Think of captive insurance as moving from "renting" your insurance to "owning" it. Instead of sending premiums to a traditional carrier, you’re basically building your own in-house insurance company. It gives you the driver's seat when it comes to coverage and costs, but like owning any business, it comes with a few extra responsibilities you’ll want to be ready for.

The main purpose of a captive insurance company is to cover risks that are unique, difficult to insure, or inefficiently priced in the commercial market. When managed well, captives can deliver cost savings, improved risk management, and greater control over coverage.

However, captive insurance may not be the right fit for every business. Like any alternative risk financing strategy, it involves tradeoffs. Understanding the advantages and disadvantages of captive insurance is essential before deciding if a captive is appropriate for your organization.

Below are the most common challenges and considerations businesses encounter when evaluating captive insurance.

What Are the Disadvantages of Captive Insurance?

Initial Setup and Costs

Let's talk about the biggest hurdle for forming a captive insurance company: the startup costs. Building a captive isn’t quite as simple as opening a new bank account. You’ll need to factor in things like feasibility studies, licensing fees, and hiring a management team to keep the gears turning.

In addition to these costs, captive insurance companies must meet regulatory capital requirements set by their chosen domicile. This capital ensures the captive can pay claims and remain financially stable, but it may require a significant cash or collateral commitment.

These funding requirements can be a significant burden. Even when the long-term economics are favorable, the short-term financial commitment can be a significant hurdle.

Regulatory Requirements for Captive Insurer

Captive insurance companies are regulated entities, and the regulatory environment can be complex.

Each captive operates under the oversight of a regulatory authority in its chosen domicile. Regulatory requirements vary by jurisdiction but typically include:

• Minimum capitalization and surplus levels
• Ongoing financial reporting and audits
• Governance and board oversight standards
• Compliance with insurance and tax regulations

Failure to meet these requirements can result in penalties, fines, loss of licensure, and reputational harm to the parent company.

Tax compliance is another area to navigate with captives. Captive insurance companies must be structured and operated carefully to maintain favorable tax treatment, including compliance with Internal Revenue Service guidelines on risk distribution, premium pricing, and claims activity. Poor execution can undermine tax advantages and create unexpected exposure.

Insurance Company Operations and Management

When you start a captive, you’re not just a policyholder anymore; you have all the responsibilities of an insurance company. This means you are responsible for handling claims, picking investment strategies, and staying on top of paperwork.

Your captive should also align with your company’s broader business strategy. Decisions about risk retention, coverage limits, and claims philosophy have real financial consequences. Poor alignment between business objectives and captive operations can lead to volatility and inefficiency.

Forming a captive is definitely not a hands-off solution. It requires a bit of a learning curve, but that’s exactly where having a brokerage comes in to help you navigate the tricky parts.

Increased Need for Risk Management

Captive insurance shifts risk back to the business, making a strong risk management practice essential.

With a captive, you genuinely have "skin in the game" with your risk policy. If your safety programs are well defined and claims are low, you’re more likely to keep the profits. On the flip side, if safety slips, it hits your bottom line directly. This accountability is a huge plus, turning safety from a tedious compliance chore into a strategic way to save your business money.

Because captive insurance companies retain risk, poor claims experience directly affects financial performance. High losses, unmanaged exposures, or inconsistent safety practices can erode underwriting profits and strain capital reserves.

Why Do Businesses Still Choose Captive Insurance?

Given these challenges, it is reasonable to ask why businesses still pursue captive insurance. But for the right organization, the advantages often outweigh the disadvantages.

Captive insurance can deliver:

• Greater control over coverage and claims
• Improved transparency into loss drivers
• Long-term cost stability and cash-flow benefits
• The ability to retain underwriting profits and investment income

Captives also encourage better risk behavior. When companies benefit directly from improved safety and lower claims, risk management becomes a strategic advantage rather than just a compliance exercise.

That said, captives are not for everyone. Businesses considering this path should have:

• Stable and predictable loss history
• Strong financial fundamentals
• A long-term mindset
• Leadership buy-in around risk management

This is where working with an experienced insurance broker and captive advisor can make a difference. A thorough feasibility study, realistic financial modeling, and a clear understanding of responsibilities can help determine whether a captive or an alternative, such as a group captive, is the right fit for your organization.

Captive Insurance: A Strategic Tool, Not a One-Size-Fits-All Solution

Captive insurance can be a powerful risk financing strategy, but it is complex.

Initial costs, regulatory requirements, operational demands, and the need for strong risk management are important considerations for any business. For some organizations, these challenges outweigh the benefits. For others, they provide greater control, transparency, and long-term value.

The key is to approach captive insurance with a clear understanding of its complexities.

At Gregory & Appel, we help businesses objectively evaluate captive insurance by considering both advantages and disadvantages to determine alignment with their goals, risk profile, and financial strategy.

If you are considering captive insurance or would like to explore alternatives such as group captives, we are available to discuss your options. Fill out the form below to take the next step.

This content is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice. Gregory & Appel is neither a law firm nor a tax advisor; information in all Gregory & Appel materials is meant to be informational and does not constitute legal or tax advice.

A captive insurance company is formed to insure the risks of its parent company or a group of related businesses. By funding their own insurance company, businesses gain flexibility and long-term financial advantages.

Captives can be structured to provide insurance coverage to a broad range of risks, including general liability, auto, casualty, property, workers’ compensation, and specialized exposures such as professional liability or cyber risk. All areas that can be difficult or costly to insure through traditional markets.

Captive programs can support more effective risk management by allowing businesses to tailor insurance coverage to their needs, allocate costs more accurately, incentivize loss control, and manage risk in alignment with actual operations.

Captive insurance companies are subject to regulation, including requirements for capitalization, solvency, financial reporting, and actuarial review. This oversight adds complexity but promotes financial discipline and long-term stability.

For businesses seeking to reduce reliance on commercial insurers, gain greater control over premiums, and implement a strategic approach to risk, captive insurance with both its advantages and disadvantages is a great option to consider.

What Are the Benefits of a Captive Insurance Company?

Captives are attractive for a reason! Benefits include:

• More Control
  At its core, captive insurance is about control: control over costs, insurance coverage, claims, and risk strategy. Captive insurance gives companies greater control over the claims process. Owners can participate directly in claims management, reducing friction, improving outcomes, and helping avoid unnecessary disputes.
• Cost Savings
  A significant advantage of a captive arrangement is cost savings. Captives can reduce or stabilize premiums by eliminating carrier profit margins and, in some cases, broker commissions. Companies fund coverage based on their own loss experience rather than inefficiencies in traditional pricing.
• Additional Cash Flow
  When properly structured, a captive can generate income from underwriting performance and investments. Premiums are set aside as reserves and invested until claims are paid, providing a timing advantage that can enhance cash flow.
  
  A captive derives income through underwriting and investment strategies aligned with its risk profile and regulatory requirements. Investment options are typically conservative and diversified, yet still offer opportunities to strengthen financial performance over time. A captive insurer can also generate investment income from premiums paid in advance. These unearned premiums are invested until claims are paid, strengthening the captive's financial position over time.
• Customization and Flexibility
  Unlike off-the-shelf insurance products, captives enable businesses to design coverage tailored to their specific risks. Policy terms, deductibles, premiums, and coverage limits can all be structured to reflect how the business actually operates, not how an insurer assumes it does.
  
