Turn Self-Insurance Into a Strength

Phelps County, Nebraska, farmer Phil High has collected one federal crop insurance indemnity in the past 40 years. Irrigation keeps yields steady in drought years, but despite his farm's low odds of a yield disaster, insurance premiums kept climbing.

A lower-deductible plan, like an 85% Revenue Protection policy, should theoretically pay out indemnities more frequently, because it takes less of a yield or price loss to trigger a claim. But, in High's area, the rate on line -- an insurance term representing the premium paid to total recovered losses -- is near 25%.

"Even with the subsidies, that means I'd need to have a complete loss every four years for that policy to make sense," he says.

So, in 2023, he employed a self-insurance strategy that's been used by American corporations since 1986: Section 831(b) of the U.S. tax code, commonly referred to as a "microcaptive." The provision allows a business to create a subsidiary insurance company that insures the risks of the parent company and its affiliated businesses. It's a sophisticated tool with costs and regulatory requirements, but also big tax- and business-planning advantages.

The approach allows High to tailor policies to his operation's risk and budget, while building a tax-deferred savings account similar to a 401(k) to cover future losses.

"We're keeping our money to protect our risk," he says.

High hasn't abandoned federal crop insurance altogether; instead, he captures the most value by buying it at lower, more highly subsidized, levels. He then buys up to his preferred coverage level with a policy from his own insurance company.

The strategy proved itself in its second year. A hailstorm destroyed or damaged all but two of his fields, and High collected his first indemnities from his microcaptive, as well as federal crop insurance, propping up his cash-flow for the year.

"It was a textbook case of how it's supposed to work," he explains. And, yet, he only knows four other farmers with their own microcaptives.

WHERE MICROCAPTIVES FIT

Cory Walters, an agricultural economist at the University of Nebraska, says many farmers across Nebraska and other Corn Belt states share High's struggles with rising crop insurance premiums and limited indemnities. At the same time, the business of farming has grown more risky, and that's why he's working on more research into how microcaptives can work for farms.

"We're 25 years into the federal crop insurance regime, so now farmers understand insurance. We're also to a point where there's a lot more wealth on farms, and they're financially more savvy and willing to experiment with approaches from other industries," Walters says.

Microcaptives are a good fit for large or diversified farms with specific perils growers can't get the right insurance for affordably on the private market, such as animal death loss, loss of a major contract or anything else that's excluded from a property policy, such as pivot replacement, for example.

"If you're a mom-and-pop Schedule F farmer, don't waste your time," says Paul Neiffer, a tax adviser and author of the Farm CPA Report. For the approach to work, a farm generally needs $10 million or more in gross annual revenue, which he says works out to around 8,000 to 10,000 acres for a crop-only operation. Other experts say microcaptives could make sense around 4,000 acres, especially if there are other entities involved, like a farm-owned trucking company.

TAX DEFERRAL BENEFITS

Section 831(b) was introduced to the tax code in 1986 after ballooning jury awards, skyrocketing premiums and mid-term policy cancellations created a liability insurance crisis, says Dustin Carlson, president of both SRA 831(b) Admin, a microcaptive management company, and the 831(b) Institute, an organization that lobbies for clearer rules and guidance for the microcaptive industry.

The law created two new ways for companies to self-insure. Captive insurance, also referred to as 831(a), created a way for large companies and organizations with similar risks to pool together to cover business-specific risks frequently excluded from traditional policies. These captives don't receive the same tax benefits as 831(b) microcaptives but have higher levels of allowable premiums.

Microcaptives, on the other hand, are designed for small businesses. A change in the tax code in 2015 increased the premium allowance and pegged it to inflation. For 2025, the most an 831(b) can collect in premiums is $2.85 million.

The tax treatment is the real benefit of the microcaptive, Carlson says. The parent company deducts the premiums paid as an expense, but the premiums don't count as income to the insurance company. Under 831(b), the microcaptive only pays tax on the investment income of its accumulated surplus. The parent company pays income taxes when it collects indemnities or long-term capital gains taxes when it takes a dividend.

"That tax deferral allows you to accrue those dollars more quickly," Carlson says.

The farm's tax bracket makes a difference. High's farm usually lands in the 25 to 30% bracket each year.

"In our mind, every dollar that we write into our captive has that kind of return attached to it," he says. It's also a more efficient income tax-planning tool than machinery purchases.

In years where a high income appears likely, farmers could buy policies with higher premiums from their captives rather than unnecessarily upgrading equipment to reduce the tax bill.

"You're never going to outguess the depreciation on equipment. When you put money into your captive, technically, it's an appreciating asset," High says. When his microcaptive doesn't pay a claim, the surplus can be invested, although there are regulations on acceptable levels of risk. For High, this meant investing in low-risk bonds, which were easy to cash out when his microcaptive needed to make a payment.

