The 2021 Environmental Power Brokers
The complete list of Power Broker® winners can be found here.
Finalists:

Allan Jackson, CPCU, ARM
Senior Vice President
Marsh, Atlanta

Steven Schwartz, CRIS
Vice President
Marsh, New York
The complete list of Power Broker® winners can be found here.
Finalists:
Allan Jackson, CPCU, ARM
Senior Vice President
Marsh, Atlanta
Steven Schwartz, CRIS
Vice President
Marsh, New York
The origins of the 831(b) election reveal much about both its intended purpose and the subsequent scrutiny it has faced. Created as part of the 1986 tax reform act under President Reagan, the provision wasn’t originally designed for captive insurance companies at all.
“The original legislative intent was for small, farm mutual insurance companies,” said Rob Walling, FCAS, MAAA, CERA, Principal and Consulting Actuary at Pinnacle Actuarial Resources. “Farmers and others in rural areas were having trouble getting insurance coverage as there simply wasn’t a market in the traditional insurance sector.”
These small mutual insurers, often operating at the county level, struggled to acquire sufficient capital to pay claims when disasters struck. The 831(b) election was designed to allow these entities to build up retained earnings on a tax-deferred basis, ensuring they could remain solvent when facing severe weather events like tornadoes or hail.
The captive insurance industry, always seeking innovative solutions to risk financing challenges, recognized that 831(b) could benefit captives meeting the requirements of the Code. The fundamental concept remained consistent: building up retained earnings on a tax-deferred basis to prepare for severe claims, whether from supply chain disruptions or myriad other difficult to manage risks.
However, this evolution has consistently drawn IRS attention and skepticism. Walling explained the reasons behind this scrutiny: “The IRS has disliked captive insurance companies generally, but particularly 831(b) captives making an 831(b) election from the beginning. In my personal opinion, this originates from the multiple ways some of these micro-captives were deferring or avoiding taxes.”
This provision in the Code creates what some view as a double tax advantage. Operating companies can deduct premiums paid to their captives as ordinary business expenses. Then, by making the 831(b) election, the captive can defer taxes on underwriting income. In some cases, companies further extended tax benefits by using captive proceeds to purchase life insurance policies or structuring ownership through generational family trusts.
“In the bad old days, some promoters had websites where ‘tax’ appeared in 72-point font while ‘insurance’ was relegated to 8-point font,” Walling noted. “The IRS targeting these promoters has caused some programs to shut down and others to completely redesign.”
The tension between tax planning and legitimate risk management continues to define regulatory approaches to these structures. While many captive insurance companies serve genuine risk management purposes, the IRS remains vigilant about the minority of those that are motivated by tax considerations.
The introduction of new reporting requirements for insurance companies making an 831(b) election has created significant ripples across the captive insurance landscape. These regulations, which went into effect in January, have prompted organizations to reconsider their risk financing strategies and captive insurance companies.
Walling identifies three distinct ways the industry is responding to increased regulatory scrutiny. “The ‘fighters’ are continuing to challenge the IRS position,” he said. “There’s significant activity happening, especially with the political changes in Washington that might offer some hope.”
These challenges are taking various forms, including legislative actions aimed at reining in the IRS and judicial proceedings in different venues. Recent court decisions, like Ankner’s victory in U.S. District Court, may have diminished some of the IRS’s momentum regarding promoter cases.
A second group, which Walling calls those who are ‘fleeing,’ has chosen to exit the 831(b) space entirely. “They’ve concluded that the benefits of an 831(b) simply aren’t worth the cost, potential regulatory overhead, or audit scrutiny,” he explained. “We’re seeing a number of captive owners leave the captive insurance marketplace entirely to pursue other forms of insurance, or more commonly, shutting down their 831(b) captive to explore alternative risk financing strategies.”
The third and perhaps most interesting category includes the “adapters,” who are finding ways to evolve their approach while maintaining captive insurance companies. Some are converting from 831(b) to 831(a) entities, which removes the premium cap limitations while preserving many benefits.
“They can write more premium, offer more coverage types, write coverages that don’t fit typical micro-captive models, provide higher limits, and write occurrence forms instead of claims-made forms for certain liability coverages,” Walling said.