  This flexibility enables coverage for unique or emerging risks that may not fit traditional policies. Captives can adapt to specialized professional exposures, operational risks, or evolving cyber concerns as the business changes.
  
  For some organizations, this customization aligns their risk and insurance strategy with overall business goals, transforming insurance from a necessary expense into a strategic risk management tool.
• Risk Management Strategies
  Captive insurance encourages improved risk management. Because the parent company funds their own risk, they are incentivized to identify hazards, improve safety practices, and proactively reduce losses. This approach can lead to significant improvements in employee safety, operational efficiency, and claims outcomes.
  
  Captives also provide access to detailed management information and claims data that isn’t always available in traditional insurance models. This transparency helps businesses analyze trends, identify problem areas, and make informed decisions about where to invest in loss control.

How Does a Captive Insurance Company Make Money?

Captive insurance companies primarily make money in two ways: underwriting profit and investment income.

Underwriting profit results when premiums collected exceed claims and operating expenses due to effective risk management. Investment income is generated by investing unearned premiums while claims are pending.

These revenue streams allow businesses to retain value that would otherwise go to a traditional insurer. Success depends on strong governance, adequate capitalization, disciplined risk management, and compliance with regulatory and tax requirements.

Is Captive Insurance Right for You?

Captive insurance can offer significant benefits, but it’s definitely not a "one-size-fits-all" solution. It’s a strategic move that requires a long-term mindset and a real commitment to safety. Before you dive in, you’ll want to look at your financial goals and your appetite for managing risk. It’s about weighing those great advantages against the trade-offs to see if it’s right for your business.

Ready to Explore Captive Insurance?

At Gregory & Appel, we’re here to help you pull back the curtain on captive insurance. Our captive experts look at your goals and unique risks to see if a captive program is the smartest move for your future.

Whether you’re interested in forming your own standalone captive or joining forces with a group captive, we’re ready to walk you through it. Let’s start the conversation and find the strategy that puts you back in control.

This content is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice. Gregory & Appel is neither a law firm nor a tax advisor; information in all Gregory & Appel materials is meant to be informational and does not constitute legal or tax advice.

If you’ve ever wondered how some businesses manage to keep their insurance costs down while still having solid coverage, captive insurance might be the secret sauce. Simply put, a captive insurance company is like having your own in-house insurance provider, created just for your business and its unique risks. It’s a smart, flexible approach that’s gaining popularity as an alternative solution and choosing the captive route can be a strategic option for businesses seeking greater customization and cost control. In this article, we’ll walk you through the key advantages and disadvantages so you can decide if captive insurance is the right fit for your business.

What Are the Advantages of Captive Insurance?

At Gregory & Appel, we often see businesses benefit in some pretty meaningful ways when they choose captive insurance. We’ve seen captive insurance arrangements help companies:

• Enhance employee safety through increased risk management and proactive loss control measures incentivized by captive insurance arrangements.
• Gain greater control over insurance coverage, allowing you to tailor insurance policies to fit your unique risks and needs, including professional liability, general liability, and other hard-to-insure exposures, for better risk management and peace of mind. Captives can provide coverage for risks that are difficult or too expensive to insure through commercial insurance.
• Achieve cost control by using a captive program or self insurance strategy, which helps businesses reduce or better manage costs related to risk and employee benefits.
• Keep underwriting profits and investment income within your own company, rather than sending premiums off to a traditional insurer. Captive programs offer underwriting advantages by allowing access to real-time and historical claims data, leading to better risk assessment and informed decision-making. The underwriting and investment income generated can be retained by the captive owners.
• Earn investment income and improve cash flow as premiums paid to the captive can be invested, allowing businesses to benefit from investment returns and enhanced financial stability due to delayed claims payouts.
• Receive dividends at the end of the year, which can boost your financial strength over time by turning your insurance program into a financial asset.
• Reduce costs by avoiding the overhead and profit margins built into traditional insurance premiums, making your insurance program more efficient. Captive insurance also offers tax advantages, favorable tax treatment, tax favored accumulation, and certain tax advantages, such as deductible premiums paid and potential reductions in state premium taxes.
• Implement robust risk management policies that help with managing risk, protecting your own capital, and allowing the captive to retain risk as it matures. Captive owners must carefully manage their own capital, as it is at risk if claims are high or if risk policies are not properly managed.
• Allocate costs more accurately within your organization, like distributing medical deductible costs or billing partners based on actual loss experience.
• Join evolving captive programs or establish your own captive program to access numerous benefits, including tailored coverage, improved transparency, and the ability to self insure for greater flexibility and control.

What Are the Disadvantages of Captive Insurance?

While captive insurance offers many benefits, we believe it’s important to be upfront about the fact that it may not be suitable for every business. Here’s a few points to consider when forming your own captive:

• Establishing a captive requires a significant capital commitment and resources, especially during the early stages of captive formation.
• Initial setup costs and ongoing administrative responsibilities can be substantial, including the operational burden of claim administration.
• Regulatory compliance varies by jurisdiction and can be complex and time-consuming, making the choice of the right captive structure critical for compliance and efficiency.
• Captives assume the financial risk of losses, which can lead to volatility, especially with catastrophic events, and require careful management of unearned premiums to maintain financial stability.
• Managing a captive demands specialized expertise in underwriting, claims handling, and risk management, with the captive owner and captive insurer responsible for overseeing claims and risk operations.

The other option is to join a captive insurance program. Here are a few potential drawbacks to be aware of:

• Shared Risk Exposure: In a group captive, your company shares risk with other members. Poor claims experience by one member can affect the overall financial performance and potentially increase costs for all participants.
• Limited Control: Compared to owning a single-parent captive, members of a group captive may have less control over policy terms, underwriting decisions, and claims management, as these are often governed by the collective group.
• Capital and Funding Requirements: Although typically lower than forming a standalone captive, group captive members may still need to commit capital or collateral and contribute to funding claims, which can impact cash flow.
• Potential for Complex Governance: Group captives require coordination among multiple companies, which can lead to slower decision-making and potential conflicts among members regarding risk management strategies.
• Regulatory and Compliance Complexity: Depending on the structure and domicile, group captives may face regulatory challenges that require careful navigation to maintain compliance.

Whether you form, join, or stick with traditional insurance, getting your business “captive ready” can really pay off. By putting solid risk management practices in place, you make your company stronger and keep your claims history looking good, which helps your overall risk profile. Staying financially stable also puts you in a better spot with insurers and gives you more control over your costs and risks, no matter what kind of insurance you use. Plus, being prepared means you keep your options open, so if a captive insurance program feels like the right move down the road, you’ll be ready to take it on.

Considerations for Captive Insurance

Before jumping into captive insurance, it’s important to take a close look at a few considerations. It’s not something to take lightly! Success means committing to managing risks well and having the right funding. Doing a thorough feasibility study upfront, including a detailed cost benefit analysis, can really help you get the most out of a captive insurance program while avoiding the common pitfalls. Before starting your own captive, factors you should consider are:

• Regulatory Environment
  Captive insurance companies are subject to regulatory oversight that varies depending on the jurisdiction in which they operate. The domicile's regulatory body sets specific requirements for capitalization, reporting, and governance standards, which can be complex and time-consuming. Failure to comply with these regulations can result in penalties and damage to the company’s reputation.
• Administrative Considerations
  Operating a captive insurance company requires ongoing administrative responsibilities such as financial reporting and claims handling. These duties can create a significant administrative burden, including legal fees and regulatory compliance costs. Effective cost allocation and careful evaluation of the domicile’s regulatory requirements are essential for maintaining financial stability.
• Risk Exposure
  Captive insurance companies assume direct responsibility for covering losses, which exposes them to financial risks. Catastrophic or unforeseen events can place significant strain on the captive’s finances. To manage large-scale risks, captives may need to access the reinsurance market, which is known for its volatility and responsiveness to loss history, impacting premium adjustments. It’s critical to evaluate and manage risk exposure carefully, including emerging risks.
• Tax Implications
  Captive insurance companies must adhere to tax regulations, including those enforced by the Internal Revenue Service, to maintain financial compliance. Careful consideration of tax benefits and implications is necessary when forming and operating a captive insurance company. It's important to consult with a licensed tax professional.

