At Gregory & Appel, we often get asked, "What is captive insurance, and how can it help my business?" Captive insurance is when a business, or group of business, join together to create their own insurance company that they collectively own. Captives give businesses more control over their insurance and risks. They can cover things that traditional insurers won’t or charge too much for. This means companies can fill gaps in coverage and better manage claims, which helps with budgeting and planning. Also, captives let businesses keep the profits from underwriting, instead of those profits going to outside insurers. This can improve the company’s bottom line.
But joining or setting up a captive isn’t simple. It takes careful planning, including a feasibility study and a solid business plan. You'll need to work with experienced captive managers and advisors to leverage captive insurance effectively. But let's not get ahead of ourselves. In this guide, we'll walk you through how to join or set up a captive insurance company and how it can transform your business.
Step 1: Evaluate if a Captive Insurance Company is Right for Your Business
Before joining or setting up a captive insurance company, you need to assess whether this risk management strategy aligns with your organization's needs and capabilities. Consider the following factors:
- Strong Loss History: Ideally, your business should have a best-in-class or near best-in-class loss history, indicating effective risk control and claims management.
- Financial Stability: A history of long-term financial stability shows that your business can support the ongoing obligations and capital requirements of a captive.
- Committed Management: A management team and organizational culture dedicated to safety and risk mitigation shows that you'll contribute to the captive’s success.
- Long-Term Perspective: Your business should be positioned for long-term planning, without imminent ownership transitions or financial restructuring that could disrupt captive operations.
- Adequate Balance Sheet: Your company’s balance sheet must be capable of supporting the collateral and capital requirements mandated by regulators.
Step 2: Find the Right Partner
Captive insurance can be confusing, but you don't have to become an expert to still reap the benefits. This process is complex and requires a team with deep insurance expertise and a solid understanding of regulatory requirements to guide you confidently through every step. There are many partners out there, like our team here at Gregory & Appel, who can help you set up or join a captive insurance company.
An experienced partner can help you prepare a comprehensive business plan, conduct a thorough feasibility study, secure necessary regulatory approvals, and maintain ongoing compliance. They typically coordinate with top actuaries, legal experts, and accountants to make sure your business meets all capital and operational requirements.
With expertise in underwriting profits, reinsurance arrangements, and governance, a knowledgeable partner focuses on making sure you join or form a captive that is compliant, profitable, and sustainable. Additionally, they can connect you with a reliable network of agents and brokers to support your insurance needs.
At Gregory & Appel, we bring this level of expertise and dedication to every client, working closely to align with your business goals and provide personalized guidance throughout the entire captive process—our support doesn't end after all the paperwork is signed! Our team is committed to helping your captive insurance company operate smoothly so you can save money, manage risk, and have better control over your insurance choice and expenses. Partnering with Gregory & Appel means making the captive process straightforward and effective, backed by a firm that truly has your best interests at heart and the experience to navigate the complexities of captive insurance with confidence.
Step 3: Choose the Captive Structure That Fits Your Business
When it comes to captive insurance, one size definitely doesn’t fit all. There are many types of captives out there, each designed to meet different needs and strategic plans. At Gregory & Appel, we help you understand these options so you can pick the structure that works best for your business.
Single-Parent vs. Group Captives
Most captives fall into one of two broad categories: single-parent or group captives.
- Single-Parent Captives are owned entirely by one organization and insure the risks of their parent company, subsidiaries, and affiliated businesses. In fact, about 90% of Fortune 500 companies have their own single-parent captives. When a single-parent captive only covers its own affiliated companies and no outside entities, it’s called a “pure captive.”
- Group Captives bring together multiple, separate organizations that join forces to buy insurance collectively. These members share risk and often come from similar industries or have comparable risk profiles, but that’s not always required. Group captives offer the benefit of shared resources and risk pooling, which can be a great fit for businesses looking for collaboration.
Owned vs. Rented Captives
Another way to look at captives is whether you own the captive outright or “rent” space in one.
- An Owned Captive means your organization (or group of organizations) fully owns the captive and is responsible for its administration, including claims payments. This could be a single-parent or group captive.
- A Rented Captive is a licensed insurance company owned by an outside party that handles many of the administrative functions. As a member, you “rent” the captive by entering into a contract, paying fees, and sharing risk without the full operational responsibilities of ownership.
Other Captive Structures to Know
There are also some specialized captives that might fit unique business needs:
- Protected Cell Captives (or segregated-cell captives) allow members to have legally separated assets and liabilities, so risks and claims don’t cross over between members. Each member has their own underwriting account, which can be appealing for companies wanting risk isolation while benefiting from a shared captive platform.
- Risk Retention Groups (RRGs) are U.S.-domiciled captives licensed to write liability insurance nationwide. They must register in every state where they operate and are regulated as captive insurers.
- Industrial Insured Captives provide coverage for multiple large companies, insuring the risks of each organization and their affiliates.
