Captive insurance, often referred to as a “captive,” is an alternative to traditional insurance where a company or group of companies provide coverage for their own risks by forming their own licensed insurance company. The term “captive” originated in 1962, when engineer-turned-insurance-broker Frederic Reiss founded the first captive insurance company as a way to retain and share risk in response to premium prices skyrocketing.
Today, about 90% of Fortune 500 companies have their own captive subsidiaries, with this alternative form of risk management continuing to grow in popularity each year. But captives aren’t limited to large companies. A wide range of entities, from corporations to non-profits, utilize captive insurers as specialized insurance entities to address their unique risk management needs.
Why are captives so popular? We’ll answer that question and more in this guide, explaining how captives work, the pros and cons, and how to determine if captive insurance is right for you. Let’s get started (and we’ll try not to make your eyes glaze over while talking shop!).
So, What Is a Captive Insurance Company?
To put it in plain words, captive insurance is when several companies band together to create a fund and then use that fund to cover their losses when they occur. If there are leftover funds after each organization’s claims have been paid out, each member could receive a share of the underwriting profits. And because much of the money in the captive is being invested, including your premium dollars, the return on these investments can be significant.
Now here's the insurance speak: a captive insurance company is a licensed insurance company that provides insurance to and is typically owned and controlled by your company's owners or insureds. These insureds actively participate in the captive, contributing premiums and managing their own risk transfer mechanisms outside of the traditional commercial insurance marketplace.
What Is the Difference Between Captive Insurance and Traditional Insurance?
The main difference is that traditional insurance transfers risk while captive insurance shares and manages risk collectively, giving members more control over their insurance program.
In a traditional model, you buy coverage from a commercial insurer. You pay a premium, and in return, the insurer takes on your risk. If you have a claim, the insurer pays according to your policy terms. When you make claims, your premiums often rise. Frustratingly, when you have several good years without claims, they'll often still keep your premium and raise your rates.
Captive insurance flips that structure. Instead of buying insurance from a carrier, you form your own insurance company to cover the risks of everyone who joins. This gives you more control and gives you the opportunity to get money back at the end of every year.
| Traditional Insurance | Captive Insurance |
| Offered by traditional, third-party insurance companies. | Formed by a single parent company or a group of companies. |
| Premiums are paid to the insurance company. | Premiums are paid to the captive insurer and invested. |
| Risks are transferred to the insurer who pays claims. | Members assume the risk and pay claims |
| Limited control over policy terms. | Customizable policy terms and coverages. |
| Nonrefundable premiums. | Member-owners can receive premium dollars and distributions of invested income. |
| Lumped in with companies who have high levels of risk or frequent claims. | Can join with companies that have a good loss history |
| Limited control over claims handling. | Offers more control over claims handling and risk management strategies. |
Why Would a Company Create or Join a Captive Insurer?
The insurance marketplace is confusing and changes constantly. You could be doing everything right with your business and still have your insurance premiums fluctuate wildly due to the “hard” and “soft” cycles of insurance. Because the commercial market can be unpredictable, some companies seek alternative risk transfer through captives. Captive insurance structures let you join with other like-minded companies so you can stabilize your costs. And don’t forget about the potential investment income! These are benefits you won’t see from traditional insurance.
How Do Captive Insurance Companies Make Money?
Essentially, you pay premiums to the captive insurer that you and your fellow businesses own. These premiums typically get invested, helping to build the captive's assets, which are essential for financial stability and regulatory compliance. Then after a set time period (typically three years) after all the claims have been paid out, each member gets a share back. This is one of the main reasons companies choose to leave the traditional market and create captive insurance companies.
Advantages and Disadvantages of Captive Insurance
While captives certainly have many benefits, they aren’t a magic solution or a good fit for every company. There are risks and nuances involved that should be fully explored. Here at Gregory & Appel, we take the mystery out of captive insurance and help you make the right decision for your business. Let’s take a look at the potential downsides first so you can be fully aware of what you’re stepping into:
Potential Downsides of Captive Insurance
- Time. This is a big one. You are not buying traditional insurance, you are joining a captive. This is a long-term commitment and goes deeper than an insurance solution. It requires an investment of time for due diligence, set up, and administration. You’ll want to talk to other captive members about their experiences and consider the impact on your overall insurance and risk management program. Captives are a long-term strategy though, and your investment of time typically pays off.
