Captive Insurance

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How To Get The Best Captive Insurance

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Gordon B. Coyle

CEO, The Coyle Group
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Executive Summary

Captive insurance is a specialized way for businesses to finance their own risk instead of relying solely on traditional insurers. By forming your own insurance company, or joining a group captive, you take control of coverage, claims, and costs. For many mid-sized businesses, captives provide both protection and long-term financial advantages.

TL;DR

  • Definition: A captive is an insurance company owned by its policyholders (you), built to insure your company’s risks.
  • Purpose: Shifts insurance from a pure expense to a strategic financial tool, capturing underwriting profits and tailoring coverage.
  • Who it’s for: Typically, companies with $1M+ in annual insurance premiums or businesses facing high costs, limited coverage, or hard-to-insure risks.
  • Benefits: Greater control, long-term savings, more stable pricing, and access to reinsurance markets.
  • Risks to consider: Up-front capital requirements, regulatory compliance, and the need for expert management.
  • Bottom line: Captives turn insurance into a profit center while still protecting your balance sheet. The right structure depends on your industry, loss history, and goals.
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What Is Captive Insurance?

Definition & Core Purpose

Captive insurance is an alternative risk financing strategy where a business forms its own insurance company to insure its risks. Instead of paying premiums to a commercial carrier, you set up (or join) a captive that you own and control.

At its core, a captive exists to:

  • Provide coverage tailored to your unique risks (including those commercial markets that price poorly or exclude).
  • Retain underwriting profits that would otherwise go to traditional insurers.
  • Stabilize costs by smoothing the impact of hard insurance markets and reducing dependency on volatile commercial pricing.
  • Strengthen risk management by aligning claims experience directly with your own financial performance.

For many middle-market firms, captives transform insurance from a cost center into a strategic asset. Done right, they offer protection, cash flow advantages, and long-term financial efficiency.

Howit Differs From Standard Business Insurance

Most companies buy coverage directly from commercial insurers. With traditional insurance, you transfer risk entirely to the carrier in exchange for premiums, but you have little control over coverage terms, pricing, or claims handling.

Captive insurance works differently:

Risk management team explaining retention versus ceded layers structure for captive insurance program
  • Ownership: You own the insurer and direct its strategy.
  • Customization: Policies can be designed around your exposures rather than generic industry templates.
  • Financial Impact: Instead of premiums disappearing, they build reserves and can generate investment income or be returned as dividends if losses are lower than expected.
  • Market Access: Captives often buy reinsurance, giving you access to protection and pricing usually reserved for large carriers.

Think of it as moving from “renting insurance” to “owning your insurance company.” This shift allows you to keep more of the upside while still being protected against catastrophic loss.

Understanding how captives work in practice helps illustrate their value across different business scenarios.

 Real-World Use Cases

To see how this plays out in practice, here are a few scenarios:

1

Mid-Market Manufacturer – Product Liability Costs

A regional manufacturer was hit with rising product liability premiums, even though actual claims were minimal. By forming a captive, they retained predictable losses and funded reserves. Over five years, they saved millions and redistributed profits back to ownership.

2

Trucking & Logistics Group – Volatile Auto Premiums

A fleet operator with 400 vehicles faced annual double-digit increases in auto liability premiums. Joining a group captive allowed them to pool risk with similar companies, stabilize pricing, and fund safety initiatives that directly lowered loss frequency.

3

Healthcare Company – Cyber and Regulatory Risks

A healthcare services firm struggled to secure affordable cyber coverage. Their captive extended limits for data breaches and HIPAA-related fines, ensuring compliance and protecting against seven-figure exposures that commercial insurers either excluded or capped at inadequate levels.

Key Features of Captive Insurance

 Types of Captives

  • Definition: Captives come in different structures, each suited to a company’s size and risk appetite.

Common types include:

  • Pure Captive: Owned by one company, insuring only its risks.
  • Group Captive: Multiple companies pool resources to insure collective risks.
  • Protected Cell / Series Captive: Segregated cells under one umbrella, allowing smaller companies to “rent” space in a captive without forming their own.
  • Micro-Captive (831b): Smaller captives with limited premium thresholds (subject to heightened IRS scrutiny).
  • Why it matters: The right structure affects cost, capital requirements, governance, and regulatory compliance. For mid-market firms, group and cell captives often provide the best entry point.
  • Example: A construction contractor joined a group captive with 50 peers, gaining access to stable pricing and profit-sharing while avoiding the steep capital outlay of a pure captive.

