REIT Captive Insurance: How Captives Work and What Regulators Require

A REIT captive insurance company is an insurance subsidiary, or a related captive arrangement, set up to insure or reinsure selected risks of a REIT, its affiliates or participating real estate entities. A captive is still an insurer. It has to be licensed or otherwise authorized under the law of its domicile and meet that jurisdiction's capital, surplus, governance, reporting, reserve and examination rules (NAIC (opens in a new tab)). The REIT also has to test the structure against Internal Revenue Code §§ 856 to 860 (opens in a new tab), including the taxable REIT subsidiary rules and the asset and income tests. Where the captive cannot write directly in the state where a property sits, a licensed fronting insurer may issue the policy and reinsure the risk to the captive.

What a REIT captive is, and how regulators treat it

A captive is a wholly owned subsidiary created to provide insurance to its non-insurance parent or parents. It operates much like a commercial insurer and carries reporting, capital and reserve requirements (NAIC (opens in a new tab), updated January 5, 2026). That is the main difference between a captive and a self-insurance account: money set aside inside the company is not an insurer, while a captive is a licensed one with a regulator watching its balance sheet.

For a REIT, the captive usually sits beside the commercial insurance program rather than replacing it. It can take a layer of property retention, a deductible band, a hard-to-place risk, or a line such as directors and officers coverage, while commercial insurers and reinsurers carry the rest. Invesco Real Estate Income Trust, for example, disclosed in its 2023 Form 10-K (opens in a new tab) that it joined a captive program established in March 2024 to provide a portion of all-risk property insurance for properties managed by its adviser and affiliates, and that existing per-incident deductibles continued to apply.

A captive insurer is also not the same thing as a captive insurance agent. A captive agent is a person who sells for one insurance company; our guide on independent vs captive insurance agents covers that meaning. A captive insurer is a company that writes insurance for its owners.

When a captive feasibility review makes sense

Before any decision about forming a captive, a board decides whether a feasibility review is worth commissioning. The answer turns on facts the REIT already has: which risks it retains today, its claims history, its deductibles, the capital it could commit, who would govern the captive, how reinsurance would sit behind it, how the tax rules apply, what lenders require, and which domicile could license it. Connecticut, for instance, asks for a feasibility study and a business plan with every captive application (Connecticut Insurance Department (opens in a new tab)).

No cost or savings result is automatic. Whether a captive costs less in total depends on the REIT's exposures, claims, capital, administration, regulatory and tax position, reinsurance terms and contract obligations. A feasibility review is the document that puts those facts side by side, and it is what a domicile regulator, auditor and tax adviser will want to read.

Which captive structures exist

Several structures carry the captive label, and they differ in who owns the company and whose risks it may take (NAIC (opens in a new tab)):

• Pure or single-parent captive: insures the risks of its parent, affiliated companies or controlled unaffiliated business.
• Group captive: insures or reinsures the risks of group members, plus permitted employee benefit risks.
• Association captive: insures the member organizations of an association and their affiliated companies.
• Sponsored or protected-cell captive: uses separate cells whose assets and liabilities are segregated by law, so one participant's losses stay in that participant's cell.
• Risk retention group: a captive organized under the federal Liability Risk Retention Act, limited to liability coverage.

The NAIC also uses the term micro-captive for a captive with annual written premium below $2.8 million for 2024. Several property-owning entities sponsored by one company can share an association captive. Inland Real Estate Corporation disclosed in a 2007 filing (opens in a new tab) that it took part in an insurance association captive owned by entities sponsored by Inland Real Estate Investment Corporation, formed to manage property and casualty coverage and premiums.

How a captive gets licensed

Licensing runs through the domicile, the state or country whose law charters the captive. The rules differ by domicile, and the states where insurance is actually transacted can add their own. Many states have captive statutes; the NAIC captive law chart (opens in a new tab) tracks them, and each state regulator publishes its own counts. Vermont reported 683 licensed captives at the start of 2025, made up of 654 active and 29 dormant, with 41 new captives licensed in 2024 (Vermont Captive Insurance (opens in a new tab)).

Two domiciles show how the requirements read in practice.

Vermont. A pure captive must hold at least $250,000 of unimpaired paid-in capital and surplus before it issues policies or enters reinsurance contracts, and the Commissioner may require more based on the type, volume and nature of the business (8 V.S.A. § 6004 (opens in a new tab)). Capital can take the form of cash, marketable securities, an approved trust or an approved irrevocable letter of credit, and the captive certifies its capital and surplus after it starts business. The same section sets higher minimums for association and industrial insured captives and for risk retention groups, and a lower one for sponsored captives.

