Captive insurance arrangements providing a cheaper alternative to conventional insurance are becoming widespread. With most offshore centres providing incentives for the establishment and maintenance of entities involved in such arrangements the trend is bound to grow in the future. Taxation of such entities and deductibility of payments made for the cover provided by them are two of the most significant issues accompanying such development. This article analyses these issues in the light of the recent IRS Ruling 2008-8 in which the Internal Revenue Service expresses its position that it will not treat a captive cell arrangement as insurance if the cell covers exclusively the company that is the participant in the cell.