The Captive Race Is On

It’s well known that the captive insurance industry is growing rapidly. More captives are being formed, in a wider range of industries, covering traditional and emerging lines of risk. Existing captives are expanding their operations. Domiciles and service providers are rallying to support companies in this effort.

What’s driving the growth goes far beyond any individual hard market. Instead, it reflects a fundamental shift in how companies are thinking about risk.

Many companies first start to consider a captive when they’re dissatisfied with commercial insurance. Rising premiums, exclusions, and even market withdrawal altogether can be the impetus. But once they get further in exploring the idea or have a captive up and running, they realize the strategic benefits that have long been enjoyed by almost every big corporation.

In short, captives give you control. To customize your coverage, stabilize and reduce your costs, streamline your claims, reinvest in your primary business, access reinsurers directly to obtain better pricing, run a new business out of the captive if you choose–the list goes on.

There’s no doubt that a company very similar to your own is thriving with a captive already. The sooner you start, the sooner you can reap the long-term benefits that don’t happen overnight. And the more attractive your program will be to partners in the space who can be the key to making it all work.

Characterizing the Growth in Captives

The race toward captives can be seen in a few ways:

• Participation. By the end of 2024, there were around 8,000 captives, or 6,300 excluding certain structures, according to reports by Risk Management Advisors and Business Insurance. Over the past five years alone, Marsh Captive Solutions formed about 500 captives. Marsh-managed captives are writing $77 billion in gross written premium. We’ve come a long way from the 1,000 captives active in 1980, as estimated by AM Best.
• Breadth of industries. What qualifies captive feasibility is not the segment; it’s the business and its risk performance. All segments use captives. Financial institutions are a leading industry for captive usage. Automotive, real estate, manufacturing, retail, energy, healthcare, and many others are also well-established and growing.
• Lines of risk. Captives cover traditional lines like general liability, workers’ compensation, and property. They increasingly also are used for emerging lines such as cyber, D&O, political risk, environmental exposures, and supply chain. And existing captives are expanding coverage. For example, the average Marsh-managed captive added one to two lines in 2024 and retained 8% more risk than in 2023.
• Domiciles. Leading domiciles like Vermont, Cayman, and Bermuda to continue to grow and adapt to market conditions. Many other onshore US domiciles are also growing and putting forth captive-friendly regulation, from those serving a greater scale of captives like North Carolina and Tennessee to those serving relatively fewer like Oklahoma and Connecticut. France and the UK are both taking steps to begin attracting a base of captives.
• Captive service providers. From captive management firms to specialized providers of actuarial, accounting, and legal advice, service providers are competing to support the continued growth and profitability of the industry. Record attendance at this year’s VCIA conference is one data point.

From Reactive to Strategic Interest

At Luzern, the tenor of our discovery calls is changing. Many initial conversations used to be: “Get me out of this!” That was referring to extreme premium increases, the lack of reward for strong loss performance, and a sense that there was no escape from the renewal cycle.

We still hear about those challenges. But with some lines softening, we now more frequently hear: “How can I get ahead of the next market shift?” And: “I want to do what I’ve seen one of my peers doing with a captive.”

In other words, the interest has changed from reactive to strategic–and aware of the competition. Echoing our experience, Marsh Captive Solutions reported that for the first time in five years, its consulting team led more strategic reviews than feasibility studies.

Both motivations can be relevant at any stage of development for a captive or the business that owns it. This table highlights the types of activities associated with each:

The Advantages of Greater Control

Consider two different companies, Company A and Company B. Company A is paying 100% of its premium dollars to commercial insurers. It is subject to premium increases that may not be well-suited to its risk performance. Its claims may be rejected, hurting operations. Overall, insurance seems a burden and a pure cost.

Company B, in the same industry, is paying even just 20% of its premium dollars into a captive that covers two lines of risk. Those lines had been the most mispriced before, and are now priced fairly. Claims processing for them is easy. But more important: the funds not paid out in claims each year are retained in the captive. A financial asset has been created, as if from nothing. And it allows for many possibilities over time.

