How does money come back out of a captive to the parent company?
The actuary releases the money, and the line of business sets the wait
Money does not simply sit in a captive waiting to be withdrawn. Premium goes in to pay claims, and it is the actuary who decides when the obligation is settled enough to release what is left. How long that takes depends almost entirely on the line of business, and Queen draws the sharpest contrast between property and casualty.
In property the question resolves quickly. At the end of a policy year the actuary asks whether the loss happened. If it did not, the money is available: it can be applied to surplus or dividended up to the parent, and Queen is relaxed about what happens next because at that point it is simply profit sitting in a bank.
Key takeaways
Release is an actuarial decision, not a withdrawal: the money is available when the obligation is judged settled.
Property resolves at the end of the policy year, while casualty carries a tail because of limitation periods and claims not yet reported.
Queen says surplus can be invested freely, and warns specifically that using it for property is the pattern that draws attention.
Casualty behaves differently, and the reason is the tail. Statutes of limitation and claims incurred but not yet reported mean the company cannot know its final cost for years, so there are good reasons to hold funds rather than declare underwriting profit early. His illustration is a surgical instrument left behind and discovered years later, a claim that relates back to the policy year in which the error happened. In medical malpractice he describes a tail running for years, and in life insurance a far longer one.
The sequence
From premium to distribution
- 01Premium enters the captive to pay claims.
- 02The policy year ends and the actuary assesses what is still owed.
- 03In property that assessment usually settles at once; in casualty the tail keeps funds reserved.
- 04What the actuary releases becomes surplus, which can be held or dividended to the parent.
From the conversation
Matt Queen
Captive Insurance Attorney and MGA Executive, Author of Modern Captive Insurance
“There's no rule saying that insurance company has to invest in this versus that.”
Transcript
Read the full transcript 8 turns
Hoston the 831 B's, how would the money come back to the parent company? So I understand you pay it into the captive tax-free underwriting profit. And then you, I guess 831 B, is it tax-free investment profit too? We have to pay tax investment
Matt Queen. So, assuming for the sake
Matt Queenof argument that the actuaries have blessed that the tail has worked out, you actually have the money. So, for those of you who aren't insurance professionals, the way it works is to put premium into a company and it preams there to pay claims. Okay. Well, in property insurance land, it's really, at the end of every policy year, the actuaries going to say, do you have a sperm down? Did the hurricane hit you? No? Okay. Here's my. So then you can take that money and you can apply it to surplus. You can dividend it up to the parent company
Matt Queen. You can invest in Bitcoin. You can do it the hell you want. It's just money. It's profit in a bank with casualty insurance policies by significant contrast. There's a tail because of things like statute of limitations, incurred but not reported claims. There's all sorts of reasons you might want to hold on to that money and not declare it as underwriting profit for a good period of time. Just an easy example, what if a surgeon leads a sponge in you and you don't discover it for three years? Well, that would relate back to the policy here
Matt Queen, excuse me, in which the surgeon made the error. So in medical malpractice, you could have a tail that goes five to 10 years. And then it's a different universe to me. I don't know a lot about it. But in life insurance, for example, I mean, that's a long tail. I mean, you put that premium in today. They may not pay a claim for 50 years. So there's, some real science on when you actually release the funds. So to answer your question quickly, any 31B space, once the actuaries says that you
Matt Queen're good to go, you then just dividend out the money. However, you see fit. Or you can invest directly through the captain. There's no rule. And this is where the IRS gets out of joint. There's no rule saying that insurance company has to invest in this versus that. Once the money is surplus, definitionally speaking, you can day trade it and go bet on, bet on the horses. So the IRS gets out of joint because if the premium that went in there was not subject to income tax and if there were no claims, then you could theoretically purchase some real
Matt Queenestate. Real estate carries a phenomenal number of deductions for depreciation. And there's all sorts of things you can write off real estate. And you can do some, wild tax tricks if you know what you're doing. But before you go running off and investing in your new capital insurance real estate plan, just be aware that the IRS has like a homing missile on people who are trying to do that. And when they inevitably watch this podcast, they will, they will then start looking at us to see on whether or
Matt Queennot we're doing ourselves
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