexpected losses.

Insurance coverage placed with non-admitted carriers when coverage is unavailable from admitted insurers. Subject to special regulations and taxes.

Extended reporting period coverage that allows claims to be reported after a claims-made policy expires.

An expense that can be subtracted from gross income to reduce taxable income. Captive insurance premiums are deductible as ordinary business expenses.

The postponement of tax liability to a future period. Captives can accumulate reserves on a tax-deferred basis under 831(b).

An IRS designation for transactions that have potential for tax avoidance. Certain micro-captive arrangements were designated as transactions of interest in Notice 2016-66.

The pricing of transactions between related parties. Captive premiums must be set at arm's length to avoid transfer pricing challenges.

The process of evaluating and selecting risks to insure, determining appropriate premiums, and establishing policy terms and conditions.

The profit or loss from insurance operations, calculated as premiums earned minus losses incurred and operating expenses. Under 831(b), this income is not taxed.

The portion of premium that has been paid but covers a future period. Represents a liability on the insurer's balance sheet.