To highlight some of the competitive advantages:

• Captives are more profitable than their commercial counterparts, and this more efficient vehicle is working for you. In a 2024 report, AM Best showed that its captive composite had a five-year average combined ratio of 88.0, compared with 97.0 of a commercial peer group. From 2019 to 2024, those captives obtained $6.6 billion in insurance cost savings, broken down into $4.6 billion in year-end surplus and $2.0 billion in dividends.
• By saving money and having the opportunity to reinvest, you can use a captive to directly impact your primary business. Your premium dollars fund your insurance, but whatever is left after claims becomes surplus that you keep, and it earns investment income. In time, that surplus becomes profit, available to the parent company like any other cash on the balance sheet. It can be used for product improvements, equipment repairs and replacement, hiring, workplace safety initiatives, etc.
• Captives allow for greater agility. As your business priorities and risks evolve, a captive helps you to adapt more easily than would be possible with commercial insurance. That may look like writing additional coverage, fine-tuning your terms, or using the captive’s financial strength to buy down execution risk elsewhere.
• A streamlined claims process keeps you on track. While other firms may be arguing with their carrier over claims or being simply denied when they most need financial relief, you can trust that your claims will be approved and processed quickly. This provides you with the funds you need to continue operations.
• You can run a new insurance business out of your captive. Say your primary business is a consumer product that requires a warranty. You could underwrite a warranty policy that is perfectly suited for that product, but that would also be competitive in the broader market. Then, sell it to your own customers and to third parties.

The Competition Has Already Begun

Although historically captives have been a rather well-kept secret of large corporations, there is no doubt successful captive operations are running today at businesses similar to your own. The head start those companies have helps more than their risk management and bottom line. It also gives them credibility in the captive space, which has practical implications.

Executives that recognize the opportunity and have established a captive stand to benefit from a longer operational history. That is useful in gaining support from regulators, reinsurance providers, fronting carriers, lenders, and other necessary players.

As exemplified in reinsurance:

• Captives offer you direct access to carrier partners, and potentially more favorable terms with them. By going directly to reinsurers to obtain excess coverage, it’s like you are dealing with a wholesaler. In the commercial model, your carrier would play middle-man, and include the markup in your premium.
• Reinsurance capacity is not infinite. The flipside of the coin is that you must find reinsurers to underwrite your risk at terms you can accept. By having a captive and a track record of operating it well, you increase your attractiveness as a reinsurance buyer. The sooner you get started, the sooner you can build a more sophisticated and financially efficient program down the line.

If you’re curious about how your industry peers are using captives within your unique business model, our risk team can provide answers.

Going Captive Is About Sharing Risk, Not Taking All of It

The decision to use captive insurance doesn’t mean abandoning commercial insurance altogether. Far from it.

The initial goal for your captive is to recreate a similar policy to the one you have today, built specifically to cover your risks (and not everyone else's). Your captive must be able to handle large losses, however unlikely. In traditional policies, this is accomplished behind the scenes. Your carrier splits your premium up among many other insurance companies, so that no one carrier is responsible if the worst case happens.

With a captive, you get to see how it works first hand. When structuring your captive, the first major decision is how much of your own risk you’d like to take, and where. For example, if you’re overpaying for cyber liability, that could be a good place to start. As could many other areas: How to Spot a Captive Insurance Opportunity.

Once you’ve selected your slice of risk, you may also need to find a reinsurance partner. In that case, the parent company takes the deductible, the captive takes the first dollar of loss beyond the deductible up until the limit negotiated with your reinsurer, and reinsurance covers the rest, for a price.

Knowing that you have a safety net for your captive makes the initiative feel much less treacherous.

The process can be pictured as a tower, and “insurance tower” is actually the technical name for this concept. Below, you’ll see:

• The lobby represents the parent company, paying its share of a loss via the deductible.
• The captive covers the next several floors within its risk responsibility.
• Reinsurers cover the remaining.
• Moving from the left to the right shows how you can increase your ownership (taking on more risk) as you build captive surplus. That also allows you to pay less for someone else to take that risk, and for you to earn more profit.

Getting Around the Blockers

Last time you checked in on captive insurance, the landscape was likely different. You may have gotten information that wasn’t quite right, too. Maybe an advisor told you a captive wouldn’t be feasible at your level, or for your needs. Maybe you thought it would be too complex to set one up. Or, that your business model is too niche, especially if you have many counterparties involved in the risks under consideration.

If you’re following the scene closely, you could be nervous that IRS scrutiny of microcaptives justifies staying away from captives altogether.

The most common hesitation might simply be inertia. It feels easier to roll with the renewal cycle and not take up a long-term project.

Many of these blockers are more myth than reality, and are no longer as relevant as they once were. On the topic of 831(b)s in particular, the entities in question are taking a tax election that is optional, and not recommended in many cases. Go beyond the other misconceptions here: Why Great Companies Delay Smart Captives.

A Fundamental Shift in Risk Management

Growing awareness and use of captives is likely to be a lasting change. As more companies, segments, domiciles, and service providers keep fueling interest and activity in alternative risk financing, captives will become common in the middle market.

The question for every business owner and executive is no longer if they should consider a captive, but when. The answer may end up being “not right now,” but the answers that come from an initial assessment will prove worth it in a vast number of cases.

How could you be using captive insurance to strengthen your competitive position?