- Micro Captives are smaller captives with limited annual premiums, often used by businesses looking for a tax-efficient way to self-insure within certain thresholds.
- Branch Captives are offshore captives licensed to operate in a U.S. state, allowing companies to extend coverage across jurisdictions without setting up multiple captives.
- Association Captives are group captives sponsored by a trade association, offering members the advantage of partnering with industry peers who share similar risks and safety goals.
- Employee Benefits Captives let employers self-insure employee benefits like health, life, and disability insurance, often lowering costs and increasing flexibility.
At Gregory & Appel, we’ll guide you through these options and help you choose the captive structure that aligns with your risk management goals, financial objectives, and operational capabilities. Whether you’re looking to own a captive outright or join a group, our team is here to make the process clear, manageable, and tailored to your business.
Step 4: Join or Form a Captive
Whether you’re thinking about joining a group captive or forming your own, it’s important to understand what’s involved. Here’s a straightforward look at the process.
Joining a group captive usually involves:
- Information gathering: An actuary will review your claims history from the past five years along with your business exposure (like payroll, sales, or number of vehicles) to help calculate your premiums. This helps make sure the group can cover all members’ claims.
- Financial review: Since the group is taking on some risk by adding you as a new member, an independent consultant will often review your company’s audited financials. Existing members want to be sure that new participants can meet premium payments and financial obligations.
- Risk profile assessment: Your organization’s approach to safety and risk control will be evaluated. Group captives look for members who actively manage risks and work to keep claims low.
Forming a captive is a more involved process and typically suits larger organizations with the resources to manage an insurance company. Key steps include:
- Assessing insurance needs: It’s important to identify which risks the captive can cover and which might still require traditional insurance. Even single-parent captives often insure only their subsidiaries and affiliates.
- Feasibility study: This includes analyzing risk profiles, loss history, and claims data, as well as modeling various loss scenarios to understand the captive’s financial resilience.
- Operations analysis: Running a captive requires ongoing management and resources. It’s worth considering whether your organization can handle this or if alternatives like sponsored captives or rent-a-captives might be better suited.
- Domicile selection: The location where your captive is incorporated affects regulatory requirements, capital needs, tax implications, investment rules, and practical matters like meeting logistics. Choosing the right domicile is an important decision.
- Incorporation: Establishing your captive as a legal entity in the chosen domicile is a necessary step to officially start the insurance company.
- Capitalization: The captive must meet minimum capital requirements to operate and pay claims. This ensures financial stability and regulatory compliance.
Understanding these steps can help you decide whether joining a group captive or forming your own is the right fit.
Step 5: Enjoy the Benefits of Captive Insurance!
Joining or setting up a captive insurance company might seem like a big undertaking, but with the right team and expertise, it can be one of the smartest moves your business makes to manage risk and control costs. The feedback we hear most often from our clients is "why didn't we join a captive sooner?"
When you form a captive, you’re creating a tool that offers real benefits:
- Enhanced Protection for Your Team and Business. By joining a group captive, you gain access to dedicated risk control resources and services that safeguard what matters most: your people.
- Stronger Commitment to Safety. Participation in a captive often drives a deeper internal focus on safety. Most group captives require member companies to establish safety committees and appoint safety leaders who understand the specific risks and operations.
- Share in Underwriting Profits and Investment Earnings. Members typically receive dividends when losses are minimized, along with investment returns on premiums, capitalization funds, and collateral contributed to the captive.
- Premiums Tailored to Your Business. Your premiums are calculated based on your actual claims history and loss experience, rewarding effective risk control efforts.
- Protection from Market Fluctuations. Being part of a risk-conscious group shields you from market-wide premium increases caused by factors like economic inflation, large jury awards, or changes in tort laws.
- Greater Control Over Insurance Policies. Captives offer flexibility to customize coverage, policy limits, deductibles, and retentions to meet your unique risk profile. They can cover property, liability, and emerging risks that traditional insurers might not address.
- Reduced Third-Party Costs. By eliminating hidden expenses often included in commercial premiums, like insurer overhead or marketing costs, captives can be a more cost-effective insurance solution.
- Direct Access to Reinsurance Markets. As a licensed insurance company, your captive can purchase reinsurance directly from reinsurers at wholesale rates, often securing better pricing due to your favorable loss record.
At Gregory & Appel, we always recommend that businesses take a thoughtful approach. It’s important to explore all your options, understand the ins and outs, and work closely with a qualified captive manager or insurance expert who can guide you through the process.
Explore Captive Insurance Today with Gregory & Appel
Ready to take control of your business’s risk management and start saving on insurance costs? Our team of captive insurance experts at Gregory & Appel is here to help. Fill out the form below to connect with a knowledgeable advisor who can help you explore your options, answer your questions, and develop a tailored captive strategy that fits your unique needs. It's time to unlock the full potential of captive insurance for your business.
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.