Connecticut. An applicant files for admission with supporting documents, including a feasibility study and business plan, and pays an $800 application fee. A Connecticut resident must be designated as a licensed agent, and one board member must be a Connecticut resident. The captive capitalizes according to its approved business plan and application (Connecticut Insurance Department (opens in a new tab)). Once licensed, it pays a $375 annual license fee, holds its annual board meeting in Connecticut, files its annual report and premium tax by March 1, and files audited financial statements by April 1. The Department may conduct an organizational examination, and captives are examined every three years, with a possible extension to five years under the Department's stated conditions.

Those are examples, not a national rule. Before a board compares domiciles, the useful questions for each regulator are what capital it will require for the proposed business, whether a letter of credit is acceptable and in what form, where board meetings must happen, which filings are due when, and which changes need prior approval.

How fronting and reinsurance work

A captive often cannot write policies directly in every state where a REIT owns property. Fronting solves that. An authorized insurer issues the policy covering risks underwritten by an unauthorized or less experienced insurer, then transfers its liability through reinsurance (NAIC Receivership and Insolvency Handbook (opens in a new tab)).

The arrangement has four moving parts:

1. A licensed fronting insurer issues the policy to the REIT or property entity.
2. The fronting insurer cedes some or substantially all of the risk to the captive.
3. A reinsurance agreement sets premiums, losses, limits, collateral, claims authority and recoverables.
4. The fronting insurer keeps financial responsibility to the policyholder.

That last point matters most when something goes wrong. The fronting insurer remains financially liable to the policyholder for the entire insured amount, even when it keeps little or none of the economic risk. This is why the collateral terms in the reinsurance agreement carry so much weight. Reinsurance behind the captive can be proportional or non-proportional and can be written on a treaty or facultative basis.

What a risk retention group can and cannot write

A risk retention group is a corporation or other limited liability association whose primary activity is assuming and spreading all or part of its members' liability exposure. Its members must share similar or related liability exposures, and its owners are its insured members or an organization made up of them (15 U.S.C. § 3901 (opens in a new tab)).

Federal law limits an RRG to liability insurance for those members and to reinsurance of similar liability exposure of another RRG or its members. An RRG cannot write property insurance, so it does not fit a REIT's building risk. It is chartered and licensed in its domicile, while other states where it operates may apply registration, financial responsibility, unfair claims and other laws.

How REIT tax rules apply to a captive

For a REIT, the tax question sits beside the insurance one. A taxable REIT subsidiary is a corporation, other than a REIT or qualified REIT subsidiary, that the REIT and the corporation jointly elect to treat as a TRS, subject to statutory restrictions (26 U.S.C. § 856(l) (opens in a new tab)). A REIT may own up to 100 percent of a TRS, per the IRS Instructions for Form 1120-REIT (opens in a new tab).

Two limits follow. The value of securities of one or more TRSs cannot exceed 20 percent of the fair market value of the REIT's total assets under § 856(c)(4), and transactions between a TRS and its REIT must be at arm's length. IXP, Inc. described in its 2007 Form 10-K (opens in a new tab) a wholly owned taxable REIT subsidiary formed to act as a captive insurance company within its overall insurance program, including earthquake and pollution coverage.

Insurance status is the second question. An affiliated arrangement can qualify as insurance for federal income tax purposes when it involves insurance risk, risk shifting and risk distribution, and is insurance in the commonly accepted sense (IRS, Internal Revenue Bulletin 2008-5 (opens in a new tab)). Premiums paid to a captive are not automatically deductible, and premiums, dividends and other captive payments each have to be classified under the applicable Code provisions and the REIT's facts. How those items fall under the 75 percent and 95 percent income tests is a question for the REIT's tax adviser, read against its own filings.

What the IRS says about micro-captives

IRS Notice 2016-66 (opens in a new tab) identified certain § 831(b) micro-captive arrangements as transactions of interest for disclosure purposes. In the arrangements the notice describes, related insured entities deduct premiums while a related captive electing § 831(b) excludes those premiums from taxable income and is taxed only on investment income.

The IRS said related-party captive insurance can be legitimate. Its concern was contracts inconsistent with arm's-length dealing and sound business practice, and the notice required affected taxpayers and material advisers to consider disclosure and recordkeeping duties under the reportable transaction rules. The IRS has continued to address micro-captives in later guidance, including the Internal Revenue Bulletin 2025-09 (opens in a new tab). An § 831(b) election does not make a captive improper, and it does not prove the arrangement is insurance either.

