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A Case for a Texas Captive

FORC Journal Winter 2013
01.01.13

As of September 1, 2013, Texas joined some 31 other states in passing legislation that allows the state to license and oversee captive insurance companies, or “captives.” Under this new business-friendly law, Texas companies or companies with operations in Texas can form a Texas captive to insure certain risks that they may currently self-insure, insure through a non-Texas captive, or otherwise insure commercially.

Insuring through a Texas captive means that a parent company forms a wholly separate insurance subsidiary and licenses it through the Texas Department of Insurance (“TDI”). Once licensed, the parent transfers selected company-wide risk and pays the attendant premium for that risk to the insurance subsidiary. Then, the Texas comptroller charges the parent company premium taxes on the premiums paid to the captive at a rate of .5 percent.

Although the formation of a captive is novel to Texas, utilizing captives to self-insure risk is not a new concept. As early as the sixteenth 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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