A Captive Insurance Company is an insurance company established with the specific objective of insuring risks emanating from their parent group. This is an alternative form of risk management that is becoming a more practical and popular means through which companies can protect themselves financially while having more control over how they are insured. In essence, a business can choose to pay tax deductible premiums to its own Captive, instead of a 3rd party, saving itself the profit margin that would otherwise have to be paid to that 3rd party. Benefits include savings to the bottom line as well as a reduction in risk exposure resulting from more targeted coverage. In addition, many Captives have developed into profit centers with reserves that accumulate tax free when premiums are in excess of claims, and when excess reserves are pulled out of the Captive they are taxed at Capital gains rates
rather than ordinary income rates.