While the tax treatment is a definite bonus, Walters says the IRS watches microcaptives closely because of the potential for abuse, such as a Nebraska business writing an insurance policy to cover damage from a hurricane.

"It's not a tax-minimization strategy. It's a risk-management and wealth-maximization strategy," Walters says, adding there's a right and a wrong way to run a captive.

THE RIGHT WAY

The most important aspect of a microcaptive is that it's run as an insurance company. That means it issues actuarially sound policies, collects appropriately priced premiums, pays indemnities when they're triggered and shares risk with other parties.

All of these tasks, as well as back-office functions like legal and tax compliance, can be accomplished by hiring a microcaptive manager, such as Carlson. Most also offer participation in a risk pool or co-op to diversify risk.

"You want to be very comfortable with who that management company is," High explains. Working with someone knowledgeable about rules and regulations is key, but you should expect to do some educating on the risks associated with your farm. "You don't get to do this for free, even though you own both sides of the equation," he adds.

There are a handful of companies that offer microcaptive management services. Price tags, and what you get for your money, vary widely, High says. It can cost anywhere from $6,000 to $100,000 to establish a captive, plus an annual administration fee.

A GOOD FIT

Crop insurance is a great fit for microcaptives from the compliance perspective, says Ken Harrison, a former career employee at USDA's Risk Management Agency and founder of Eliasson Group, an insurance company that consults and advises farmers on establishing microcaptives.

RMA has already done most of the actuarial work on crop insurance, which makes it easy to assess the risk in a policy and its appropriate premium, which greatly reduces the odds of an IRS legal challenge.

Policies covering avian influenza and other devastating animal diseases may also be well-protected from IRS scrutiny. The IRS conceded a challenge to a New Jersey egg farm's microcaptive policy covering avian influenza in 2021. The farm was hit by the virus the next year.

Carlson says fears around an IRS audit are a bit overblown. His firm has serviced more than 1,300 clients, and none have been audited as a result of owning an 831(b), although there have been random audits of his clients' operating companies.

If a farmer is interested in pursuing a microcaptive, Neiffer suggests asking potential management companies about their history of audits.

A LONG-TERM STRATEGY

It's important to be tactical, especially in the beginning, to avoid the possibility of a claim pushing the company into insolvency, Carlson says.

"With good underwriting, you're accruing those reserves, and then you can go write more risk. You can increase limits or maybe issue additional policies," he says.

That's why federal crop insurance is still an important part of High's insurance plans. In 10 years or so -- once he's accumulated enough surplus in his 831(b) -- he may consider going without it. But, for now, the $5-per-acre out-of-pocket premium on a 70% Revenue Protection policy protects about $700 to $800 per acre.

High funded his microcaptive heavily in its first year. Coming off the strong profits from 2022, he wrote a policy covering 71 to 95% of revenue from his microcaptive, which carried a premium of around $100 per acre. Profitability wasn't looking as good in 2024, so he only covered up to 80%, a much less-expensive endeavor. In just the first two years, High created enough reserve in his 831(b) to pay the indemnity indicated by his policy for 2024's hailstorm. The remainder continues to grow.

High's talking with various companies about increasing the deductible on his property insurance policies and writing a policy that covers the deductible from his microcaptive, but he has yet to receive a quote that makes the math work.

Carlson says microcaptives can be exceptional tools for covering emerging risks that private insurers can't do affordably. For instance, most cybersecurity insurance policies include an exclusion for employee error. So, if a critical employee falls victims to a phishing attack, the third-party policy may not cover it. That's a prime spot for a microcaptive policy to fill the gap.

CONSIDER THE POSSIBILITIES

Farmers make a lot of decisions based on their crop insurance. The 2025 spring crop insurance price for corn is $4.70 per bushel and soybeans $10.54 per bushel. Compared to farmers' breakevens, those prices provided a better safety net for corn production. Corn acreage rose 5% from the prior year to 95.2 million, while soybean acreage fell.

"You're betting on probabilities," High says, making it more important to analyze your risk-management decisions carefully. "You've got to drill down and really understand what your risk is. I think every single farmer is capable of doing that. Do they? No."

While High believes in his microcaptive's potential, his son, Nolan, may be even more excited. He shares his father's perspective on risk management and believes the microcaptive is a great estate- and succession-planning tool.

"Every farmer's No. 1 idea is to go buy land to sustain their farm for generations," Nolan says. "This is a different tool -- a different asset -- that's also easier to transfer to the next generation of the farm."

Neiffer says that's one of the biggest advantages of the microcaptives, if they can manage them successfully enough to get to that point. He's known farms that have had varying levels of success and says some are less keen on the plan after several years of operation.

"If a farmer's using it to truly diversify risk, it's going to work really well," he says. "If you're using it purely to save on taxes and shelter taxable income, it's not going to work as well."

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