Why Great Companies Delay Smart Captives

It’s a situation our team faces all the time. We’re talking with a CEO, CFO, risk manager, or broker. This person is keen on using captive insurance in one way or another. They’re aware of the benefits. They know big corporations use captives as a major part of their risk management strategy and that the vehicle can produce a new line of revenue. The whole thing seems too good to be true, and out of reach. Not to mention, it’s complicated, takes a long time, and…

There are some true statements in that paragraph, and also some not-so-true statements. As typically happens with a rapidly growing product category, there are a lot of myths obscuring the reality in captive insurance. Captives still aren’t even widely-known among CFOs. And the misconceptions prevent action.

The longer the captive-curious individual waits, the more time is lost where owning their insurance could have improved coverage, stabilized insurance spend, and made money.

So if you’ve wondered if a captive could be right for your business or clients, or how you can better put your current captive to work, we wanted to summarize the top concerns we’ve heard and how we’ve responded. Throughout, we bring in survey data from our hosted session at RISKWORLD’s 2025 conference, giving a sense for how practitioners in the market see the potential blockers.

For those who already own a captive, you’re one of the early adopters. If you'd like, use the sidebar navigation to skip down to "Getting the Most Out of Your Captive," covering three leading ways to do just that.

Top Captive Concerns and the Reality Behind Them

Complexity

Concern: Setting up a captive will be too complicated and resource-intensive. Complexity was the #1 concern at RISKWORLD, cited by 47% of participants. (Bandwidth was #3 at 28%, and regulations and lack of expertise were also noted).

• “Endless steps and parties involved.”
• “I wouldn’t know where to begin.”
• “We don’t have time for this right now."

Perspective: There is some complexity inherent in captive planning and formation. You need to marshal expertise from many subject areas (actuarial, legal, etc.) and manage a process that takes months. But we find this concern is overstated, especially once you have a clear roadmap of exactly what needs to be done, and you don’t have to take the journey alone.

A captive manager, for example, should be coordinating the specialized trades and can provide leverage across the process. That reduces how much of your own in-house resources are required. At Luzern, we take an end-to-end approach and can also incorporate your broker, who may or may not be savvy on captives. Each year you wait is a missed opportunity to retain underwriting profits that can start to compound.

Financial Risk

Concern: The upside is a clear attraction, but downside takes the stage. Suffering major losses was the #2 concern, at 37% of respondents (costs were also noted).

• “A big loss could wipe it out.”
• “I’ll need too much cash up front.” 
• “Too much collateral required.”

Perspective: Taking risk in-house can be nerve-racking. Before, a commercial insurer was on the hook, and now you are. But captives are designed with resilience in mind. They use reinsurance to protect against large, unpredictable losses. As a result, even significant claims can be managed without jeopardizing the captive's stability.

A key step in setting up a captive is making sure it is adequately capitalized to meet its insurance obligations and regulatory requirements. The cash required depends on risk exposure, size, and domicile (we answer the top 5 questions on funding a captive). Collateral protects you, its terms can dwindle over time with good captive performance, and it frees up, unlike payments to a commercial insurer.

Internal Alignment

Concern: Getting buy-in for something long-term and strategic (in this case, a captive) can be hard. It was the #4 concern (26% of responses).

• “This just isn’t a priority, though I’d like it to be.”
• “I’m not the decision maker.”
• “I don’t know how to answer questions from our Board/C-Suite.” 

Perspective: You may already know that investing in a captive now will pay dividends in the future. But other members of the leadership team or Board may be focused on short-term savings, and in the early years, a captive needs to grow. Framing the value proposition is essential for stakeholders to recognize a captive’s potential impact. We can help by equipping you with the right materials and messages, grounded in your situation, to communicate across the organization.

An important point to emphasize is that a captive is a long-term investment. It may or may not lead to lower premiums in the immediate term, but over time the financial benefits are undeniable. Preventing surprises is key to success.

Company Profile

Concern: Some assume that captives are only for the Fortune 500.

• “Captives are a sophisticated tool that only the biggest players can use.”
• “No companies like mine are using captives.”