- Shared Risk. When you join a captive, you’re going into business with other companies and sharing all of their risks in addition to your own. You need to carefully research the other businesses in the group and look closely at the captive's loss experience. You don’t want to share risk with companies that aren’t managing their claims properly! On the flip side, you also probably won’t be invited to join a captive if your organization has a poor loss experience. Captives work best when all the businesses share the same mindset and are diligent in minimizing risk.
- Administration and Overhead. Remember that a captive is still an insurance company, and that there are costs involved in operating and maintaining this structure. However, these can be mitigated by the cost savings and benefits of being part of a captive. And joining a group captive creates economies of scale, as you are sharing these costs with other organizations.
- Capitalization. You must be able to invest capital in order to fund your captive’s operations. This is your ownership stake in the company. The minimum capitalization requirements of a captive vary by size, risk profile, and domicile, but they are important for this whole thing to work.
- Collateral. Before joining a captive, you must put up collateral money in advance. This is essentially a financial guarantee you’re making to help protect the captive and its members from credit risk.
We’re not trying to steer you away from a captive by sharing these potential downsides. Remember: we wrote this guide and believe in the value of captives! We also believe it’s vitally important for you to fully grasp the commitment and costs required of a captive member.
Potential Benefits of Captive Insurance
Now on to the fun stuff. Here’s why we get excited about helping our clients set up and manage their captive insurance businesses:
- Stronger Protection for Your People and Your Business. When you join a group captive, you’ll have direct access to risk control resources and services that protect what matters most. In fact, an independent study by Captive Resources showed that across 15 mature group captives, members had 48% fewer fatalities and 22% fewer workers’ comp claims than the industry average. The best way to protect your business is to protect your people. You can help them go home safe each and every day.
- Improved Safety. Joining a captive often sparks a stronger internal commitment to safety. Most require each member company to form a safety committee and appoint a dedicated safety leader who knows the work and the risks firsthand.
- Return on Underwriting Profits and Investment Income. In a group captive, you typically receive dividends when you’re able to reduce your losses, plus you’ll get investment returns on money paid into the captive (like premiums, capitalization funds, and collateral).
- Premiums Based on Your Business. Premiums paid to the captive are based on your actual claims history and loss experience. If you can control your risk factors, you stand to benefit as your premiums go down.
- Insulation From Market Conditions. Instead of being lumped in with organizations that don’t control their losses, you are associating yourself with other risk-conscious organizations. Separating your company from bad risks helps you avoid rising premiums in the traditional market, as well as the factors contributing to them (like economic inflation, large jury awards, or tort reform).
- Control Over Insurance Policies. A captive provides greater control over your unique needs and concerns. You’ll have more flexibility in program design and terms, and a voice in the decision-making process when it comes to things like coverage options, policy limits, deductibles, and retentions. Captives often insure property risks in addition to liability and other exposure, and they can be tailored to cover unique risks and emerging risks that may be difficult to insure in the traditional market.
- Saving on Third-Party Costs. Captives are often more cost-efficient since you’re no longer paying for hidden costs in your premiums (like a third-party insurer’s payroll or those fancy Super Bowl ads that insurance companies love to buy).
- Access to Reinsurance Markets. Because a captive is an insurance company, you can buy reinsurance coverage directly from reinsurers, essentially buying it wholesale and bypassing the traditional market. And because the price is directly related to your organization’s loss record, your captive can generally get more cost-effective rates for reinsurance due to your superior risk profiles.
What Is a Captive Company Example?
A strong example of a captive company comes from one of Gregory & Appel’s clients, an HVAC distributor that joined a group captive with our help. By joining, the client became one of the captive owners, gaining influence over the captive's operations and strategic decisions.
When they first came to us, their insurance costs were climbing despite a solid safety record. Our team took the time to truly understand their business, digging into claims data, operations, and risk management practices. We helped them evaluate whether a captive was the right fit, guided them through the onboarding process, and connected them with a group of like-minded, safety-focused companies.