Most of these considerations involve starting your own captive insurance company, which can feel like a big commitment with plenty of moving parts. The initial steps of captive formation require meeting financial requirements and regulatory capitalization set by the domicile's regulatory body. But here’s the good news: you might not have to go it alone. You can partner with an experienced insurance broker like Gregory & Appel to help you along the way.

Or, many businesses choose to join an existing group captive insurance program instead. This approach lets you tap into the benefits of captive insurance without shouldering all the startup costs and administrative burdens yourself. It’s a way to share risks and resources with other like-minded companies, making it a more accessible and manageable option for businesses that want to explore captives but aren’t ready to build one from scratch. So, if the idea of forming your own captive feels overwhelming, joining a group captive could be a smart alternative to consider.

How Do Captive Insurance Companies Make Money?

Captive insurance companies make money mainly in two ways: through underwriting profits and by earning investment income. When your business pays premiums to your captive, some of that money is set aside as unearned premium reserves until claims are paid out. During that time, the captive invests these funds, generating investment income that can really boost its financial health. Since claims can sometimes take a while to be paid, this investment income becomes a crucial part of the captive’s earnings.

Other financial factors to be aware of with captive insurance companies are:

• Capital Requirements: To keep things running smoothly, captive insurance companies need to hold enough capital to cover potential losses and fluctuations in claims. This capital acts as a financial safety net, making sure the captive can pay claims when they come up. The parent company, or companies, will need to post collateral as part of the arrangement to back up these claims.
• Investment Strategies: Captives don’t sit on the premiums. They actively invest them using strategies that balance earning potential with risk management. Their investment portfolios are typically diversified and tailored to the captive’s risk appetite and regulatory rules. Plus, the regulatory body in the captive’s domicile often sets guidelines to keep investments safe and sound.By thoughtfully choosing where to invest, captives can boost their underwriting gains and overall financial results. Smart investing is a key part of how captives help control costs and increase cash flow for their parent companies.
• Financial Performance: How well a captive does financially depends on several factors: underwriting profits, investment income, efficient claims handling, and solid capital management. Of course, startup costs, ongoing admin expenses, and regulatory compliance also play a role in the overall picture. Underwriting profit is especially important as a measure of success for captive insurance companies, reflecting the effectiveness of risk management and claims control.

By forming a captive, companies get to keep the underwriting profits and investment income that would normally go to traditional insurers. This blend of cost savings, better cash flow, and more control over finances makes captive insurance a compelling option for businesses looking to take charge of their insurance costs and risk management.

Gregory & Appel: Your Partner for Captive Insurance Success

While captive insurance requires a commitment to risk management, funding, and careful evaluation of regulatory and capital requirements, it can be a powerful alternative for businesses seeking cost savings, improved risk management, and increased flexibility. With Gregory & Appel’s expertise, you gain access to customized coverage options and solutions you won't find in traditional insurance markets.

Ready to find out if a captive insurance program is the right fit for your business? We'd love to talk with you and help you explore your options. Fill out the form below to start the conversation with Gregory & Appel today.

This content is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice. Gregory & Appel is neither a law firm nor a tax advisor; information in all Gregory & Appel materials is meant to be informational and does not constitute legal or tax advice.

If your company faces challenges obtaining affordable or specialized liability insurance through traditional channels, an RRG might be a smart alternative. These member-owned insurance companies, often viewed as a type of captive insurance, are designed specifically for businesses with similar risks who want more say in how their coverage is structured.

One of the biggest advantages of an RRG is the control members have over their insurance programs. Since the policyholders are also the owners, they can influence coverage terms, risk management strategies, and claims procedures to better fit their specific needs. This collaborative approach helps businesses manage their liability risks more effectively.

At Gregory & Appel, we can help you explore whether an RRG aligns with your company’s risk management goals and long-term financial health.

Risk Retention Group (RRG) Example

Imagine a group of independent healthcare providers spread across several states, each struggling to obtain affordable and comprehensive medical malpractice insurance through traditional insurance companies. These providers faced rising premium costs, limited coverage options, and inconsistent service from conventional insurers. Recognizing their shared challenges and similar liability risks, they decided to form an RRG.

By pooling their resources and risks together, this group created a member-owned liability insurance company tailored specifically to their unique needs. As policyholders and owners, they gained direct control over their insurance coverage, claims handling, and risk management strategies. RRGs provide liability coverage and only provide insurance for liability lines such as professional liability, product liability, and general liability. The RRG allowed them to customize policies that addressed the specific exposures of healthcare providers, such as professional liability and malpractice insurance.

Operating under a single domiciliary state’s regulation, the RRG efficiently extended its coverage across multiple states where its members practiced, bypassing the cumbersome licensing requirements traditional insurers face. With access to reinsurance markets and a focus on collective risk management, the group maintained stable premiums and improved loss control programs, benefiting all members. RRGs customize policy forms to address the specific liability exposures of their members.

Over time, the RRG not only provided the healthcare providers with affordable, reliable liability insurance but also fostered a collaborative environment where members shared best practices to reduce risks. In years with fewer claims, members even received dividends, reinforcing the financial strength and community spirit of the group. RRGs are required to maintain robust financial statements and conduct actuarial analysis to ensure ongoing financial stability.

This example illustrates how an RRG can empower businesses facing similar liability challenges to take control of their insurance needs, achieve cost savings, and enhance risk management through collective ownership and tailored coverage.

Why Are Risk Management Strategies Important for RRGs?

It’s all in the name! RRGs don’t work without a strong focus on risk management. Because members share similar liability exposures, effective collective risk management helps reduce losses and keep premiums stable. Strong risk management strategies directly support the RRG’s effectiveness and stability through:

• Reducing claims: Members collaborate to identify and control shared risks, lowering overall losses.
• Managing large losses: Access to reinsurance markets helps RRGs absorb significant claims and maintain financial strength.
• Customizing loss control: Tailored risk management programs address the specific exposures of member businesses.
• Stabilizing premiums: Proactive risk management keeps pricing consistent despite market fluctuations.
• Enhancing coverage eligibility: Strong risk controls help members maintain insurability and prevent coverage gaps.

