What a captive is, and what it is not.

A captive is an insurance company you own, formed to insure risks of your own business.

The name comes from the steel industry. In 1953, Fred Reiss founded Steel Insurance Company of America for Youngstown Sheet & Tube Company in Ohio, the first active captive insurer in the United States. He borrowed the word from the steel company’s “captive” mines, which sent their ore only to its own mills. Today nearly every company in the Fortune 500 owns at least one captive insurance company.

For a business your size, the structure Fortress uses is a supplemental one. Your commercial policies stay in force. Alongside them, your own company insures the risks the commercial market leaves with you, priced by credentialed actuaries, run by a licensed insurance manager, and regulated like any insurer. Premiums that are not consumed by claims stay in the company as reserves and equity, and that company belongs to you.

Owners of profitable small and midsize businesses that carry real risk and are tired of paying strangers for it.

The list of industries is long: construction, manufacturing, distribution, dealerships, dairies and farm and ranch, energy, healthcare and physician groups, dental practices, hospitality, real estate development, professional firms, restaurants, staffing and service companies. What they have in common is not the industry. It is a set of risks that ordinary insurance does not cover well, and enough consistency in the business to fund coverage for them.

The honest test is the one an actuary would apply: does the business have genuine, plausible casualty risks that are uninsured or underinsured today? If yes, a captive is worth a real look. If the only reason to form one is a tax result or an estate-planning result, the answer is no, and we will tell you so.

The risks you are already carrying yourself, whether you have named them or not.

A captive insures business casualty risks that commercial policies exclude, cap, or price out of reach. Every one of them is a risk that, today, comes straight out of your operating account when it lands.

• Business interruption
• Loss of a key customer or supplier
• Loss of a key employee
• Supply chain interruption
• Cyber risk and data breach
• Warranties, express and implied
• Deductibles and policy exclusions
• Litigation defense and legal expense
• Employment practices
• Products and professional liability
• Construction defects
• Brand and reputation
• Regulatory risk
• Mold, pollution, and contamination

What it cannot insure matters just as much. Personal risks. Employee benefits like disability, life, and health. And ordinary business judgment: a bad bid, a bad hire, the wrong marketing agency. Those are decisions, not casualties, and no properly managed captive will write them.

By credentialed actuaries, using insurance-industry data. Not by you, and not by us.

The actuaries review your risks and exposures, decide which are appropriate for the captive, and set a premium for each using loss data from businesses like yours. The report is written, it is signed, and it is the foundation of everything that follows.

Premiums are based on risk. They are never based on your income, and they cannot be moved up or down in December to suit the year you are having. That rule is what makes the structure sound, and it is the first thing a careful advisor should ask any captive manager about.

A team of independent professionals, each with a defined job, and none of them Fortress.

Fortress consults. We assess whether a captive fits, design the structure, and shepherd the formation. The captive itself is run by people whose independence is the point.

The credentialed actuaries

Identify the risks, set the premiums, and update the study every year.

The licensed insurance manager

Forms and licenses the company, keeps the books and the reserves, administers claims through a claims committee, files the specialized insurance tax return with its elections, prepares financial statements for the regulator, and serves as the liaison with the regulator.

The law firm

Handles the corporate work, the subsidiary, the annual minutes and resolutions.

Your advisors

Your CPA and your financial advisor are in the process from the first call. The captive's reserves are invested under written guidelines, at institutions you choose, with the advisor you already trust.

You

You own the company. You elect its board. Its board oversees its officers. That is not a formality. It is what makes it yours.

A one-time consulting fee to form it, and an annual fee to run it. Both are stated in writing before you sign anything.

The consulting fee covers the assessment and the formation. The annual fee, paid to the insurance manager, covers the actuarial update, the license, the return and the election, financial statements, claims administration, minutes and records, and the resident agent. A premium expense applies to each premium paid, on a schedule that steps down as premiums grow.

No part of the engagement is a surprise, and nothing beyond the consulting engagement is owed before you have the actuaries' study and have decided to proceed.

A captive is not a tax strategy with an insurance company painted on it. Anyone who sells you one that way is selling you a problem.

The Internal Revenue Code contains provisions that let a small insurer build reserves, and a properly managed captive uses them the way they were written. But the decision to form a captive is made on one basis only: the management of genuine business casualty risk. Tax treatment follows the structure. It never leads it.

• It does not replace your commercial coverage. Cancelling policies to inflate captive premiums is improper, and we will not do it.
• It does not insure implausible risks. Hurricane coverage in Des Moines is not a risk. It is a red flag.
• It does not let you set your own premiums, or change them to fit your income.
• It does not skip the actuary, the claims process, or the annual filings. A captive that does is not a captive.
• It is not for everyone, and we say so early, on the first call, before anyone has spent a dollar.

Captive insurance sits under standing scrutiny from the IRS, and it should. The businesses that have run into trouble are the ones that treated it as a tax play. The structure Fortress builds is the one that has stood up: real risk, independent pricing, third-party administration, and the filings made every year.