Capital & Solvency Requirements

  • Definition: Captives must hold minimum capital and surplus as determined by their domicile (state or offshore jurisdiction). This ensures claims-paying ability and regulatory compliance.
  • Why it matters: Underfunded captives risk regulatory intervention, IRS issues, or insolvency. Proper capitalization demonstrates credibility and allows access to reinsurance markets.
  • Example: A mid-sized distributor funded $1.5M in initial capital reserves to launch its captive. This buffer allowed them to underwrite predictable losses while ceding catastrophic layers to reinsurers.

Risk Retention Levels & Deductibles

  • Definition: A captive typically retains predictable “working layer” losses, while catastrophic exposures are transferred to reinsurers. Retentions vary by industry and risk appetite.
  • Why it matters: Setting retentions too high exposes a business to volatility; too low, and the captive adds little value. Balance is crucial.
  • Example: A trucking company’s captive retained the first $500k of losses per claim, while excess liability above that was reinsured. This struck the right balance of cost savings and protection.

Understanding high deductible workers comp programs helps illustrate how retention strategies work across different coverage types.

 Reinsurance Access

  • Definition: Captives often buy reinsurance to cover catastrophic claims beyond their retention. Reinsurers provide financial strength and global risk transfer capacity.
  • Why it matters: Access to wholesale reinsurance markets allows businesses to secure coverage on terms unavailable in the retail market, often at lower cost.
  • Example: A manufacturer’s captive purchased reinsurance to cover catastrophic product liability claims above $2M, ensuring financial security without over-capitalizing the captive.

 Customizable Coverage Lines

  • Definition: Captives can underwrite a wide variety of risks, from standard lines like workers’ comp, general liability, and commercial auto, to specialized risks like cyber, environmental, or product recall.
  • Why it matters: Businesses can cover exposures that traditional insurers price poorly, exclude, or cap at inadequate limits. This flexibility turns insurance into a tailored risk management tool.
  • Example: A healthcare provider used its captive to extend cyber coverage limits when the commercial market would only offer $5M, leaving a significant gap.

Governance & Claims Management

  • Definition: Captives operate as licensed insurers, requiring governance, board oversight, and claims management systems. Many firms partner with captive managers for administration.
  • Why it matters: Strong governance ensures regulatory compliance, effective claims handling, and accurate reserving. Poor management can trigger audits, disputes, or coverage failures.
  • Example: A group captive implemented a safety and claims oversight committee, reducing claim frequency by 20% across members within three years.

 Financial & Tax Treatment

  • Definition: Premiums paid to a captive are generally deductible if structured properly, and underwriting profits may return as dividends. Captives may also generate investment income on reserves.
  • Why it matters: Tax and financial benefits are a driver for many, but the IRS scrutinizes captives closely. Compliance with risk distribution and shifting requirements is essential.
  • Example: A professional services firm’s captive distributed $750k in underwriting profits back to ownership over five years, effectively converting insurance cost into retained earnings.
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How Much Does CaptiveInsuranceCost?

Unlike traditional insurance, where you pay a flat premium to a carrier, captive costs are a mix of up-front capital and ongoing management expenses. Understanding these cost components is essential for evaluating whether a captive makes financial sense for your business.

Cost Drivers

For a mid-market firm, here’s what typically drives the economics:

Captive insurance managers reviewing reserves, underwriting profit, and balance sheet performance metrics
  • Startup & Feasibility Study: Most captives begin with a formal feasibility analysis. This includes actuarial modeling, regulatory review, and structuring advice. Fees often range from tens of thousands for a simple structure to six figures for complex captives.
  • Capital Requirements: Regulators require minimum capital, usually ranging from $250,000 for a simple single-parent captive to $1M+ for larger programs. The amount scales with domicile, coverage types, and risk profile. This capital isn’t “spent”, it’s set aside as reserves.
  • Advisor & Management Fees: Ongoing costs include captive managers, auditors, actuaries, and legal support. Expect $25,000–$250,000 annually for administration, compliance filings, and financial reporting, depending on the size of your captive.
  • Claims & Risk Control: Some costs shift in-house. You’ll likely invest more in safety, loss control, and data management since your own balance sheet is on the line.

In contrast, traditional insurance is entirely variable, premiums rise and fall with the market, with no retained value. With a captive, a significant portion of your spend is locked in as capital reserves, creating long-term equity if claims run better than expected.

Market Trends and Relative Factors

The captive market has matured significantly. According to the NAIC, there are now over 7,000 captives globally, with increasing uptake from mid-sized companies, not just Fortune 500s.