The Benefits of Risk Retention Groups vs. Traditional Insurance

RRGs provide an alternative to traditional insurance options by enabling businesses to have more control over their insurance coverage and costs. Unlike traditional insurers, RRGs operate across state lines with fewer regulatory hurdles and focus solely on liability coverage tailored to their members. By pooling risks between members who share similar liabilities, members of an RRG can collectively manage risk. Here are a few examples of how that benefits members:

• More control over insurance programs: members of a risk retention group have a voice in how their insurance programs are structured, meaning they can influence the coverages, terms and conditions, limits and deductibles that best fit their needs.
• Leverage and access to reinsurance: RRGs often have more collective leverage and purchasing power with reinsurers. As a group, they can gain direct access to reinsurance markets, purchasing reinsurance to help manage risks and provide long-term financial stability.
• Long-term stability with pricing: owners have the ability to predict pricing more accurately because with larger risk pool than just their own exposures, losses are easier to forecast. Premiums are based on their actual loss history (and a prediction of future losses), instead of being subject to volatile market factors in the traditional market.
• Potential return of dividends for good loss experience: in an RRG, there is potential for owners to receive an annual dividend in years when claims (and other expenses) are below projections. Traditional insurance, of course, does not offer this opportunity.

What Types of Risks Fit Best in Risk Retention Groups?

Risk retention groups are most commonly formed as risk-bearing entities for writing liability insurance, and are used by similar organizations facing similar risks. Some examples of common risks covered by RRGs include:

• Professional liability: errors & omissions insurance, like legal or medical malpractice
• Tech E&O: errors & omissions insurance related to technology-related professions or businesses
• Product liability: coverage for liability that arises from the use of a product, such as manufacturing or design defects, or failure to issue warnings for safe use
• General liability: such as bodily injury or property damage caused by a member organization’s operations
• Directors and officers liability: risks arising from an organization’s management or decision-making processes
• Auto liability: coverage for risks arising from the use of company vehicles, such as bodily injury and property damage

A risk retention group can include a variety of coverages, but is limited to liability coverage. While the above list gives you an idea of the types of risks which are often included, it depends on the organizations, what risks they share and whether there is a shared interest in retaining these risks collectively.

Take Control of Your Liability Coverage Today

Risk retention groups offer a powerful alternative to traditional insurance, giving businesses with unique or high-risk liability exposures the opportunity to customize coverage, stabilize pricing, and enhance risk management through collective ownership. Whether you’re exploring RRGs or other captive insurance options, understanding your specific needs and the regulatory landscape is key to making the right choice.

Ready to take charge of your insurance program and unlock the benefits of a risk retention group or captive insurance? Fill out the form below to contact Gregory & Appel and let our experts guide you through tailored solutions designed to protect your business and control costs.

This content is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice. Gregory & Appel is neither a law firm nor a tax advisor; information in all Gregory & Appel materials is meant to be informational and does not constitute legal or tax advice.

At Gregory & Appel, we often get asked, “what is captive insurance?” It’s a question that opens the door to a powerful way for businesses to take control of their own risk management and insurance costs. Imagine having your own insurance company: one that’s tailored specifically to your unique risks and needs, rather than relying solely on traditional insurers.

This concept is known as self insurance, where a business assumes the financial risk for its own losses. Captive insurance is a formalized and regulated version of self insurance, allowing businesses to create their own insurance company to better manage, customize, and potentially reduce the costs of covering specific risks.

Captive insurance is a strategic partnership that lets you manage risks on your terms, unlock potential cost savings, and gain greater control over how your business protects itself. Let’s explore how this approach can transform the way you think about insurance.

What Are the Benefits of Captive Insurance?

At Gregory & Appel, we see captive insurance as a powerful way for businesses to take the reins on their risk management and insurance costs. With a captive, you’re keeping control in-house. It gives you more control to handle emerging risks and tailor coverage to what really matters to your company, including covering unique risks that might not be available through the usual channels. Captives can also provide coverage for employee benefits, which can be difficult to insure through traditional markets. In addition, captives can provide coverage for specialized or hard-to-find risks that commercial insurers may not offer. Captives can also improve how claims are handled and boost your overall risk control, making them a smart tool for businesses serious about managing their risks better.

One of the biggest perks is the financial incentives that come with captive insurance. These can make a real difference in reducing your overall insurance expenses, achieving lower costs, and can even put money back in your pocket at the end of the year. Plus, captives often lead to cost-effective coverage, helping you lower premiums and manage your insurance budget more strategically.

What Is the Downside of Captive Insurance?

At Gregory & Appel, we know that captive insurance isn't for everyone. It offers great benefits, but it’s not without challenges. Setting up a captive requires a significant upfront investment and ongoing management, which may not be cost-effective for smaller companies. Captives also concentrate risk within your own company, so large losses may hit harder than with traditional insurance. Compliance and IRS scrutiny mean you need expert guidance to avoid pitfalls. Ultimately, captives work best as a long-term strategy with the right resources and commitment.

How Captive Insurance Works

Captive insurance works by allowing a parent company (or several companies) to create its own licensed insurance company to cover its specific risks. This captive sets premium levels and issues policies tailored to the parent’s needs, giving your business greater control over insurance costs and risk management. The captive is capitalized and regulated like any other insurance company, often purchasing reinsurance to protect against large or catastrophic losses. Managed by a board of directors, your captive operates under regulatory requirements to make sure it remains financially sound and compliant, making it a flexible and effective risk financing option.

How Do Captive Insurance Policies Work?

Captive insurance policies are specially designed contracts issued by your captive insurer to the insureds, who are typically the owners or affiliates of the parent company. In a captive structure, the insured is also the owner of the captive, which allows for greater policy customization and direct involvement in governance. Unlike traditional policies, these are tailored to the specific needs and risk profiles of your business, providing customized coverage that may not be available in the commercial insurance market. This bespoke approach allows you, as the captive owner and insured, to have direct influence over policy terms, pricing, and claims handling, enhancing your company’s ability to manage and finance its risks effectively.

How Do Captive Insurance Companies Make Money?

Like any other insurance company! Captive insurance companies make money primarily by collecting premiums from their parent company or related entities. These premiums are set based on the specific risks the captive covers, allowing for tailored pricing that reflects the company’s own loss history and risk profile. If claims are lower than expected, the captive keeps the difference, which can improve cash flow and even generate profits. Captives often invest the reserves they hold for future losses, earning income that adds to their bottom line. So, if you join or form a captive, you'll usually get more than covering risks. You'll also typically see an ROI, making captive insurance a smart financial strategy that benefits your company.

What Are the Tax Considerations for Captive Insurance Companies?

When setting up and operating a captive insurance company, it’s important to be aware that there are tax implications involved. Captives must comply with applicable tax laws and regulations, including guidelines set by the Internal Revenue Service (IRS) related to risk distribution and risk shifting. One of the key advantages of captive insurance companies is the potential tax benefits they can offer when structured and managed properly. Because tax rules around captives can be complex, companies should seek specialized advice to make sure they stay compliance and to understand how the captive fits into their overall tax strategy. Proper tax planning and reporting are essential to avoid unexpected issues and to maintain the captive’s effectiveness as a risk management tool.

What States Allow Captive Insurance?

Captive insurance companies can be formed and domiciled in a variety of states across the U.S., each offering different regulatory environments, benefits, and requirements. Some states have established themselves as leading domiciles for captive insurance due to their favorable laws, experienced regulators, and supportive infrastructure. Notable states that allow captive insurance include Vermont, Delaware, Utah, Hawaii, South Carolina, and Nevada, among others.

Choosing the right domicile depends on factors like your company’s risk profile, business goals, regulatory preferences, and tax considerations. Companies often work closely with captive managers and legal advisors to select the domicile that best aligns with their captive structure and long-term strategy.

