Shavonda Every profitable business carries risks it doesn't bother insuring through a big carrier - supply chain hiccups, contract disputes, warranty exposure, gaps in commercial policies. Most owners just absorb those risks and hope. Large companies figured out a better move long ago: they insure themselves.
Private reinsurance brings that move to businesses well below the Fortune 500.
The basic idea
Instead of paying premiums to an outside insurance company for certain risks, your business pays premiums to a licensed insurance company that you own. That company - often called a captive - holds the premiums, invests the reserves, and pays claims if the insured risks actually happen. If they don't, the money stays inside your structure instead of padding a carrier's profits.
The tax code has a specific provision for this: small insurance companies can elect to be taxed only on their investment income under Section 831(b), which is what makes the structure efficient when it's built correctly.
Who this is for
This is not an entry-level strategy. It fits profitable, established businesses - generally those with strong, consistent revenue and real uninsured risks. The risks must be genuine: the IRS looks hard at captives that exist only to shuffle paper, and legitimate risk coverage is the whole ballgame. Done right, this is a recognized structure used by thousands of American businesses. Done carelessly, it's exactly the kind of thing you don't want your name on.
What implementation looks like
A proper setup involves an actuarial review of your business's actual risks, formal formation and licensing of the insurance company, and ongoing administration and compliance. It runs alongside your CPA and attorney, not around them. Once in place, it operates year after year - quietly turning risk you already carry into reserves you own.
The bottom line
Your business already self-insures these risks - you're just doing it unofficially and getting nothing for it. The question a review answers is whether your numbers justify making it official.
Straight answers
Who is private reinsurance best for?
Profitable businesses - typically $500K or more in revenue - with real, identifiable risks that are expensive or impossible to insure conventionally.
Is this the same as an 831(b) captive?
Section 831(b) is a tax election many small captive insurers use. The strategy is broader than the election, and any structure must insure real risk and be documented properly to stand up.
Is captive insurance legitimate?
Yes - captive insurance is a long-established structure used by most large U.S. companies. It is also an area the IRS watches closely, which is exactly why it must be set up and run correctly, never as a DIY project.