  • Hard market conditions (premium hikes, tighter terms) are accelerating captive adoption.
  • Advisor ecosystem has expanded, lowering barriers for mid-market firms to enter group or cell structures with less capital outlay.
  • IRS scrutiny remains a concern, especially for small “micro-captives” under section 831(b). Proper structuring and documentation are essential.

In today’s environment, many mid-market firms use captives not only to cut costs but also to stabilize coverage when the commercial market is unreliable. Many firms explore captives after discovering that cheap business insurance often comes with significant coverage gaps.

Case-Style Examples

1

Mid-Market Distributor ($80M revenue, $2M annual premium spend)

Formed a pure captive requiring $1M in startup capital plus $175k in annual management costs. Over 5 years, they retained $3M in underwriting profits that would have otherwise gone to insurers.

2

Construction Group (50 firms in a group captive)

Each member contributed ~$500k in capital plus $100k annually for management. In exchange, they stabilized workers’ comp and auto liability costs, which had been rising 15% per year in the commercial market.

3

Healthcare Company (cell captive)

Chose a protected cell structure with ~$350k capital requirement and $75k annual fees. This allowed them to cover cyber and malpractice risks that traditional markets excluded.

Regulatory and Compliance Considerations

Moving from cost considerations to the regulatory framework, it’s important to understand that captives operate in a highly regulated environment with both opportunities and obligations.

State or Federal Regulations Impacting Captives

Captives are legitimate, regulated insurance companies. They must be licensed and domiciled in a jurisdiction, whether a U.S. state (like Vermont, Delaware, North Carolina) or an offshore center (like Bermuda or Cayman).

Key compliance elements:

Insurance professionals analyzing loss data and captive insurance strategy including retention layers and reinsurance structure

Example

A North Carolina-based manufacturer formed a captive domiciled in Vermont. Regulators required $1.2M in minimum capital plus quarterly reporting, ensuring solvency and transparency. The company gained credibility by meeting these standards, which later helped when negotiating reinsurance contracts.

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Industry-Specific Compliance Requirements

Certain industries face heightened regulatory oversight, and captives must adapt coverage to meet those rules:

  • Healthcare & Life Sciences: HIPAA, FDA, and patient-safety regulations often drive captive use for medical malpractice, cyber liability, and regulatory fines.
  • Financial Services: SEC and FINRA compliance exposures may be insured through captives, but disclosures must be meticulous.
  • Construction & Contracting: Captives may be required to show proof of coverage that meets state workers’ comp or bonding requirements.
  • Transportation & Logistics: DOT and FMCSA standards mean auto liability coverages in captives must satisfy regulatory filings.
  • Environmental & Manufacturing: EPA compliance risks (pollution liability, waste disposal) are frequently excluded in commercial policies but can be written into a captive, with the right environmental reporting.

Example

A regional construction firm using a group captive needed to demonstrate workers’ comp compliance in multiple states. Their captive structure included “fronting arrangements” with a licensed carrier to issue certificates that satisfied state regulators and contract requirements.

How to Choose the Best Captive Insurance Program

Not all captive programs are created equal. The difference between a successful captive and a costly mistake often comes down to structure and governance.

What to Look for in a Policy

Key elements to evaluate:

Board meeting discussing captive governance and regulatory compliance requirements for captive insurance company
  • Feasibility Study: A rigorous actuarial and financial analysis to test if a captive makes sense for your risk profile.
  • Trigger & Scope: Clear definitions of what risks are covered, and whether coverage extends to emerging or hard-to-place exposures.
  • Capital & Reserves: Adequate capital ensures solvency and regulatory approval. Undercapitalized captives are red flags.
  • Reinsurance Strategy: Strong reinsurance partners protect against catastrophic claims and smooth volatility.
  • Governance Model: Captive board oversight, claims protocols, and independent audits matter for long-term credibility.
  • Exit Flexibility: Ability to dissolve or restructure the captive if business conditions change.

A well-structured captive is not just an insurance tool; it’s a strategic financial vehicle.

Benefits of Working With The Coyle Group

Captive insurance is a powerful tool, but it’s also highly technical. Without the right expertise, a captive can create more problems than it solves. At The Coyle Group, we bring the knowledge, relationships, and experience needed to design, launch, and manage successful captive programs.

Why working with a specialized broker matters:

  • Domicile & Manager Access – We connect you with multiple captive domiciles and managers, ensuring your program is built on the right foundation.
  • Cost Benchmarking & Reinsurance Negotiation – We help compare program costs, structure layers effectively, and negotiate with reinsurers to secure favorable terms.
  • Regulatory & IRS Compliance – Our team guides you through IRS requirements, risk distribution standards, and documentation to protect your program from scrutiny.
  • Claims Advocacy – When claims arise, we make sure payouts are handled in line with your captive’s design and your expectations.
  • Feasibility & Strategic Alignment – We support feasibility studies and align captive strategies with your long-term financial and risk management goals.