Explore Captive Insurance Solutions With Gregory & Appel

At Gregory & Appel, we understand that every business has unique risk management needs. Our experienced team is here to guide you through the process of exploring captive insurance options tailored to your company’s size, risk profile, and goals. From initial feasibility studies to ongoing claims management and regulatory compliance, we provide comprehensive support to help you unlock the significant benefits of captive utilization. Partner with us to gain greater control over your insurance costs, improve loss control, and design cost-effective coverage that fits your business perfectly.

If you’re ready to learn more about how captives can work for your business, fill out the contact form below. Our team at Gregory & Appel is ready to help you explore this innovative risk management solution and support you every step of the way.

This content is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice. Gregory & Appel is neither a law firm nor a tax advisor; information in all Gregory & Appel materials is meant to be informational and does not constitute legal or tax advice.

With the volatility of the insurance market, many organizations are exploring creating their own insurance companies. For CFOs and risk management professionals starting a captive insurance company can be appealing but what is the price of admission?

Understanding the cost to set up a captive insurance company is not just about the initial check to a lawyer. It involves capitalization, ongoing management, regulatory compliance, and a long-term commitment to self-insurance. For the right organization, that investment can pay off. For others, it may not.

Captives as an Investment

A captive insurance company is a specialized entity created to insure the risks of its parent organization or related entities. A captive lets businesses retain and finance risk internally, often resulting in better alignment between insurance costs and actual loss performance.

Captive insurance companies provide tailored risk management solutions and can deliver long-term cost savings, but forming one is complex and capital-intensive. It typically requires a feasibility study, business plan, actuarial modeling, and licensure from an insurance regulator.

Captive insurance programs is most commonly structured as either:

• Single-parent captives, wholly owned by one company, or
• Group or association captives, where multiple organizations pool resources and risk.

That structural choice significantly impacts both upfront and ongoing and upfront costs.

How Much Money Do I Need To Start a Captive Insurance Company?

Setting up a captive involves two financial considerations: the initial upfront costs to establish and license the entity, and the necessary capitalization required to make sure it will be solvent as an insurer.

Understanding Upfront Costs

Initial startup costs for a captive insurance company typically range from $50,000 to over $100,000, depending on complexity, domicile, and risk profile. Upfront costs typically include:

• The Feasibility Study
  Before a captive can receive its insurance licensed, regulators require proof of financial viability. A feasibility study evaluates historical loss data, projects future claims, and models the captive’s long-term financial performance. Most studies cost between $15,000 and $25,000, though complex captive insurance programs can exceed that range.
• Legal and Formation Fees
  Formation of a captive insurer requires specialized legal expertise. Articles of incorporation, bylaws, governance documents, and insurance policy language must be carefully drafted. Legal and formation fees often start around $10,000 and increase for multi-state operations, complex risk-sharing agreements, or international domiciles.
• Licensing and Domicile Fees
  Every captive insurance program must be licensed in a specific domicile, commonly a state like Vermont or an offshore jurisdiction like Bermuda. Application and licensing fees generally range from $5,000 to $15,000, depending on the jurisdiction.

Ongoing Costs

Once licensed, captive insurance functions like a real insurance company. Most organizations outsource daily operations to a professional captive manager. Ongoing costs typically include:

• Management FeesManagement fees are commonly structured as:
  • 15%–35% of annual written premiums, or
  • A flat annual fee ranging from $36,000 to $100,000+
• These fees cover underwriting, claims administration, regulatory filings, and coordination with actuaries and auditors.
• Annual Compliance CostsAdditional recurring costs typically include:
  • Actuarial opinions: $5,000–$15,000 annually
  • Audit and tax preparation: $10,000–$20,000
  • Premium taxes: generally 0.4%–2% of written premium
  These costs are unavoidable but predictable with proper planning.

What Is the Minimum Capital Requirement for Captive Insurance?

Regulators require captive insurers to maintain minimum capital and surplus to make sure your captive can pay your claims. These requirements vary by domicile and captive type:

• Pure / single-parent captives: typically $100,000–$250,000
• Group captives: often $250,000–$500,000+
• Risk retention groups (RRGs): frequently $1 million or more

For 2026, many domiciles have increased capital expectations to account for higher inflation and claim severity. Capital is usually required in the form of cash, letters of credit, or high-quality liquid assets.

Formation vs. Joining a Captive: What's the Difference?

For many mid-market organizations, forming a single-parent captive insurer may feel out of reach. This is where group or cell captives become attractive.

• Joining a group captive: Requires a one-time participation fee, shared expenses, and pooled risk.
• Forming your own captive: Requires more capital and effort, but provides full control over underwriting profits, investment income, and strategy.

So, Why Would I Set up or Join a Captive?

For organizations paying $1 million or more in annual commercial premiums, captives can offer compelling returns:

• Premium reductions: Many participants see 20%–30% savings over three years
• Profit retention: Underwriting profits and investment income stay with the business.
• Tax considerations: For qualifying small captives, Section 831(b) allows taxation on investment income only, with the 2026 premium cap increased to $2.9 million
• Control: Claims strategy, settlement philosophy, and investment decisions remain in-house.

Is Captive Insurance Right for My Business?

Unfortunately, we can't give you a firm answer to that. The truth is simple: setting up or joining a captive insurance company is a significant financial commitment. With $100,000 or more in startup costs and $250,000 or more in required capital, captives are best suited for profitable organizations with a long-term risk management vision. But, if you can afford it, for most companies the ROI often becomes clear within three to five years. A captive transforms insurance from a sunk expense into an asset, and can materially strengthen your financial resilience.

An experienced insurance broker like Gregory & Appel plays a crucial role in helping your organization assess whether a captive insurance company is the right fit. With deep expertise in risk management and captive structures, we can guide you through the complex formation process, conduct thorough feasibility studies, and analyze your organization's risk profile and premium pricing.

Our tailored approach helps you understand the total cost, benefits, and long-term advantages of a captive alternative, so you can make an informed decision that aligns with your business goals and risk appetite. Partnering with a knowledgeable broker also streamlines managing ongoing operating costs, compliance requirements like annual audits, and regulatory filings, making the captive journey more manageable and focused on delivering value.

This content is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice. Gregory & Appel is neither a law firm nor a tax advisor; information in all Gregory & Appel materials is meant to be informational and does not constitute legal or tax advice.

A captive insurance company is an alternative to a traditional insurance company and the real difference comes down to who benefits from the policy. At its core, when you set up a captive insurance company, it changes where your insurance dollars go. By transitioning from a buyer to an owner, your organization can turn a fixed operating expense into a financial asset.

The Ownership of a Captive Insurance Company

The most important distinction between a captive insurance company and traditional insurance companies is who owns and benefits from the risk management pool.

Third-party shareholders own traditional commercial insurers. Their pricing, underwriting, and claims strategies are shaped by the need to generate profits for investors. This often results in bundled pricing where your premiums and the profit margins within them subsidize higher-risk accounts across the industry.

In contrast, a captive insurance company is owned by the businesses it insures. Because policyholders are the owners, financial benefits flow directly back to the organization rather than to outside investors. This shift realigns incentives, rewarding disciplined risk management rather than just underwriting against it.

The impact of this ownership model is clear in industry performance metrics. According to AM Best, the five-year average combined ratio for U.S. captive insurers was 88.0, well below the 97.0 combined ratio of their commercial casualty peers.

This performance gap shows the costs and profits that captive owners retain rather than pay to traditional insurers.

Revenue: Financial Benefits of a Captive Insurance Company

Captive insurers generate value in three main ways: underwriting profit, investment income, and, when structured properly, tax efficiencies.

