Insurance Captives: A New Solution for Texas Business

05 May 2014 Publication
Author(s): Kimberly A. Yelkin

Texas Lawyer

In modern times, general counsel for employers large and small face an increasingly complex web of risk management concerns. Whether it be procuring hard-to-come-by insurance coverage for exotic risks or choosing to internalize professional liability or litigation defense costs, general counsel must often handicap whether the benefits of insurance outweigh the burdens.

With the passage of a new business friendly insurance law, certain risks that companies may otherwise internalize or insure commercially might be better handled by forming a Texas captive. Essentially a form of self-insurance, a parent company can now form a wholly separate insurance “captive” and license it through the Texas Department of Insurance. Once licensed, the parent transfers selected risk and pays the attendant premium for that risk to its captive subsidiary. Then, the Texas comptroller charges premium taxes on the premiums paid to the captive at a premium tax rate of .5 percent.

Texas joins some 31 other states in passing a new captives law, although utilizing captives to self-insure risk is not a novel concept. As early as the 16th Century, ship owners would meet in London coffee houses and pool funds to cover the cost of risks associated with their ships — a rudimentary form of a group captive.

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