Micro-captive risk management was one of the hot topics until the 831(b) captives disappeared from the workers' comp insurance scene.

James Moore

I was even taken in by the allure of managing workers' comp losses by forming your own insurance company, be it offshore or onshore. The market for using micro-captive risk management became what was viewed as a viable alternative until the Internal Revenue Service listed micro-captives on its "dirty dozen" list.

I attended multiple Captive Insurance Companies Association conferences thinking that micro-captives would change how companies purchased workers' compensation coverage and paid claims.

Reserve mechanical decision

A tax court decision and then a later Court of Appeals decision shut the door on micro-captives in 2020. This article from the Greenburg Traurig law firm covers the subject well. 

The captive in question did not function as an insurance company due to the spread of risk and not operating as an insurance carrier. From Greenburg Traurig:

Although the court stated it was not reaching an opinion on the legitimacy of risk pooling in general, the case sets a high bar for micro-captive insurance companies to establish risk distribution. 

After the decision, many risk management companies including J&L assisted with the unwinding of the 831(b) captives. That was not the micro-captive risk management I had anticipated for the captive markets.

Future micro-captive risk management

Two insurance consultants I have worked with in the past are now assisting the IRS with evaluating whether captives functioned as true insurance companies. From our conversations, not all micro-captives were deemed illegal.

I do think there still exists a place for micro-captives. As noted earlier, the IRS placed the bar very high (possibly too high). One cannot rule out a return to micro-captives.

Many larger captives function today to cover risks. In North Carolina, 31 captives remain viable.

This blog post is provided by James Moore, AIC, MBA, ChFC, ARM, and is republished with permission from J&L Risk Management Consultants. Visit the full website at www.cutcompcosts.com.