1. Retaining Underwriting Profit

Underwriting profit is the difference between premiums collected and claims paid plus operating costs. In traditional insurance, that surplus belongs to the carrier. In a captive, it remains on the owner's balance sheet.

Disciplined risk management and loss control help captives generate consistent underwriting gains. U.S. captives added an estimated $4.6 billion to year-end surplus between 2019 and 2024, money that would have otherwise gone to commercial carriers (AM Best).

This retained surplus strengthens captive insurance company's balance sheet and can be used for claims, risk mitigation, or investment.

2. Capturing the “Float” (Investment Income)

There is often a gap between when premiums are received and when claims are paid. During this time, those funds sit in unearned premium reserves.

A captive insurance company can invest these reserves, usually in accordance with regulatory guidelines, and earn returns while maintaining liquidity for future claims. This practice, called capturing the float, allows businesses to earn a return on the money they would otherwise pay to an external insurer.

3. Tax Benefits and Dividends

Certain captive structures, particularly micro-captives electing Section 831(b) status, can offer federal tax benefits. Under Section 831(b), qualifying captives pay tax only on investment income, effectively exempting underwriting income from federal taxation up to indexed premium thresholds.

An important consideration is the IRS heavily regulates these structures, especially where risk transfer is unclear, or loss experience is inconsistent with genuine insurance activity. Ensuring compliance and sound documentation is essential to preserve these benefits. You should also consult with a licensed tax professional before counting on any tax benefits from a captive structure.

With proper regulatory oversight, captive companies may also return surplus to owners through dividends, further enhancing the captive’s value.

Cost Savings: Reducing Insurance Costs

A captive insurance company reduces insurance costs by aligning coverage with actual risk exposure rather than industry averages. Instead of overpaying for blanket coverage that includes risks you do not have, your premiums are calibrated to your loss experience and unique risk profile.

This is especially advantageous in volatile lines like auto liability and cyber, where commercial rates have been high and renewal volatility is common.

Captives empower organizations to proactively manage risk. When businesses benefit from reduced claims, they often invest more in safety programs, training, and mitigation efforts, creating a cycle of better performance and lower future costs.

Who Funds Captive Insurance?

Captive insurance is funded by the insurance premiums paid by its owners. Two common forms of captives are:

• Single-Parent Captive Insurance Company
  Single-parent captives are funded by a single organization and used by larger companies with sufficient capital and risk maturity.
• Group Captive Insurance Company
  Group captives allow multiple organizations to pool resources and share risk, giving smaller companies access to captive advantages while reducing individual volatility.

Captives: A Strategic Asset

A captive insurance structure can offer you a strategic alternative to traditional insurance. By joining or forming a captive, you can help your business reduce insurance costs, improve profitability, and take greater control of your financial future.

However, it's important to note that captives are not a one-size-fits-all solution. They require planning, strong risk management, and governance to succeed, and it's here that experienced guidance makes the difference.

If you are considering captive insurance, Gregory & Appel can guide you through a comprehensive feasibility study and risk profile assessment to determine whether a captive is the right fit for your organization and which type would best meet your unique needs. Our experienced team partners with you to evaluate your risks, design tailored captive solutions, and support you throughout the formation and ongoing management process to maximize the financial and risk management benefits of your captive. Fill out the form below to get started.

This content is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice. Gregory & Appel is neither a law firm nor a tax advisor; information in all Gregory & Appel materials is meant to be informational and does not constitute legal or tax advice.

At Gregory & Appel, we often get asked about risk retention groups and what makes them a smart choice for businesses facing unique liability challenges. Risk retention groups (RRGs) provide a valuable alternative to traditional insurance by offering customized risk management and loss control strategies tailored to niche liability coverage. Since 2000, RRGs have grown significantly, especially in healthcare, and are supported by states with strong captive insurance programs. This growth offers a stable source of liability coverage for businesses sharing similar risks. By understanding risk retention groups, you can make informed decisions about your liability insurance needs and find affordable, effective solutions that work for your business.

What Are Risk Retention Groups?

Risk retention groups (RRGs) are member-owned liability insurance companies created to offer innovative insurance solutions tailored to the unique challenges businesses face within specific industries. Established under the federal Liability Risk Retention Act (LRRA), RRGs were designed to make it easier and more affordable for businesses to get product liability coverage and manage their commercial liability insurance.

While they operate under state regulation, RRGs follow different rules than traditional insurance companies. One of their biggest advantages is that they can provide liability coverage across multiple states without needing separate licenses in each one. Licensed in their home state, or domicile, RRGs can function as either standard mutual insurers or captive insurers. This setup also gives members access to reinsurance markets, helping them better handle catastrophic risks.

Key Features of Retention Groups

• An alternative to traditional insurance
• Provide liability coverage to commercial businesses that pool their related liability exposures
• Typically serve professional groups with substantial liability risks, like the medical and legal sectors
• Customized risk management practices and loss control strategies

What Is the Purpose of an RRG?

At Gregory & Appel, we see risk retention groups (RRGs) as a smart way for businesses facing similar liability risks to come together and create customized insurance solutions that really fit their needs. The main goal of an RRG is to provide tailored risk management and loss control strategies that traditional insurers might not offer in the way you need. By pooling resources, members gain access to reinsurance markets, which helps keep costs down and makes liability coverage more affordable. Plus, working together means better risk management, helping everyone stay insurable and enjoy more stable, long-term insurance programs.

What Is an Example of a Risk Retention Group?

At Gregory & Appel, we’ve seen firsthand how risk retention groups can transform the way businesses manage their liability insurance. For an example, think about a group of mid-sized medical practices in the Midwest, all struggling with skyrocketing professional liability premiums and limited options from traditional insurance companies. Individually, these practices faced high costs and inconsistent coverage, making it tough to focus on patient care without the constant worry of insurance gaps.

By coming together to form an RRG, these practices pooled their resources and risks, creating a member-owned insurance company tailored specifically to their unique liability exposures. This group was able to gain access to more stable insurance coverage and benefited from customized risk management practices designed to reduce claims and improve patient safety. Because the RRG was regulated by a single domiciliary state but able to operate across multiple states, the practices enjoyed streamlined compliance and lower premium costs.

Through this collaborative approach, the members shared in the profits, reinvesting dividends back into the group and their businesses. The RRG structure gave them greater control over their insurance programs, enhanced their ability to manage risk collectively, and provided a stable source of liability coverage even during challenging market conditions.

This example illustrates how, at Gregory & Appel, we guide businesses in exploring risk retention groups as a strategic solution. We help clients obtain liability coverage and build stronger, more resilient risk management programs that support long-term success.

What Are the Benefits of a Risk Retention Group (RRG)?

RRGs offer some unique advantages that can make a big difference, especially for companies in the same industry or facing similar risks. Here’s a quick look at the key benefits:

• Customized, long-term liability coverage designed specifically for your industry or shared risks
• Stable pricing and consistent coverage, even during tough insurance market conditions
• Collective risk management that helps all members stay insurable and reduce claims
• Cost savings by pooling risks and cutting out traditional insurer overhead
• Access to reinsurance markets to better handle large or catastrophic losses
• Members share in profits through dividends or reinvestment, giving you more control over your insurance dollars
• Simplified regulation by operating under one state license, yet providing coverage across multiple states

Potential Downsides of Risk Retention Groups

While risk retention groups offer many benefits, they may not be the ideal solution for every business. RRGs focus exclusively on liability insurance and do not provide property coverage, which means you might still need separate policies for other risks. Additionally, because RRG members share liability exposures, a significant loss by one member can impact the entire group’s premiums. There is also no protection from state guaranty funds if an RRG faces financial difficulties, which can increase risk for members. At Gregory & Appel, we understand that every business has unique needs, and we’re here to help you evaluate whether joining or forming an RRG is the right fit for your organization’s risk management strategy.