The group captive insures the risks of its owners and participating companies, providing tailored coverage and risk management. After joining the group captive, the company doubled its revenue and exposures yet paid half as much for significantly more coverage and even earned money back through the captive’s profit distributions. This success story reflects our hands-on approach. As a family- and employee-owned firm, we show up, listen, and deliver solutions built around our clients’ real-world goals, not a corporate playbook.
Why Should I Use a Captive Insurance Broker?
Here’s why you might want a captive insurance broker like Gregory & Appel in your corner:
- Expertise in a Specialized Field. Captives operate under unique financial, regulatory, and structural rules. A broker who specializes in captives understands how they work from feasibility studies and domicile selection to risk pooling and governance and beyond. We’ll help you decide whether a captive is the right fit, and if so, which structure (group, single-parent, etc.) makes sense for your business.
- Access to the Right Captive Programs. A good captive broker has relationships with established group captives and can connect you to one that aligns with your industry, risk profile, and financial goals. At Gregory & Appel, we’ve helped many clients set up and manage captives. We can help you vet other members and understand each group’s performance before you start or join a captive.
- Strategic Risk Management. Captive brokers help you strengthen your safety and loss control programs to make your company more attractive to captives and improve your long-term returns. Our team analyzes your claims data, recommends safety initiatives, and benchmarks your performance against similar businesses.
- Financial and Operational Guidance. From capitalization to collateral and annual renewals, a broker helps manage the ongoing administrative and financial requirements. We work alongside actuaries, underwriters, and captive managers to make sure your investment and participation are well-structured and sustainable. A broker like us can connect you with a comprehensive team of experts to help structure reserve financing arrangements to meet regulatory requirements and support reserve redundancies, which are critical finance mechanisms for captives. Additionally, it's important to work with tax professionals to make sure you stay compliant with complex tax regulations, like those related to Section 831(b), and to navigate IRS rules and deductions associated with captives.
- Advocacy and Transparency. Finally, a broker acts as your advocate. We walk you through the fine print, explain your options in plain language, and represent your interests within the captive. Our goal is to help you balance opportunity with risk and make the process far less daunting.
When picking a broker, it’s important to find a true partner with deep experience in captive structures. At Gregory & Appel, we’re driven to help our clients succeed. As a family- and employee-owned company, our advisors are committed to meeting your unique needs, not those of outside shareholders. We show up (in-person as often as we can!), get to know your business, and bring a personal touch that you won’t find with a large conglomerate.
Is Captive Insurance a Good Idea for My Business?
Almost every time one of our clients gets into a captive, they tell us they wish they'd done it sooner because the captive’s structure makes them a better company. Think about it: if you’re with a group of like-minded peers and everybody’s trying to get better, you’re sharing ideas and best practices that transform you into a better company.
Plus, in a captive, the policyholder is often also the owner, which provides greater control over insurance operations and decision-making. So certainly, you should consider something that puts you in the driver's seat and improves your business operations. Start having those internal discussions with your leadership team and take a look at some of the factors that determine whether a captive is the right fit for you:
- Best-in-class loss history, or close to it
- History of long-term financial stability
- Management team and organizational culture committed to safety
- Can think long-term, not near an ownership transition or financial restructuring
- Balance sheet can support collateral requirements
Additional Things to Consider:
- Annual Spend on Premiums. There isn’t an exact formula to tell you whether or not you’ll be successful in a captive. However, we’ve found a good rule of thumb is that your company should be spending at least $100,000 annually on workers’ compensation, general liability and auto coverage for this type of insurance to be beneficial.
- Capital Commitment. Captives are built for the long haul. Typically, distributions don’t begin until 3-5 years after the end of a policy year for commercial insurance captives, though the return can be quicker for employee benefits captives. It’s unlikely that you will see an immediate return after joining a captive. This is a long-term strategy.
- Risk of Adverse Underwriting Results. It’s important for captive members to have a strong commitment to risk prevention. If loss control programs are not in place, the likelihood of claims increases and will negatively impact the captive as a whole, because you are retaining and sharing risks. And if risks are not accurately accounted for in underwriting, the captive may not be prepared to pay out claims. That’s why captive members are required to provide a detailed loss history before being accepted into the captive as a group arrangement will not accept poor risks.
- Time Commitment and Related Costs. There is an investment of time and resources related to participating in a captive. However, in return for your time, you’ll see an increased focus on risk management and loss prevention, savings on lost time claims, fewer worksite accidents, and over time, lower overall insurance costs.