Perspective: Large corporations have long made use of captive insurance. 95% of the Fortune 500 fall into that bucket. But today, captives are increasingly available to small- to mid-sized businesses, though are still widely underused. The qualifying factors are not business size, but commitment to risk management, sufficient premium volume to make the economics viable, and an appropriate risk profile. That assessment needs to be made on a case-by-case basis. Our Captive Simulator can be a good starting point. In general, a unified, modern platform makes this type of analysis easier and more approachable.

The bottom line: companies resembling yours in terms of industry, size, and risks are probably already using captives as a strategic asset. 

Lines of Coverage

Concern: We hear hesitations about the types of risks that can be considered.

• “Captives are only for hard-to-place risks.”
• “My risks are too unique.”
• “A long loss history is a prerequisite.”

Perspective: A captive can be used for nearly any type of risk. It can be well-suited for hard-to-place risks (like emerging risks in AI, cyber, climate, and supply chains). It can also be ideal for bread-and-butter risks that you manage better than your insurance provider is giving you credit for (like workers’ compensation).

Across the board, captives can offer more tailored coverage than commercial insurance. For example, when a cyber policy excludes outages shorter than 8 hours, a captive can fill the gap. Business interruption coverage is often tied to property damage; a captive could cover any time you have to close doors. A long loss history can help the assessment but is not always required. For newer risks, such loss records may not be available, but actuarial methods can step in to fill an experiential gap.

Notoriety

Concern: Captives are somehow illegitimate.

• “I’ve heard they’re a tax scheme.”
• “Self-insurance doesn’t sound very stable or innovative to me.”

Perspective: The tax angle is a common misconception. Historical examples of malfeasance are thought to represent the industry as opposed to specific bad actors and their actions. The reality is that captives are highly-regulated insurance companies. Sometimes they can offer tax efficiencies, but that is not their primary goal or a guarantee. Having a captive manager that holds the highest standard for taxation is essential. We bring a deliberate process to stay clear of lines in the sand repeatedly reaffirmed by IRS scrutiny.

Turning to another aspect of captive reputation, unlike self-insurance, a captive is a licensed insurance company that you control. It allows you to underwrite risk, secure reinsurance, and more that is not possible with self-insurance.

Getting the Most Out of Your Captive

If you’ve already gotten past any initial concerns and are currently operating a captive, you’re ahead of the curve. Now, you want more out of your captive, you just aren’t clear how to achieve that. In fact, nearly half of our respondents said a review of their existing captive strategy and operational performance could help them on their journey.

Typically, there are several ways captives are underused. Exploring each of these could boost your performance:

• Expand into New Lines of Risk. Once you have a captive, there’s a synergistic effect as the premium of one line of risk can support the losses of another. To take advantage of this, you need accurate modeling of your captive. Modern tools purpose-built for captive management can be an accelerant. A captive is also consistent with the need to respond to emerging risks (as defined by the International Risk Governance Council, “new or familiar risks that become apparent in new or unfamiliar conditions”) and evolving risk management priorities.
• Reassess Your Reinsurance Strategy. Right now, you may (for example) be insuring any losses over $1 million with reinsurance. Over time, as you build the capital base of your captive, you could be better off taking a higher retention and paying less to reinsurance, enhancing your independence and driving down costs.
• Manage the Surplus. The surplus can be reinvested into programs that mitigate risks or pursue growth opportunities. Just to get the ideas flowing, we’ve seen clients offer a warranty product off the main business to create a new revenue stream, or develop their own tenant legal liability coverage for their rental property.

Help on the Journey

This list shows resources our audience said they’d find valuable as they explore captive opportunities. All tractable, these can be to-dos rather than blockers.

• More Educational Content
• Review of Your Current Captive Operation
• Specifics on Your Business Case
• Technology for Captive Management
• Captive Manager Guidance
• Actuarial Help with Your Data

Luzern Risk is here to help on all these dimensions. Check out our Resource Center for tools and topics of interest to you. We can work with you to evaluate performance, model your current or potential captive, and develop recommendations. Feel free to get in touch to start the conversation.