What Is the Difference Between Insurance Companies and Risk Retention Groups?

Traditional insurance companies offer a wide range of insurance products designed for the general market. Their policies tend to be more standardized, aiming to cover lots of different industries and risks. On the other hand, RRGs focus specifically on liability insurance tailored to the unique risks faced by their members, who are usually businesses in the same industry or with similar exposures.

Ownership is another big difference. Traditional insurers are owned by shareholders or private owners who are not the policyholders, and their main goal is to maximize profits for those owners. RRGs, however, are owned by their members, the policyholders themselves. This means any profits made by the RRG can be reinvested back into the group or returned to members as dividends, giving members more control over their insurance dollars.

When it comes to managing risk, traditional insurers often focus on individual policyholders’ recent claims history. RRGs take a collective approach, working together to manage risks across the entire group. This teamwork can lead to better risk management practices and potentially lower premiums over time.

Finally, RRGs shine in tough insurance markets when traditional coverage is hard to find or expensive. They offer a long-term, stable solution for businesses seeking liability coverage tailored to their specific needs, especially during challenging times.

What Is the Difference Between a Risk Retention Group and a Captive?

Risk retention groups (RRGs) and captive insurance companies might sound similar, and that’s because they share some common ground: both are owned and controlled by their members or policyholders. But there are some key differences that set them apart.

Think of an RRG as a specialized type of captive insurance that focuses exclusively on liability coverage. Members of an RRG are usually businesses or organizations facing similar liability risks, and they come together to create a shared insurance company that tailors policies to their unique needs. This shared ownership means that profits can be reinvested back into the group or returned to members, giving everyone more control over their insurance experience.

Captive insurance companies, on the other hand, tend to have a broader scope. They can provide coverage beyond just liability, including property insurance and other types of risk, and are often set up by a single parent company to insure its own risks.

Another important distinction is how they’re regulated. RRGs are regulated under the the Federal Liability Risk Retention Act (LRRA), and must be licensed in at least one state. A captive is regulated under insurance laws specific to the jurisdiction where it is domiciled (usually overseas or in specific U.S. states).

Both RRGs and captives can be powerful tools for businesses looking to take control of their insurance needs, depending on what kind of coverage and flexibility they require.

Gregory & Appel: Your Trusted Insurance Broker and Risk Management Advisor

At Gregory & Appel, we understand that navigating the complexities of risk retention groups can be challenging, but you don’t have to do it alone. Our experienced team is here to help you explore whether an RRG is the right fit for your business and to guide you through the process of obtaining tailored liability coverage. If you’re interested in learning more about how risk retention groups or captives can provide customized, cost-effective insurance solutions, we invite you to fill out the contact form below. Partner with Gregory & Appel to protect your business and control your insurance costs with confidence.

This content is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice. Gregory & Appel is neither a law firm nor a tax advisor; information in all Gregory & Appel materials is meant to be informational and does not constitute legal or tax advice.

When it comes to managing your business’s liability insurance, exploring alternatives beyond traditional coverage can open up valuable opportunities. Two popular options are risk retention groups (RRGs) and captive insurance companies. Both offer ways for your business to pool risks, reduce costs, and gain greater control over their insurance programs. Understanding how they differ will help you find the best fit for your organization.

In this article, we’ll break down the key distinctions between RRGs and captives, highlighting the advantages and considerations of each. Whether you’re a business owner, risk manager, or insurance professional, gaining clarity on these self-insurance formats can empower you to make smarter decisions and unlock new possibilities for your risk management strategy.

What Is a Risk Retention Group?

An RRG is a liability insurance company owned by its members, typically businesses in the same or similar business, formed under the federal Liability Risk Retention Act (LRRA). RRGs were originally created to address product liability and product liability risks for manufacturers and similar businesses. RRGs are limited to writing liability insurance, such as general liability, professional liability, and products liability, and cannot write casualty coverages like property or workers’ compensation.

Licensed in one state, RRGs can conduct business across all 50 states after initial registration, without needing separate licenses in each state. They must offer insurance through a formal insurance policy that outlines coverage terms and compliance with insurance laws. RRGs may access reinsurance markets to manage their risk exposure and are often tracked by industry sources such as the risk retention reporter for trends and compliance updates.

What’s the Difference Between a Risk Retention Group and a Risk Purchasing Group?

Risk retention groups (RRGs) and risk purchasing groups (RPGs) both help businesses with liability insurance, but they work a bit differently. RRGs are actual insurance companies owned by their members, who share similar risks. They take on the risk themselves and provide coverage directly.

On the other hand, RPGs don’t insure risk themselves. They simply band together to buy liability insurance from traditional insurers, whether admitted or non-admitted. However, to qualify for protection under the state guaranty fund, insurance purchased through an RPG must be from an admitted insurer. Both types of groups are regulated under insurance laws like the Liability Risk Retention Act, but the rules vary depending on the group.

Captive insurance companies, meanwhile, follow traditional insurance laws and need state regulatory approval. And throughout it all, the insurance commissioner keeps an eye on things, overseeing RRGs, RPGs, and captive insurers to make sure everything runs smoothly.

What is Captive Insurance?

Captive insurance is a form of self-insurance where a company or group creates its own licensed insurance company, known as a captive insurer, to cover its risks. Captive insurers can take various forms, like as pure captives, which are owned by a parent company to insure only that company and its subsidiaries, or group captives, which are formed by unrelated companies with similar risks to collectively insure their exposures. In some cases, captives may use a fronting insurer to operate in multiple states and meet regulatory requirements. Popular domiciles for captive insurance companies include South Carolina, Vermont, and Hawaii, due to their favorable regulatory environments. Captive insurance allows businesses to have more control over their insurance coverage, manage risks more effectively, and potentially reduce costs compared to traditional insurance options.

RRGs vs Captives: Key Differences

You may recognize some similarities between RRGs and captive insurance, and the truth is, there are far more similarities than differences. Some people consider RRGs to be a type of captive! However, here are a few factors that distinguish RRGs from captives:

• Domicile: a captive insurance company can be formed and regulated (domiciled) in a wide variety of locations all over the world, whereas a risk retention group must be domiciled in the United States.
• Legal structure: an RRG is regulated under the LRRA, and must be licensed in at least one state. A captive is regulated under insurance laws specific to the jurisdiction in which it is domiciled (these can be overseas or in certain U.S. states).
• Purpose: an RRG is typically formed to provide liability coverage to their members, who are focusing on a specific line of insurance or within a defined industry. A captive could be used for a wider range of risks including property, casualty and even employee benefits.
• Ownership: an RRG is required to be owned by its members, whereas captives have varying methods of ownership. While many captives are also owned by their members, within some organizational structures such as rented captives, association captives or trade captives, they may be owned by a separate group.

Should I Consider a Risk Retention Group or a Captive?

If you’ve spent more on premiums than claims over the last five years and have liability exposures suitable for an RRG or captive, we’re here to help you explore these long-term alternative risk strategies. Our experienced team at Gregory & Appel can guide you through the complexities, helping you learn more about your options and find the right fit tailored to your organization’s unique needs. To get started, please fill out the form below, and one of our specialists will reach out to discuss how we can support your risk management goals.

