Is a Captive Insurance Program Right for Your Business?

With commercial insurance premiums rising and coverage terms tightening, many mid-sized companies are looking for better ways to manage risk. For business owners tired of market volatility and limited policy flexibility, captive insurance may be the strategic solution you've been searching for.

Captives give companies more control over their insurance spend, more insight into loss trends, and more freedom to design coverage around real-world exposures—not broad industry assumptions.

Let’s explore how captive insurance works, why it’s gaining traction across industries, and whether your business could benefit from this alternative approach to risk management.

What Is a Captive Insurance Program?

A captive insurance company is a licensed insurance entity formed by a business (or group of businesses) to insure its own risks. Rather than paying premiums to a commercial insurer, the business pays premiums to its captive, which then pays claims and manages risk.

Captives come in several structures depending on your goals:

• Single-Parent Captives: Owned by one company to insure its own risks.
• Group Captives: Owned by a group of companies that share similar risk profiles; ideal for mid-sized businesses.
• Rent-a-Captives: Access to a captive without the cost and complexity of ownership; perfect for exploring the model.
• Protected Cell Captives: Segregated “cells” within a shared entity; each participant’s assets and liabilities are isolated.

Why More Businesses Are Choosing Captive Insurance

Captives are a proactive approach to managing your company's risk and insurance strategy. Here's why so many mid-market firms are considering the move:

1. Premium Stability and Cost Control

In the traditional insurance market, premiums are influenced by market cycles, insurer profitability goals, and the pooling of risk across unrelated businesses. This often results in unpredictable and rising costs, even for companies with excellent loss histories.

With a captive, your business sets its own underwriting criteria and pricing based on actual risk exposure and historical performance. This allows for:

• More stable and predictable premiums year over year
• Reduced reliance on volatile commercial markets
• Retention of underwriting profits that would otherwise go to insurers

Example: A manufacturing firm with a strong safety record may find that its premiums are inflated due to industry-wide losses. A captive allows it to break free from that pricing model.

2. Cash Flow and Capital Efficiency

Traditional insurance premiums are a sunk cost—once paid, they’re gone, regardless of whether you file a claim. Captives, on the other hand, allow businesses to retain and invest unused premium dollars.

Benefits include:

• Improved liquidity and working capital
• Ability to earn investment income on reserves
• Potential for surplus distribution back to the parent company

Example: A transportation company with low annual claims can accumulate a surplus in its captive, which can be reinvested into fleet upgrades or safety initiatives.

3. Underwriting Flexibility

Commercial insurers often offer standardized policies that may not align with your business's unique risk profile. Captives provide the flexibility to design coverage tailored to your specific needs.
This includes:

• Covering emerging or niche risks (e.g., cyber liability, supply chain disruption)
• Structuring deductibles and limits to match your risk appetite
• Filling gaps left by exclusions in traditional policies

Example: A large agribusiness faces unique risks related to crop contamination and equipment breakdown – risks that are either excluded or overpriced in the traditional market. Through its captive, the company designs custom policies that address these exposures directly, ensuring comprehensive protection and operational continuity during critical harvest seasons.

4. Improved Claims Management and Transparency

In a captive model, your business has direct oversight of claims management. This can lead to faster resolution, better communication, and more strategic decision-making.

Advantages include:

• Greater visibility into claim trends and root causes
• Ability to implement targeted loss prevention strategies
• Reduced administrative friction and fewer disputes

Example: A construction firm can use its captive to manage workers’ compensation claims more proactively, reducing litigation and improving return-to-work outcomes.

5. Profit Potential and Strategic Reinvestment

If claims are well-managed and reserves are appropriately invested, captives can generate surplus income. Unlike traditional insurance, where the carrier retains profits, captive profits remain within the business.

This surplus can be used to:

• Reinvest in operations or risk mitigation
• Offset future premiums
• Pay dividends to the parent company

Example: A multi-location outpatient care network uses a captive to cover professional liability and cyber risks. Due to strong clinical governance and cybersecurity protocols, claims remain low. Over time, the captive generates surplus capital, which is reinvested into telehealth infrastructure and staff training to further reduce risk and enhance patient care.

6. Access to Better Data and Risk Intelligence

Captives provide access to granular, real-time data on claims, exposures, and trends. This level of insight is often unavailable through traditional insurers.

With better data, businesses can:

• Identify loss patterns and emerging risks
• Benchmark performance across locations or divisions
• Make data-driven decisions to improve safety and reduce costs

Example: An independent power producer operating wind and solar farms uses its captive to insure property damage and business interruption. Through the captive's data analytics, the company identifies that turbine failures are more frequent in coastal regions due to salt corrosion. This insight leads to a targeted maintenance and materials upgrade program, reducing downtime and improving the reliability of energy output across its portfolio.

Who Is a Good Fit for a Captive?

Captives aren’t for every business. But they can be a wise choice for companies that meet the following criteria:

• Have a predictable, low-to-moderate claims history
• Invest in strong risk management and loss prevention
• Are frustrated by rising premiums, exclusions, or poor service
• Want more control over how insurance dollars are spent
• Are financially strong enough to fund claims or participate in a group model

If that sounds like your business, a captive may offer long-term value that traditional insurance simply can’t match.

Debunking Common Captive Myths

• “Captives Are Only for Large Corporations.” While large companies were early adopters, today’s captives are accessible to mid-market companies across industries.
• “They’re Too Expensive or Risky.” While start-up costs exist, many programs minimize capital outlay. For companies with disciplined risk management, the long-term return on investment (ROI) often outweighs the initial investment.
• “We’ll Lose Coverage Flexibility.” Captives offer more flexibility. You can tailor policies to your specific needs, including emerging risks like cyber liability or supply chain disruption.

What Are the Risks?

Captives do come with operational and regulatory responsibilities. It’s important to weigh the benefits against:

• Capital Requirements: Captives must be adequately capitalized to meet regulatory and operational needs. This varies by domicile and risk profile.
• Administrative Oversight: Captives require governance, reporting, and compliance. Many companies partner with captive managers or consultants to handle day-to-day operations.
• Regulatory Compliance: Captives are regulated insurance entities. They must meet licensing, solvency, and reporting standards in their chosen domicile.
• Time to Break Even: Captives are a long-term strategy. It may take several years to realize full financial benefits, especially in the early years of formation.
• Not Ideal for High or Unpredictable Loss Activity: If your business has frequent or severe losses, a captive may not be the best fit or may require significant reinsurance support.

Explore the Captive Option with Confidence

Captive insurance provides business leaders with more control, clarity, and value from their insurance expenditures. It's not just about lowering costs; it’s about building a stronger foundation for risk financing and business resilience.

At AssuredPartners, our Captives team specializes in helping mid-market companies explore, launch, and manage captive solutions. From initial feasibility studies to full formation and ongoing management, we guide you through every step of the process.