Research by Marsh finds most US captive owners do not treat their captives as a means of tax efficiency but a tool for operational and risk management value


Captives are being used more as a tool to generate operational and risk management value rather than for their tax efficiencies by US owners, according to Marsh’s annual captive benchmarking report.

The report, The Evolution of Captives: 50 Years Later, is based on the activities of 1,148 captives under Marsh’s management, including an array of all types of captives, risk retention groups, non-traditional captives and life insurance company captives. It found that of the 664 captives benchmarked with a US parent, only 37% are deducting captive premiums on US federal income taxes. 

Among the captives that are being treated as insurance companies for tax purposes, the number of new small captives, or so-called 831(b) captives, is trending upwards. These captives – typically created by mid-size companies writing less than $1.2m (€0.87m) in premium – represent the most common new captive formations in the US in the past five years and have led to the significant growth of domiciles like Utah, Kentucky, Montana and Delaware.

According to the report, 68% of small captives are opting for the brother/sister approach, whereby a captive owner is a holding company with several subsidiaries, in order to qualify as insurance companies for tax purposes.

More than 20% are taking a hybrid approach (that is, brother/sister and third-party writings) and only 10% are achieving it with a third-party risk approach. With the growing popularity of smaller pooling facilities, which is an approach to securing third-party risk, Marsh expects the pooling approach to grow significantly in the future.

Julie Boucher, Marsh’s Americas captive leader, said: “Marsh has always advocated that captives be viewed as a tool to help companies better deal with fluctuating market conditions, unstable regulatory environments and global economic shifts, rather than just view them as a tax benefit.”

Other highlights from Marsh’s report include:

  • more captives are underwriting voluntary employee benefits, such as critical illness, ID theft, pet insurance, group home, group auto and group umbrella,
  • a third of the captives benchmarked enter into intercompany investments with their parent companies, of which 18% are securitised by the captives for added regulatory comfort. This trend is expected to grow in the near future as a result of increased regulatory flexibility,
  • captive growth in US domiciles, including Utah, Vermont, Texas, Tennessee, Connecticut, and New Jersey is expected to continue in the near term thanks to recently implemented captive legislation or resurrected captive laws, making these locations more attractive. With the Solvency II implementation set for January 2016, EU domiciles also are expected to experience growth in the short term,
  • compared to 2012 when 16 captives re-domesticated from offshore to onshore jurisdictions, only 11 captives did so in 2013, demonstrating no large-scale trend; and
  • almost 12% of Marsh’s captives under management participate in a terrorism program, with 71% accessing the US Terrorism Risk Insurance Program Reauthorization Act.