This content is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice. Gregory & Appel is neither a law firm nor a tax advisor; information in all Gregory & Appel materials is meant to be informational and does not constitute legal or tax advice.

Before defining group captive insurance, let's first answer the question, "what is captive insurance in simple terms?" Captive insurance is an alternative to traditional insurance where a business provides coverage for their own insurance risks by joining or forming their own licensed insurance company. When a business forms their own captive without anyone else, this is known as a single parent captive.

A group captive is the same basic idea, but instead of one company participating, a member-owned group captive is owned by multiple, separate organizations who join together to buy insurance as a group, retaining and sharing risk.

In this blog, we'll be talking about these member-owned group captives, which are owned by the participating member organizations.Another structure, calledrented captives,is when the captive is owned by a third-party but allows other businesses to participate.

How Does Member-Owned Group Captive Insurance Work?

Think of it like a group fund, which each member pays premiums into which are used to pay claims and to operate the insurance company. Each group shares risks, but because the members of a group captive are carefully selected, only like-minded members who are carefully managing their claims and risk management are included.

This means that instead of being lumped together with organizations that have frequent claims, you are isolating yourself from the rest of the market. A prospective member with poor loss experience would not be included in the captive.

What Are the Benefits of Joining a Group Captive?

Here are some reasons to consider joining a group captive:

• Premiums based on your loss experience: Premiums can be lower than traditional insurance since they are based on your group's combined loss experience. There's value in partnering with other safety-conscious organizations, but there's also value in not partnering with organizations experiencing frequent claims. When your premiums are dictated by the performance of other companies anyway, why not join a smaller pool full of other organizations with great claims history?
  
• Potential return on investment: Group captive members often benefit from the investment income generated by premiums held within the captive. This investment income can be returned to member companies as dividends, providing an additional financial incentive beyond just lower premiums. Over time, this can significantly improve the total cost of insurance for participants.
  
• Improved Safety and Risk Management: All members of the captive have a financial incentive to improve safety protocols and minimize claims. Plus, group captives often require the participation of members in risk management strategies and decision-making processes. This collaborative environment fosters a culture of workplace safety and loss control, which benefits all participants by reducing claims frequency and severity.
  
• Insulation from market conditions: Group captives provide more stable pricing than traditional insurance markets. Because the captive is wholly owned and controlled by its member companies, it is less susceptible to the cyclical fluctuations and pricing volatility seen in the commercial insurance market. This pricing stability allows member companies to better plan their budgets and manage cash flow.
  
• Control over policies: every group captive is different, and there are parameters that dictate what lines of insurance and what risks are included. That being said, a captive typically provides greater control over program design and terms and conditions. As a member, you'll have the flexibility to tailor coverage to your specific operational risks.
  
• Access to specialized coverage: Group captive insurance companies can offer customized coverage options that may not be readily available in the commercial insurance market. This flexibility allows member companies to address unique operational risks, such as workers compensation, general liability, commercial auto, and auto physical damage, tailored to their specific needs.
  
• Control over claims: in a group captive, you're encouraged to manage claims in a way that will allow premiums to decrease over time, and you are given access to resources that allow you to do so. Group captive members benefit from enhanced claims management services, often partnering with third-party administrators and captive consultants who specialize in claims handling and risk control. This hands-on approach helps to reduce the total cost of claims and improves overall risk outcomes.
  
• Financial stability and transparency: Because the captive is member-owned, there is greater transparency into financial information, underwriting profits, and the overall performance of the insurance program. Members have a vested interest in the captive’s success and participate in governance, which leads to more prudent financial management and stronger financial stability.
  
• Collaborative governance and decision-making: Group captive members typically have equal voting rights and participate in the captive’s board of directors. This democratic structure ensures that all participants have a say in key decisions, including underwriting guidelines, reinsurance arrangements, and risk management strategies. This collaborative approach fosters a strong sense of ownership and alignment among participants.
  
• Lower capital requirements compared to single-parent captives: Joining a group captive generally requires a lower upfront capital investment than forming a single-parent captive. This makes group captives accessible to mid-sized companies and organizations that may not have the scale or resources to create their own captive insurance company.
  
• Access to expert captive management: To handle day-to-day operations, group captives often contract with experienced captive management companies and consultants. These professionals assist with regulatory compliance, claims handling, actuarial services, and reinsurance placement, ensuring the captive operates efficiently and effectively.
  
• Enhanced networking opportunities: Being part of a group captive creates opportunities for member companies to network with peers, share best practices, and collaborate on common challenges. Annual meetings, risk workshops, and other events foster a community focused on continuous improvement in risk management and insurance program performance.

Overall, joining a group captive insurance company can offer member companies a unique blend of financial benefits, risk control advantages, and governance participation that can lead to more stable pricing, improved safety, and long-term cost savings.

What Are the Disadvantages of Joining a Group Captive?

Joining a captive requires time and effort, though in our experience, the juice is well worth the squeeze. Don't think of a captive simply as insurance solution, because it's so much more than that – active participation in a captive provides access to risk management resources, networking and benchmarking that you just won't find in the traditional market.

However, here are some of the costs of joining a captive:

• Time: with a long-term commitment such as a captive comes additional investment. There's up front work involved in joining a captive, like compiling your five-year loss history. You may not see an immediate return on your investment (for many of our clients it takes 3-5 years). However, most understand that this time commitment offers so many advantages it's an investment worth making.
  
• Administration and overhead: even though you aren't purchasing insurance through the traditional market, you still need people to perform the day-to-day functions of the captive. Yet the overall costs still tend to be lower in a captive, due to their streamlined structure and efficiency. And keep in mind these costs exist in the traditional market, too.
  
• Capitalization: joining a captive will involve collateral, paid to the captive to ensure its ability to pay out claims. The minimum requirement varies based on the domicile (location where it's based), among other factors, and these costs are shared by each member-owner. Capitalization requirements are usually lower in a group captive than a single-parent captive.

Should I Consider Joining a Group Captive?

A group captive is not a fit for everyone: we tend to steer our clients toward the idea when they meet the following criteria:

• Spent more in premium dollars than they spent on claims over the past five years
• Great loss history over the past five years
• Safety-conscious and are committed to minimizing future claims
• Comfortable collaborating with other business leaders and making decisions as a team
• Focused on long-term organizational goals and have healthy financial history

When it comes to group captives, we find the best fit is a mid-market organization who fulfills the above criteria, though there are captives for organizations of all shapes and sizes. It will not be a fit if you experience frequent liability claims.

Am I Ready to Join a Group Captive?

If the advantages seem attractive to you, and you feel you may meet the criteria discussed in this blog, you may be a fit for a member-owned group captive. The next step would be:

• Find the right broker to provide the appropriate guidance and help you make the right connections. We're here to help.
• Gather information with the help of an actuary to review your five-year claims history, relative to your exposure, to calculate your premiums.
• Schedule your captive proposal carefully to give you time to talk to captive members about their experiences and to consider your overall insurance program structure.

At Gregory & Appel, we have extensive experience working with clients as they navigate through this phase of their risk management journey and beyond. We're eager to help, so if you are ready to learn more, fill out the form below.

This content is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice. Gregory & Appel is neither a law firm nor a tax advisor; information in all Gregory & Appel materials is meant to be informational and does not constitute legal or tax advice.