This conversion process often becomes an opportunity for expansion rather than merely a regulatory response. “Many organizations realize they don’t need separate group captives, medical stop-loss captives, and enterprise risk captives,” noted Walling. “They can consolidate their risk financing into fewer captive insurance companies, creating operational efficiencies.”
Other adapters are choosing to remain within the 831(b) framework while modifying their approaches to meet reporting requirements. They’re working to increase loss ratios and exploring different risk distribution methods beyond traditional risk pools.
This evolution reflects the micro-captive industry’s historical adaptability and innovation. “The industry constantly learns from tax court cases, regulatory oversight, and various other inputs to improve programs,” Walling said. “As I observe managers active in the micro-captive space, I see constant growth and evolution. Their programs rarely remain static as they develop new coverages, new risk distribution approaches, and methods to incorporate additional unrelated risk.”
For a deeper examination of these approaches, readers can visit Pinnacle’s detailed analysis at Fight, Flight, or Adapt: Approaches to New Micro-Captive Regulations.
Rob Walling, FCAS, MAAA, CERA, Principal and Consulting Actuary, Pinnacle Actuarial Resources
As organizations navigate this complex regulatory terrain, specialized actuarial expertise has become increasingly valuable. It is important to identify innovative and experienced actuaries that bring unique insights into helping captive owners make informed decisions about their risk financing structures.
“As an actuary with experience as an expert witness in tax court, I have a backstage seat to what’s happening between the industry and the IRS,” Walling explained. “This provides me with firsthand knowledge of what IRS attorneys and tax court judges care about.”
This perspective proves invaluable when helping clients determine whether to fight IRS challenges, convert to different structures, or pursue alternative risk financing approaches. Pinnacle assists organizations in triaging cases to determine whether they should proceed to tax court or reconsider their approach if problematic factors exist.
For many clients, the decision between remaining an 831(b) captive insurance company or converting to an 831(a) entity represents a critical strategic choice. While the premium-setting process doesn’t fundamentally change between these structures, the conversion creates opportunities to reconsider and optimize risk portfolios.
“I’ll give you an example,” Walling said. “I work for a very large home builder in the Southeast who intentionally limited the number of coverages in their 831(b) insurance company to stay within the premium threshold while maintaining massive self-insured exposures. Converting from a B to an A entity, without being subject to that premium maximum anymore, allowed them to bring a significant amount of coverage into the captive that they previously had to exclude.”
Understanding the nuanced differences between these structures requires specialized knowledge. For instance, while 831(b) entities don’t pay taxes on underwriting income, they also can’t deduct underwriting losses. Conversely, 831(a) entities pay taxes on gains but can deduct losses.
“One of the things that people don’t talk about much regarding 831(b) insurance companies is that in a scenario where they paid a million dollars in premium and had a $1,500,000 loss, they don’t get to deduct that half million-dollar loss,” Walling noted. “Whereas an 831(a) entity gets to take an additional deduction for the loss at the captive level.”
Actuaries like Walling bring value through their understanding of the insurance fundamentals that must remain consistent regardless of tax election. “Both 831(b)s and 831(a)s are insurance companies, first and foremost,” he emphasized. “The issues of risk transfer, risk distribution, insurability of coverages, and operating like an insurance company in the generally accepted sense for a company of that size remain unchanged between the two.”
Perhaps most importantly, experienced actuaries help organizations focus on the fundamental purpose of captive insurance: managing risk effectively. “There’s tremendous value in really listening to and understanding the insured operating company, their risks, and the concerns that keep them up at night—whether they’re currently insuring against those risks or not,” Walling said.
In an environment of regulatory uncertainty, this focus on risk management fundamentals provides a solid foundation for captive insurance companies that can withstand scrutiny while delivering genuine value to their parent organizations.
“When navigating moments of regulatory turbulence, it’s crucial to have service providers who truly know what they’re doing,” Walling advised. “It’s really important to have captive managers, auditors, captive attorneys, and actuaries who don’t just have experience, but possess genuine expertise.”
To learn more, visit https://www.pinnacleactuaries.com/.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Pinnacle Actuarial Resources, Inc. The editorial staff of Risk & Insurance had no role in its preparation.