8176 / Are there any safe harbors that can be used in a captive to ensure that an insurance arrangement will be found to exist?

In Revenue Ruling 2002-89, the IRS found that, in a parent-subsidiary relationship, a captive will qualify as insurance if at least 50 percent of the premiums received by that captive insure unrelated third party risk. In Revenue Ruling 2002-90, which involved a brother-sister captive arrangement, the IRS found that if the captive insured the risk of at least 12 entities, insurance would be present for income tax purposes.

These revenue rulings provide a degree of certainty for companies that wish to form captive insurance subsidiaries that will insure only the risk within the corporate group.