- Tax Treatment. This is not an investment or a way of receiving tax benefits. Captives are strictly an insurance product. Whether or not they offer tax benefits for your organization should be determined by a CPA or qualified tax attorney.
After going through this list, you might find yourself saying, "Wait a second! What if..." That's a great instinct, and we hear those questions a lot. Let's answer a few of the most common.
What if…
…My Company Is Too Small for a Captive?
Group captives come in all sizes and span across different industries, so your insurance spend really shouldn’t be the deciding factor. There’s also micro captives, a form of single-parent insurance company that provides smaller organizations with the benefits a captive can offer.
In addition to micro captives, small or unrelated companies can consider different captive structures such as pure captives, sponsored captives, rental captives, and cell captives. A pure captive is owned directly by a single policyholder or a homogeneous group and insures only the risks of its owner(s). Pure captives are distinct from sponsored captives, which are owned and controlled by unrelated parties and can include structures like rental captives and cell captives.
Rental captives allow insureds to access the captive without contributing capital, typically by paying an access fee, while cell captives are a type of sponsored captive where each insured has its own legally separated 'cell' within the captive, allowing for risk management and insurance solutions tailored to multiple participants.
Footnote: IRS code section 831(b) allows small, non-life insurance companies to elect to pay tax only on their investment income, not their underwriting income. However, this has allegedly been exploited to create tax shelters disguised as captive insurance companies. While this can be a legitimate structure for a captive, the IRS has pursued litigation against groups falsely claiming this classification. Only work with a broker you trust when identifying alternative risk options for your organization.
…There’s a Catastrophic Loss That Bankrupts the Captive!?
In the group captive structure, the funding system separates and accounts for both the frequency and severity of losses. A loss forecast is developed by an independent actuary, generally using a member’s previous five years of loss history, with that forecast being split between the two layers. Losses are shared and absorbed through the captive’s funding, but reinsurance still protects the captive against catastrophic losses. In these scenarios, the captive operates within established legal and financial frameworks to absorb and manage catastrophic losses, utilizing its funding and reinsurance arrangements to provide tailored risk management solutions for its parent company.
…I Get Stuck Paying for Everyone Else’s Claims?
While it’s true that you may share risks with other businesses, depending on the type of captive you’re in, that won’t necessarily cost you more. The beauty of a captive is that you’re paired with like-minded peers who are all trying their best to minimize their own risk and work their own claims as efficiently as possible. Every business has bad claims now and then, but in a group captive, you can be confident sharing risk for the potential rewards.
…There’s Too Many Regulations and We Can’t Stay Compliant?
Yes, a captive is an insurance company, and as you can imagine, this does involve some complexity. Captives may be subject to both state and federal regulations, depending on their structure and activities. The captive's primary jurisdiction, or domicile, (typically a state like Conneticut or Delaware, although it can be a country like the Cayman Islands or Bermuda) governs financial reporting, reserve obligations, and compliance with regulatory guidelines. However, regulatory complexity isn’t a reason to avoid considering a captive. While familiarizing yourself with these regulations is important, in a group captive, day-to-day management (including regulatory compliance, audit, and tax prep) is typically supported by captive management, leaving members free to focus on what they do best.
…It’s Too Expensive and Too Hard to Start?
Yes, it can be difficult to start, and you will have to spend some money up front. Captive insurance companies are a form of self insurance, allowing organizations to manage their own risks internally and tailor coverage to their specific needs. However, your investment should pay off eventually as captives are a long-term approach to risk management. There are some things you can do to mitigate the cost, like joining a captive rather than starting one. Keep in mind that if you do leave the captive in the future, collateral is returned when the last policy year your company participated in is closed.
So, Is a Captive Right for Me?
Only you can answer that for your business. At the end of the day, a captive may or may not work for your unique circumstances. However, getting your business captive-ready has virtually no downsides. The process mostly involves improving safety and reducing your claims, which makes your company quite desirable to traditional insurance as well as captives.
Want to get your business captive-ready? Interested in exploring captives? Don't see the answer to your "what if..."? We can help! Download our Leader's Guide to Captives to learn more or connect with us today by filling out the form below. We'd love to talk with you.
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.