Regulation
Captives may be licenced to write some lines of business directly. In other cases, such as workers' compensation in the U.S., for example, the business must initially be written by another insurer, under its insurance licence, which then reinsures it (lays it off) to the captive. The original insurer retains a fee, usually somewhere between 5% and 15%, to provide this service. Premiums paid to captives are tax deductible, provided the terms of the policy (including the premium amount) are reasonable. A captive cannot arbitrarily set the premium amount simply to generate a deduction for the parent.
In the European Union, a new set of regulatory requirements (Solvency II) is planned with additional restrictions and responsibilities for captives and reinsurance companies. Some European captives ask for simplified regulation.
Read more about this topic: Captive Insurance
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