Literally thousands of America’s businesses are able to operate more efficiently because they have taken their insurance and risk management functions in-house, by way of so-called captive insurance companies, and thus cut-out the costs of the middlemen insurance brokers and retained the insurance profits for themselves.
Many of these business, and particularly small and growing businesses, are able to take advantage of captive insurance companies because of a tax benefit given by Congress in the form of an election that they may make under Internal Revenue Code section 831(b), which provides some slight (but to a small company very important) relief from the insurance company tax rules that apply to larger insurers. For background, see the interesting article by Drew Estes, 831(b) Captive Insurance Companies: Why Policymakers Have It All Wrong.
On October 22, 1986, Congress passed PL 99–514 (100 Stat 2085), which created section 831(b) largely in response to the hard (read: expensive) insurance market of the 1980s that was destroying numerous small- and medium-sized businesses. The idea at the time was that by incentivizing new start-up insurance companies, the overall insurance capacity of the marketplace would ease the hard pricing, and this is largely what occurred.
Today, section 831(b) is used by numerous small insurance companies to fill gaps in traditional coverage where large insurance companies have either completely left the marketplace, or charge so much in premiums that the purchase of such insurance is uneconomical. Many smaller businesses today would be completely exposed to such things as products liability claims, employee practices claims, environmental claims, and numerous other claims but for their coverage from 831(b) insurance companies. This is the baby.
Captive Insurance Plans 