Benefits of Creating a Captive Insurance Company

What is a captive insurance company? It’s a common question—one with multiple answers, given the wide variety of captive structures and programs available. At its core, a captive is an insurance company owned by its insured(s). While captives are fully regulated by state insurance departments, they typically insure a limited number of entities—ranging from a single parent organization to multiple participants in a group or segregated cell arrangement. Captive ownership can offer a range of potential benefits, from cost savings to greater control over risk management.

Key Benefits of Captive Ownership

The most cited benefits of captive ownership include retaining underwriting profits within the organization, gaining greater control over the claims and underwriting process, increased flexibility in coverage design, access to global reinsurance markets, and more favorable tax treatment compared to traditional self-insurance. However, when managed strategically, the advantages of a captive can extend well beyond these fundamentals—offering long-term value and tailored risk management solutions, including:

1. Flexibility for hard-to-insure and emerging risks

Another significant aspect of captive insurance programs is their flexibility, especially within emerging risk markets. The commercial market is often hesitant to underwrite new and emerging risks where the risk of loss is hard to quantify due to the lack of historical knowledge or other underwriting concerns.

A captive can be utilized to fill in coverage gaps that exist in commercial policies, underwrite risks that are not available on the commercial market, or provide coverage limits that are hard to insure commercially. Some examples of these include:

• cyber risk coverages
• loss of electronic medical records
• telehealth and telemedicine coverages
• loss of key third-party payor coverage
• breach of privacy coverage
• regulatory change coverage
• batch claim coverage
• legacy risks of acquired organizations

These risks, and more, are often hard to insure in the commercial marketplace.

An important consideration for many insureds is access to reinsurance, particularly when premium costs rise, and benefits coverages become harder to obtain (often referred to as a “hard market” for insurance). Captives can be utilized to gain access to reinsurance markets, a key driver for many captive participants through fronting carrier arrangements, risk pools, participating in or forming risk retention groups, or utilizing other captive insurance structures. Many participants have found captives to be an effective tool in leveraging retained coverages with reinsurance benefits to manage their risk exposures most effectively.

2. Increased Control

Captive insurance companies can also give the provider organization increased control over the underwriting, claims management, and investment processes. In the underwriting process, they can customize their coverage by removing standard items that are not needed or adding tailored coverage lines that may be limited or not available in the commercial marketplace. It also allows them to exercise more control over deductible and self-insured retention layers. On the claims management side, commercial insurers have become quick to settle claims in an effort to manage their overall litigation costs, which can often result in unfavorable losses for provider organizations, especially those with large deductible layers or self-insured retention layers built into their commercial policies. A captive program allows the provider organization increased control over the claims management process, allowing them to manage internally or appoint their own third-party administrator for claims. This allows the provider to be more selective over which claims should be litigated and which claims should be settled to manage those claims effectively. Additionally, the captive provides for greater control over the investment of premium dollars, allowing the organization to align its premium financing with its risk management goals.

3. Potential Tax Benefits

The tax benefits that may be available should never be the driving focus for forming a captive insurance company and are often small in comparison to the risk management benefits obtained. However, key tax benefits can be derived from a captive insurance arrangement. First, losses for a self-insured company, or one with a large deductible built into its commercial coverages, cannot be deducted until the loss event occurs. In many cases, a captive insurance company can deduct its estimated liabilities for losses that have occurred but have not yet been reported, allowing for quicker tax deductions on losses.

The IRS released its final rules on the taxation of smaller captives in January 2025, providing valuable insight into how the service views Section 831(b) transactions. As such, insurance professionals now have clearer guidance on tax benefits available for qualifying captives.

4. Strengthening Risk Management

Many organizations that participate in captive insurance programs report improvements in safety protocols, risk control strategies, and claims monitoring as part of their overall risk management approach. Particularly in higher-risk industries, the structure of a captive encourages a closer look at internal processes and loss trends. Over time, these enhancements can lead to more effective risk mitigation and improved claims outcomes—further supporting the long-term value of captive participation.

Move Forward with Confidence and Clarity

Is your organization considering forming or participating in a captive? While successfully overseeing a captive can be complex, partnering with an experienced captive insurance advisor can bring confidence and clarity to the process. Contact your CRI Captive Insurance professional today to take the next step in the right direction. Our team is here to help you make informed decisions and build a captive structure that aligns with your organization’s goals.