Captive Insurance as a Strategic Risk Financing Solution

Insurance premiums are one of the largest operating expenses for many businesses, yet they are also among the most difficult costs to predict. Even organizations with a strong claims history can experience premium increases due to broader market conditions, rising catastrophic losses, or reduced insurance capacity.

Adding to that, businesses are also facing emerging and hard-to-insure risks such as cybersecurity, climate-related events, supply chain disruptions, and employee benefits that are often expensive or difficult to insure through traditional commercial markets.

As a result, organizations are increasingly exploring alternative approaches to risk financing, with captive insurance emerging as one of the most effective long-term strategies.

While organizations around the world are increasingly adopting captive models, North America continues to lead the global captive insurance market in both the number of captive formations and premium volume, reflecting the growing importance of captives as a long-term risk financing solution. Today, captives are no longer used only by large enterprises. Companies of all sizes, not-for-profit organizations, and government agencies are using captive structures to manage risk more strategically, improve financial control, and respond to changing market conditions. Recent industry trends also indicate a significant increase in the formation of small and mid-sized captives, particularly those with up to US$5 million in net premium.

Market Growth at a Glance:

• According to Risk & Insurance, the number of U.S. domestic captives grew from 3,365 in 2023 to 3,466 in 2024.
• A study from the National Association of Insurance Commissioners (NAIC) reported that the majority of Fortune 500 companies now have captive subsidiaries, highlighting a significant trend in corporate strategies.
• From 2019 to 2023, AM Best-rated captives generated an estimated $4.3 billion surplus growth and $2.0 billion in dividends; that would otherwise have gone to the commercial market.
• AM Best also reports that the captive composite's five-year average combined ratio, a key measure of underwriting profitability, has consistently outperformed the commercial composite average.
• The 2024 Self-Insurance Institute of America (SIIA) Captive Industry Survey & Trend Report found that Employee Benefits/Medical Stop-Loss and Property & Casualty were the leading areas of growth for additional captive premium and new captive formations.

What's Driving Organizations Towards Captives?

Reason 1: Instead of purchasing commercial insurance for every risk, organizations can retain risks they understand and can manage through a captive, while transferring larger or less predictable risks to the commercial insurance or reinsurance market. This helps reduce insurance costs while allowing underwriting profits to remain within the business. 

Reason 2: Captives also create long-term financial value beyond premium savings. As funds remain within the captive, organizations can build reserves and earn investment income over time. These funds can then be used to pay future claims, support business growth, or invest in other strategic priorities.

Reason 3: Captives also give businesses the flexibility to adapt as their risks change. As operations grow or new exposures emerge, organizations can adjust their risk retention and add new lines of business.

Reason 4: Beyond the financial advantages, captives help organizations take a more proactive approach to risk management. Because  underwriting, and loss data remain within the organization, businesses gain deeper visibility into their risk profile. This makes it easier to identify loss trends, strengthen prevention strategies, collaborate more effectively with third-party administrators (TPAs), and make better-informed decisions about future risk financing.

Traditional Insurance vs Captive Insurance

While both traditional insurers and captive insurers provide insurance coverage, their ownership models, operating structures, and objectives are fundamentally different.

Understanding Different Captive Business Models

Over the years, captive insurance has evolved into several distinct structures to meet different business and risk management needs. Choosing the right structure depends on the organization's risk appetite, capital availability, and long-term objectives. 

Single Parent Captive

Also known as pure captive, it is wholly owned by one organization and primarily insures the risks of the parent company and its subsidiaries. The parent company determines the level of risk it is willing to retain, the lines of business to insure, and how capital is managed, providing greater control compared to the traditional commercial insurance market.

Single-parent captives are commonly used for low-frequency, high-severity risks such as property and catastrophic (CAT) events, business interruption, pandemics, and inventory-related losses. For example, Warrior Met Coal established a Vermont-based single-parent captive to cover deductibles and self-insured retentions for its cyber, property, workers' compensation, and general liability insurance programs.

According to AM Best, single-parent captives have consistently outperformed commercial casualty insurers across several underwriting metrics, benefiting from appropriate pricing, low expense ratios, and disciplined underwriting. Many organizations also continue expanding their captives into additional lines of business to diversify risk.

Group Captives

A group captive is jointly owned by multiple organizations with similar risk profiles. By pooling the resources, participating businesses can share risks, operating costs, and underwriting results, making this model particularly attractive for small and midsize organizations that lack the required risk exposure to justify owning a pure captive.

For example, the NewCon Insurance Program is a group captive created in 2003 by contractors for contractors. It enables eligible construction businesses, including electrical, plumbing, HVAC, drywall, masonry, and carpentry contractors, to collectively insure their auto liability, general liability, and workers' compensation risks.

Risk Retention Groups (RRGs)

Risk Retention Groups (RRGs) are a specialized form of group captive that provides liability coverage exclusively to member businesses operating in the same industry and facing similar risks. Rather than relying on the traditional market, members pool resources to collectively finance and manage their liability exposure.

