A captive is an insurer owned by the group to insure or reinsure the group's own risks. It can lower cost and give access to reinsurance markets, but it must sit in a domicile with a suitable regulator and usually works alongside local fronting insurers. The EU's 2025 Solvency II amendments recognise captives' distinct risk profile, US tax rules give small captives a special election, and the DIFC actively hosts captives.
Domiciles and regulation
Directive (EU) 2025/2 amends Solvency II and states that captives covering only their own group's risks have a distinct risk profile, which should be reflected in risk assessment and disclosure requirements, and that they should not need an audit of their solvency and financial condition report. Groups should check the application date and the operative provisions before relying on these changes.
Outside the EU, the DIFC lists captive managers and captive insurers among its firms, with licensing by the Dubai Financial Services Authority. Guernsey taxes most companies at 0% and domestic insurance business at 10%; how captive income is treated was not confirmed.123456
Tax and fronting
In the US, a small insurer can elect under section 831(b) to be taxed only on investment income if premiums stay below an inflation-adjusted USD 2.2 million base and it meets a diversification test, such as no policyholder providing more than 20% of premiums.
Where local law requires local placement, a captive participates as reinsurer of a licensed fronting insurer. UAE law, for example, allows licensed insurers to reinsure outside the UAE.789
| Domicile or rule | Point | Source |
|---|---|---|
| EU (Solvency II as amended by Directive 2025/2) | Captives' distinct risk profile recognised; no SFCR audit requirement | EUR-Lex |
| DIFC (Dubai) | Hosts captive managers and captive insurers; DFSA licenses | DIFC |
| Guernsey | 0% standard rate; 10% on domestic insurance business | PwC (secondary) |
| United States (federal) | Section 831(b) election up to USD 2.2 million base, inflation-adjusted | US Code |
Decisions to make
- Which risks will the captive write, and which countries require local fronting?9Captives usually reinsure locally licensed insurers where direct placement is barred.
- Will the captive be small and non-complex under Solvency II?2Proportionality measures under the 2025 amendments depend on that classification.
- For US captives, will premiums and ownership meet section 831(b)?78The premium ceiling and diversification test determine whether the election is available.
Documents usually needed
- Captive feasibility study and business plan
- Licence application to the domicile regulator
- Fronting and reinsurance agreements
- Actuarial pricing and reserving reports
- Transfer pricing support for premiums paid by group companies
Common mistakes
- Setting captive premiums without independent actuarial support
- Ignoring local placement rules and having the captive write local risks directly
- Using a US 831(b) captive without meeting diversification
- Underestimating capital and governance requirements in the chosen domicile
What this guide does not yet confirm
These points need checking with a qualified local professional before you rely on them.
- Singapore captive licensing and the Guernsey Financial Services Commission's captive and protected cell company regime could not yet be checked.
- DFSA captive rule details (capital, classes) were not reviewed.
- The application date of Directive (EU) 2025/2 and its operative captive provisions were not visible in the text reviewed.
- IRS rules treating certain micro-captive transactions as listed transactions could not yet be checked.
- ADGM captive rules and India's position on captives were not researched.
Sources and review status
Each statement is numbered to the source it was checked against. We use official sources where we can, and each statement says whether it was checked against an official or a secondary source. Sources last checked on 19 October 2026. None of it has been professionally reviewed yet: it is research checked against official and secondary sources by WONE Global, not legal or tax advice.
Directive (EU) 2025/2 of 27 November 2024, published on 8 January 2025, amends the Solvency II Directive. EU-wide insurance prudential regime; the transposition and application dates were not visible in the portion of the text reviewed.
The 2025 Solvency II amendments recognise that captive insurers and reinsurers covering only risks of their own industrial or commercial group have a distinct risk profile, which should be reflected in requirements such as the own-risk and solvency assessment and disclosures, and allow them to benefit from proportionality measures if classified as small and non-complex. Directive (EU) 2025/2, recital 19; the operative captive provisions were not reviewed in full.
Under the 2025 Solvency II amendments, captive insurance and reinsurance undertakings should not be subject to the requirement to audit the solvency and financial condition report. Directive (EU) 2025/2, recital 37.
The Dubai International Financial Centre lists captive managers and captive insurance companies among the insurance and reinsurance firms it hosts. DIFC is a financial free zone in Dubai with its own regulator; onshore UAE insurance law does not regulate DIFC financial services.
Financial firms setting up in the DIFC, including insurers, follow a process of letter of intent, in-principle approval from the Dubai Financial Services Authority, then registration and licensing, and the DFSA grants licences and regulates their activity. DIFC financial free zone.
Guernsey companies pay income tax at a standard rate of 0%, while domestic insurance business, insurance intermediary and insurance management business are taxed at the 10% intermediate rate. Guernsey; the source does not say how captive insurance income is treated.
Secondary source; the Guernsey Financial Services Commission site could not yet be checked. Jurisdiction recorded as INTL because Guernsey is outside the main markets list.
A small US insurance company can elect under section 831(b) to be taxed only on its taxable investment income if its net written premiums, or direct written premiums if greater, do not exceed a base of USD 2.2 million adjusted for inflation. Internal Revenue Code section 831(b) (federal); the inflation-adjusted figure for 2026 was not confirmed. Once made, the election can be revoked only with IRS consent.
Unofficial reproduction of the US Code text.
To use the US section 831(b) election, a captive must meet a diversification test, for example that no more than 20% of its net written premiums comes from any one policyholder. Section 831(b)(2)(B); an alternative ownership-based test applies where the 20% test is not met.
Unofficial reproduction of the US Code text.
A UAE insurance company may reinsure with another reinsurance company inside or outside the State. Article 82(2); this is the route by which UAE risks written by a licensed insurer can be ceded to group captives or overseas reinsurers.
Questions on this topic
8 statements on captives