Terrorism risk and the federal program

For Terrorism Risk Insurance Program purposes, Treasury defines a captive insurer as an insurer licensed under a state's captive insurance laws or regulations (U.S. Treasury, 2024 TRIA Program Effectiveness Report (opens in a new tab)). A captive participates only when it meets the statutory, regulatory, policy, reporting and program conditions. Treasury's captive insurer data call (opens in a new tab) asks qualifying captives to report on terrorism risk insurance subject to the program and separates captives that write eligible property and casualty insurance from those that do not issue terrorism coverage subject to it.

So, a captive policy is not program-eligible by default. The captive's license, the policy, the covered lines and its reporting status are reviewed together.

What public REIT filings show

SEC filings give dated examples of how listed REITs have used captives. They are each company's own disclosures, not a pattern another REIT is expected to follow.

• NexPoint Residential Trust: a 2026 interim filing (opens in a new tab) disclosed that NexPoint Captive Insurance Company was authorized in Montana, began providing rental insurance coverage in August 2023, was owned through the operating partnership, and held a $250,000 cash reserve for potential claims.
• Invesco Real Estate Income Trust: its 2023 Form 10-K (opens in a new tab) described an aggregate deductible first-loss retention position in the adviser's captive property program.
• ARMOUR Residential REIT: a 2015 filing (opens in a new tab) disclosed a wholly owned insurance subsidiary providing D&O coverage to the REIT.

State surplus lines and self-procurement rules

A captive domiciled in one state can still trigger rules in the states where the insured properties sit. Depending on the state, those can include licensing, unauthorized insurance, surplus lines, premium tax or self-procurement requirements. There is no single national rule; the NAIC tracks them through its state insurance charts (opens in a new tab).

The working answer starts with five facts: the property state, the insured entity, the captive's authorization, the fronting arrangement, and the state tax and filing rule that applies to that combination. Confirm the property state's surplus lines, direct procurement, premium tax and captive registration requirements with that state's insurance regulator.

Questions for the board and advisers before going further

A board asked to approve a captive feasibility review, or a captive itself, can work from questions the domicile regulators and the NAIC already frame:

• Which risks would the captive insure or reinsure, and for which entities and locations?
• Which structure is proposed: pure, group, association, sponsored, protected cell or another authorized form?
• What does the feasibility study show, and what business plan supports the application?
• What capital and surplus will the domicile require, and will a letter of credit be used?
• Who will serve as resident agent, board members, actuary, auditor, captive manager and claims administrator?
• Where must board meetings take place, and which annual reports, audits, premium tax filings and renewals fall due when?
• How often may the regulator examine the captive, and which changes need prior approval?
• What fronting, reinsurance and collateral agreements are needed, and how do they respond if the captive cannot pay?
• How does the structure fit the TRS rules, the asset and income tests, and the REIT's Form 10-K disclosures?
• What do lenders and property contracts require for admitted coverage, insurer ratings, certificates and terrorism insurance?
• What happens if the captive is sold, dissolved or placed into runoff?

A captive holds reserves for open claims, so the exit plan shapes how much capital stays committed after the captive stops writing new business.

Frequently asked questions

Short answers on REIT captives.

Can a captive write property insurance for a REIT?

A captive may write property risks when its domicile's law and its license authorize them. A risk retention group is the exception, because federal law limits it to liability insurance and related reinsurance.

Who pays the claim if a fronting insurer reinsures the risk to a captive?

The fronting insurer stays financially liable to the policyholder for the insured amount. It then looks to the captive under the reinsurance agreement, which is why collateral terms carry so much weight.

Does a section 831(b) election make a micro-captive valid?

No. The IRS has treated certain micro-captive arrangements as transactions of interest and has challenged arrangements that do not operate as insurance in the commonly accepted sense.

Does every captive take part in federal terrorism reinsurance?

No. Eligibility, policy, reporting and program requirements apply under the Terrorism Risk Insurance Act and Treasury rules, and a captive that does not issue terrorism risk insurance subject to the program sits outside it.

Your next step

A captive review brings in the REIT's insurance adviser, actuary and tax counsel together. If you are looking for an agency that places commercial real estate coverage, Riskado lists insurance agencies across the US in our agency directory. Take the board questions above to the first meeting, and confirm any producer's license through your state insurance department (opens in a new tab).