The legal definition of a micro captive insurance company is any captive insurance company which functions with a written premium of less than $2.2 million on an annual basis. This level was increased for the fiscal year 2017 by a House law, (H.R. 34) from an annual written premium of $1.2 million. It was also written into law that the written premium amount could be adjusted for inflation in future years.
Micro captives enjoy special tax benefits because of the way they are structured. For instance, any captive which can legally be determined to be a qualifying insurance company is only taxed on their investment income. To be a qualifying company, the micro captive must behave like a regularly functioning insurance company. This means that there needs to be a sufficient amount of risk-sharing and risk shifting and they must be regulated just like any other insurance company is.
Some things to remember when trying to start a captive is that in the first year, the company may have far less than the $2.2 million insurance premiums that are written. However, during the second year, the company may grow exponentially and thus become too large to any longer qualify for micro captive status.
Some people may think that micro captive insurance companies to perform wealth transfers or as a “magic bullet” acting in the form of a well-formed and legal tax-shelter. This is the furthest thing from the truth. In fact, micro captive insurance companies are under intense scrutiny and are regulated in a high manner just like any other financial institution. They need to be handled and run by professionals who know exactly what they are doing so that proper actions are taken and no laws are broken during the day to day running of operations.