One example is the Ophthalmic Mutual Insurance Company (OMIC), a physician-owned RRG providing professional liability coverage tailored to ophthalmologists, giving members specialized underwriting and risk management support built around their profession.

Cell Captives

A cell captive, also known as a Protected Cell Company (PCC) or Segregated Portfolio Company (SPC) in some jurisdictions, is a captive structure that enables multiple participants to insure their risks within a single legal entity. Each participant operates through an individual cell, with its own assets, liabilities, underwriting results, and reserves that are legally segregated from those of other cells. This structure allows organizations to benefit from captive insurance without the cost and complexity of establishing a standalone captive.

Example: Marsh Cell Captive Facilities enables organizations across industries to establish individual captive cells for various risks. Each participant operates independently within its own legally protected cell while leveraging Marsh's established captive infrastructure and management expertise.

Key considerations when forming a captive

Before moving forward with a captive, organizations should evaluate the following considerations to ensure it aligns with their risk financing needs and long-term business objectives.

1. Conduct a feasibility study to determine the risks to be insured, estimate capital requirements, assess long-term financial viability, and determine whether a captive is the right choice.
2. Assess the organization's risk appetite to determine how much risk it is willing and financially able to retain, supported by a strong risk management framework.
3. Select the most appropriate captive domicile based on regulatory requirements, and tax considerations. A captive domicile is the state, territory, or country that licenses a captive insurance company and has primary regulatory oversight over that captive insurer.
4. Choose a captive structure that aligns with the organization's risk financing strategy, governance model, and operational needs.
5. Appoint an experienced captive manager with expertise across multiple domiciles to ensure the most suitable jurisdiction and operating model are selected.

Critical Role of Risk Diversification

Once a captive is established, one of the biggest priorities is avoiding risk concentration. Unlike commercial insurers that spread risk across thousands of policyholders, a single-parent captive usually starts by insuring the risks of one organization. If several losses occur at the same time, the captive has a much smaller pool of premiums to absorb those claims.

Successful captives address this by diversifying their portfolios:

• Across different lines of business such as cyber liability, workers' compensation, commercial auto, and general liability.
• Across different geographic regions to reduce the impact of localized catastrophes, as explained by Christopher Lowell and Somil Jain in MGA 101 series.
• Through reinsurance, which helps transfer catastrophic or high-severity risks.
• By managing correlation risk, recognizing that events like natural disasters can also trigger cyber incidents or supply chain disruptions.

Managing Reinsurance Market Volatility 

Diversifying risk is only part of the equation. Most captive insurers must also rely on reinsurance to protect against catastrophic or high-severity losses that exceed the captive's retention limits. This allows captives to retain manageable risks while transferring larger, less predictable exposures.

However, this reliance on reinsurance also means captives are exposed to changes in the global reinsurance market. Unlike the traditional insurance market, reinsurance pricing and capacity often respond more quickly to major catastrophe losses and evolving claims trends. After high-loss years, reinsurance premiums can increase significantly, and coverage may become more difficult to obtain. Smaller captives are often more vulnerable to these changes because they have a smaller portfolio of risks over which to spread the additional costs.

When evaluating a captive model, organizations should also consider how reinsurance market conditions could affect its long-term sustainability, including:

1. Current reinsurance costs and how they impact the captive's overall financial model.
2. Future market cycles, including the potential for higher premiums or reduced capacity.
3. Capital adequacy to ensure the captive can remain financially resilient during periods of a hard reinsurance market.

By considering these factors early, organizations can build captives that are better equipped to adapt to changing market conditions while maintaining long-term financial stability.

Enabling the Next Phase of Captive Growth

Here's the bottom line: captive insurance is no longer used only by large enterprises. As insurance costs continue to rise and new risks become harder to insure, mid-size organizations are also turning to captives as a long-term risk financing strategy. According to the 2024 Self-Insurance Institute of America (SIIA) Captive Industry Survey & Trend Report, captive owners reported having an average of two captives, while 83% said they had not considered leaving their captive, reflecting growing confidence in the model.

At the same time, captives are taking on a much bigger role than they did a few years ago. Businesses are using them to manage a wider range of risks and several U.S. states continue to broaden captive regulations to support new insurance applications. However, growth also brings new challenges. AM Best notes that social inflation, litigation financing, and rising claims costs are creating new challenges, making disciplined underwriting, claims management, and capital planning more important than ever.

As captive programs grow in size and complexity, managing multiple captive structures, expanding risk portfolios, and coordinating with reinsurers, captive managers, TPAs, brokers, and regulators require greater visibility, efficiency, and collaboration than manual processes can provide.

This is where technology is shaping the next phase of captive growth. Modern, cloud-native insurance policy administration system helps automate underwriting, claims FNOL, and bordereaux reporting, reducing manual intervention and enabling leaner operations. As organizations continue to diversify their risks and support multiple captive business models, configurable low-code insurance platforms will make it easier to scale operations, improve collaboration, and adapt to changing business requirements.