Commercial Insights

Captive insurance: Taking control of risk management for your business

Businesses with consistent and predictable insurance needs may find that establishing a captive insurance company, essentially their own insurance entity, offers a compelling alternative to traditional carriers.

Captive insurance or self-insurance — a financial risk-management strategy used by large companies in the U.S. since the 1950s — is again making headway among small and midsize organizations looking to pare business insurance costs, improve risk management and create long-term value.

The captive segment’s inherent flexibility and control in managing risk has the potential to drive profitability and retain earnings, while creating value for policy holders and stakeholders, regardless of market conditions.

The market for captives has experienced strong growth. Forecasts show 8,000 captives globally writing $50 billion in premiums, according to 2024 research by Risk Management Advisors.¹ The recent net growth in the number of total captives is attributed to the hard commercial market, which has seen heightened use of pure captives for property and casualty (P&C) risk with high premiums rates — particularly cyber, directors’ and officers’ (D&O) liability, umbrella liability and medical malpractice, according to the Captive Insurance Companies Association.¹

“I’ve seen companies across a wide range of industries turn to captives to help manage their own risk portfolios, from workers compensation and general liability to warranties and more specialized areas,” says Ben Yeakley, senior vice president for Regions Institutional Services. “Though hospitals, physicians’ groups, and long-term care facilities have long used captives, the structure is also gaining momentum with transportation companies, distributors, and other businesses where either the costs are high, or it is hard to find competitive commercial insurance.”

Generally, a captive entity can potentially ease financial pressures if insurance issues are an ongoing concern for a business’s operations. For example, a transportation company with frequent claims tied to its fleet of vehicles or an industrial company that deals with hazardous materials may find captives a compelling alternative to traditional carriers, as premiums for such companies could be prohibitive.

What are the benefits of a captive?

“By forming a captive, a business creates a licensed insurance company that assumes some or all of its own risk,” Yeakley says. In doing so, a company may benefit from:

• Greater control over insurance costs
• Enhanced claims management and transparency
• More strategic risk management
• Improved operational practices
• The ability to retain underwriting profits within the business

In addition, many companies use captives to cover the first layer of risk. For example, the first $1 million in liability, and then purchase reinsurance or excess coverage from commercial insurers at more favorable rates.

Generally, it starts to make sense to explore a captive structure when the annual premiums exceed $2 million and maybe lower, as little as $500,000 for some businesses, says Yeakley. Many businesses begin by covering workers’ compensation or general liability through the captive, and then expand into areas like property and casualty, D&O liability, cyber risk, and possibly into employee health.

A focus on risk, not tax

It is important to note that captives are no longer viable as a wealth transfer or tax avoidance vehicle.

The PATH Act of 2015 eliminated certain provisions that were previously misused for non-insurance purposes. As a result, the IRS has significantly increased its scrutiny of small captive structures, particularly those electing under section 831(b).

Businesses considering captives should treat them as legitimate insurance solutions, building and operating them with compliance and transparency in mind. Businesses that elect to structure and operate a captive are running an insurance entity.

Capitalizing on the captive opportunity

To pursue captive insurer possibilities, Yeakley suggests taking the following steps:

1. Start with a high-level feasibility study with a reputable captive advisor to determine whether a captive structure is a good fit.
2. Next, if applicable, hire an actuary to conduct a full feasibility study that scrutinizes your company’s risk profile, financials and cash flow. Then work with the captive advisor to develop a business case for creating a captive structure.
3. Research possible locales for the entity. File for regulatory approval in your chosen location. Some jurisdictions are easier to work with, however all will have formal processes and reporting requirements.
4. Engage an experienced investment manager to oversee the assets within the captive, in coordination with your broader financial and insurance strategy. Your investment manager should have specific captive insurance investment management experience, including knowledge and capabilities in captive performance, regulations and reporting.
5. Coordinate closely with your commercial brokers to ensure the captive fits within your overall risk financing framework.

“While captives may not be right for every business or insurance need, they can be a powerful, strategic tool for those with the right risk profile and long-term vision,” Yeakley says.

Choosing an investment manager for your captive

Effectively managing the assets of your captive insurance company is crucial for long-term financial health and preserving the ability to pay claims. Here’s what to look for in an investment manager for a captive insurance company:

• Captive insurance expertise. Does the firm have a track record of effectively managing assets specifically for captive insurance companies? Do they understand the regulatory and capital requirements of captives?
• Risk management focus. Can they tailor investment strategies to match the specific liabilities and payout timelines of your captive? How do they approach capital preservation and loss mitigation?
• Transparency and reporting. Do they provide clear, comprehensive reporting on investment performance, asset allocation and fees?
• Responsive service. Are they proactive in their communication, and do they offer dedicated client service?

Need an investment manager for your organization’s captive insurance? Regions Institutional Trust team can help you manage risk and control costs. Connect with our team to determine how Regions can help your organization with captives.

Source:
¹Captive Insurance Companies Association. “2024: A Milestone Year for Captive Insurance Growth,” January 2025.