With over 95 years in business and decades of experience structuring alternative risk programs, The Coyle Group helps businesses use captives as a strategic advantage, not a compliance headache.

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Questions to Ask Before You Buy

Before committing to a captive program, smart buyers press for clarity on critical issues.

  • What is the minimum capital requirement in my chosen domicile?
  • How will the captive handle claims, internally, or with a third-party administrator?
  • What risks are excluded, and why?
  • Does the policy respond to emerging risks like cyber or environmental?
  • How much flexibility do I have if I expand into new states or industries?
  • What is the expected break-even period compared to traditional insurance?
  • Who manages compliance with state regulators and the IRS?
  • How are underwriting profits returned to owners?

Questions about Captive Insurance?

Captive insurance is when a business forms its own licensed insurance company to cover its risks. Instead of paying premiums to a commercial carrier, you fund the captive, retain underwriting profits, and buy reinsurance for catastrophic claims. This structure gives you more control over coverage, pricing, and claims while turning insurance into a strategic financial tool.

No. While Fortune 500 companies pioneered captives, mid-sized businesses with $1M+ in annual insurance premiums increasingly form or join them. Group captives and cell structures allow smaller firms (25–1,000 employees) to participate with lower capital requirements while still reaping the benefits of stability and profit sharing.

Captives can insure most commercial lines—workers’ comp, general liability, auto, property—as well as emerging risks like cyber, environmental, and supply chain disruption. Many businesses use captives to cover gaps left by traditional insurers or to secure higher limits in areas like product recall, professional liability, or regulatory exposures.

It depends on domicile, coverage lines, and risk profile, but regulators generally require $250,000–$1M+ in initial capitalization. That capital isn’t “spent”—it’s held as reserves. Companies joining a group or cell captive can often enter with far less, sometimes in the $250k–$500k range.

Captives may offer tax advantages, including deductible premiums and investment income growth. However, the IRS closely scrutinizes captives. To qualify, you must demonstrate real risk shifting and risk distribution. Poorly structured captives—especially micro-captives—risk disallowance and penalties. Always seek expert tax and legal advice.

Traditional insurance transfers all risk to the carrier, but premiums are gone forever. With captives, you retain predictable risk, control coverage, and capture underwriting profits. Many businesses adopt a hybrid model—funding a captive for routine exposures while using commercial carriers or reinsurance for catastrophic events.

Key risks include capital at risk, regulatory complexity, IRS scrutiny, and management overhead. A poorly structured or underfunded captive may fail to pay claims or lose tax advantages. The solution is a feasibility study, professional management, and ongoing compliance with domicile and federal requirements.

Costs vary widely based on capital, advisors, management fees, and coverage lines. Expect six-figure startup and annual management costs for a mid-market firm. Compared to traditional insurance, much of this spend is retained as equity and reserves. The only way to know your true cost is through a tailored feasibility study.

Yes—captives are often used to insure risks excluded, capped, or overpriced in the standard market. Examples include cyber beyond market limits, environmental liability, supply chain interruption, and reputational harm. However, captives cannot legally insure illegal activities, known losses, or certain punitive fines.

Captive formation usually takes 3–6 months, including feasibility, regulatory approval, and capitalization. Joining a group or cell captive can be faster—sometimes 30–60 days. Complexity depends on domicile requirements, risk profile, and how quickly financial and actuarial data are assembled.

Get the Right Captive Insurance for Your Business

Captives aren’t for everyone, but when they’re designed and managed correctly, they can transform how a business finances risk. Whether your goal is to gain more control over premiums, improve cash flow, or create a long-term risk management strategy, the key is having a broker who knows how to structure a captive the right way.

At The Coyle Group, we guide you through the entire process, from feasibility studies and domicile selection to compliance, reinsurance, and ongoing management. Our focus is on making sure your captive isn’t just compliant, but truly aligned with your business and financial goals.

Bottom line: With the right captive strategy, your business gains both protection and financial advantage. Without one, you’re leaving control and potential profits on the table.

This article was written by Gordon B. Coyle, CPCU, ARM, AMIM, PWCA, CEO of The Coyle Group. With more than 40 years of experience advising middle-market companies on alternative risk financing, Gordon has deep expertise in captive insurance solutions, including single-parent captives, group captives, and rent-a-captive models.

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