What Is Captive Insurance and How Does It Work for Businesses Seeking Greater Control Over Risk?
Captive insurance is a specialised form of self-insurance that allows businesses to create and own their own insurance company to cover specific risks. Instead of relying solely on traditional insurance carriers, companies use captives to gain greater control over coverage design, claims handling, and long-term cost management.
The captive insurance industry is projected to reach a global market value of $250 billion by 2028, reflecting a growing need for alternative insurance solutions amid rising premiums, shrinking coverage options, and increased regulatory complexity. For industries facing unique or emerging risks—including cannabis, manufacturing, healthcare, and construction—captive insurance has become a strategic tool rather than a niche solution.
In this article, we’ll explain what captive insurance is, how it works, why businesses use it, and how it differs from traditional insurance models.
What Is Meant by Captive Insurance and Why Do Businesses Create Them?
In simple terms, captive insurance refers to the practice of establishing an insurance company that is owned and controlled by the business it insures. Rather than purchasing coverage from an external provider, a business forms its own captive insurer to underwrite some or all of its risks.
Companies typically turn to captive insurance when traditional policies become too expensive, too restrictive, or fail to adequately cover their exposures. Captives are designed to cover losses while giving businesses more control over risk financing, claims management, and loss prevention strategies.
Captive insurers can cover a wide range of risks, including:
Property and casualty risks
General and product liability
Workers’ compensation
Cyber liability
Employee benefits and health plans
Because the parent company owns the captive, it can directly influence underwriting standards, claims handling practices, vendor selection, and investment strategies capabilities that are rarely available through conventional insurance arrangements.
How Captive Insurance Works: From Formation to Claims and Reinsurance
Captive insurance companies operate much like traditional insurers, with one key distinction: in many cases such as with pure captives, they insure only the risks of their parent company or affiliated entities.
Here’s a simplified overview of how captive insurance works:
Formation: A business or group of businesses establishes a captive insurance company, often in a favourable onshore or offshore jurisdiction with established regulatory frameworks.
Premium Collection: The parent company pays insurance premiums to the captive, similar to how it would pay a commercial insurer. These premiums are actuarially determined based on risk exposure.
Claims Management: When a covered loss occurs, the captive pays claims. Because the business owns the captive, there is often more flexibility, transparency, and alignment in how claims are managed and resolved.
Reserves and Investments: Premiums collected by the captive are held as reserves to pay future claims. These reserves can also be invested, generating additional income and improving cash flow over time.
Reinsurance: To protect against catastrophic losses, captives often purchase reinsurance. This allows them to retain predictable losses while transferring extreme risk to larger global insurers.
The Strategic Advantages of Captive Insurance for Growing and Regulated Industries
Captive insurance offers several compelling benefits that make it attractive to businesses seeking long-term stability and risk control.
Bespoke Coverage Designed Around Real Business Risks
One of the most significant advantages of captive insurance is the ability to design policies tailored to a company’s actual risk profile. Traditional insurers often rely on standardised forms that may exclude or limit coverage for niche or emerging exposures.
Captives allow businesses to insure risks that are otherwise difficult or expensive to place, creating coverage that aligns with operational realities rather than generic assumptions.
Reduced Operating Costs and Improved Cost Transparency
By bypassing traditional insurance carriers, businesses can reduce overhead costs, broker commissions, and carrier profit margins built into commercial premiums.
Captives also provide unparalleled transparency. Companies gain clear visibility into what drives claims, where losses originate, and how risk management efforts impact overall costs.
Enhanced Cash Flow and Long-Term Financial Benefits
Premiums paid to a captive remain within the organisation rather than leaving it. Over time, retained underwriting profits and investment income can significantly improve liquidity and financial flexibility.
This structure rewards companies with strong safety records and effective risk management programs.
Potential Tax Advantages When Properly Structured
Captive insurance premiums may be tax-deductible, and reserves for future losses can often be accumulated on a tax-advantaged basis—benefits that are generally unavailable through informal self-insurance.
Proper structuring and compliance are essential, but when done correctly, captives can offer meaningful tax efficiencies.
What Is the Difference Between Captive Insurance and Independent Insurance?
The primary difference between captive and independent insurance lies in ownership and control.
Captive insurance is owned by the insured business and provides coverage primarily to that business or its affiliates.
Independent insurance involves purchasing coverage from a third-party insurer that operates independently and serves many unrelated clients.
Captive insurance offers greater control over pricing, coverage terms, claims handling, and data transparency. Independent insurance, on the other hand, offers simplicity and minimal administrative responsibility.
The right choice depends on factors such as company size, claims history, risk tolerance, cash flow stability, and long-term strategic goals.
Who Should Consider Captive Insurance and When It Makes Sense
Captive insurance is best suited for businesses with:
Stable and predictable claims experience
Strong cash flow and financial discipline
Long-term commitment to risk management
Exposure to hard-to-insure or volatile risks
Industries facing regulatory complexity or inconsistent insurance markets often benefit most from captive structures, especially when traditional coverage becomes restrictive or cost-prohibitive.
Get in Touch With Experts Who Understand Captive Insurance Strategy
Establishing and managing a captive insurance company requires expertise in accounting, governance, compliance, actuarial analysis, and risk management. Businesses considering captives should work with experienced advisors who understand both the technical and strategic implications of captive ownership.
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