Captive Insurance
A licensed insurance company wholly owned by the organization it insures, used to self-fund risk while accessing reinsurance markets.
What It Is
A captive insurance company is a licensed insurance entity created and wholly owned by the company or group of companies it insures. Rather than transferring risk entirely to a commercial carrier, the parent organization retains risk through its captive, capturing the underwriting profit (or absorbing the loss) and gaining access to reinsurance markets.
Captives come in several forms. A single-parent captive insures only its parent company. A group captive is owned by multiple unrelated companies, often in the same industry, that pool their risks. A rent-a-captive or protected cell company allows multiple participants to access captive benefits through separate cells within a single legal entity, each with segregated assets.
Captives are domiciled in jurisdictions with favorable regulatory frameworks, including Vermont (the largest US captive domicile with over 600 captives), Hawaii, South Carolina, Delaware, and offshore domiciles such as Bermuda and the Cayman Islands. Forming a captive typically requires minimum capital of $250,000 to $500,000, an actuarial feasibility study, a business plan, and ongoing regulatory compliance including annual financial reporting and examinations.
Why It Matters for Brokers
Captives are increasingly common for mid-market commercial accounts with $500,000 or more in annual premium, not just Fortune 500 companies. Brokers who understand captive structures can identify clients who might benefit from a captive approach and either facilitate the formation or partner with captive managers. Captive programs also require ongoing fronting arrangements, excess coverage, and reinsurance that brokers can place.
Real-World Example
A group of 15 independent trucking companies, each paying $200,000-$400,000 in commercial auto premium, form a group captive in Vermont with total capital contributions of $4.5M. The captive writes $4.2M in combined auto liability premium, purchasing excess reinsurance above $500,000 per claim. Over five years, the captive accumulates $2.8M in surplus from favorable loss experience, which is distributed to members as dividends. Each member's effective cost of insurance drops 22% compared to the commercial market.
Common Mistakes
- 1Recommending captive formation for accounts too small to justify the $50,000-$100,000 annual operating costs of maintaining a captive.
- 2Not ensuring the captive has adequate reinsurance protection for catastrophic losses that would exceed the captive's surplus.
How brokerageaudit.com Handles This
brokerageaudit.com tracks captive program structures including the fronting carrier, captive domicile, and reinsurance layers. The system manages the unique documentation requirements of captive programs, including captive-specific certificates of insurance and evidence of fronted coverage.