TRENDS
challenges.
• Stabilize coverage pricing and longterm affordability.
Advantages and Disadvantages of Captive Insurance
The formation of an insurance captive is complex and requires careful consideration of multiple factors, including tax implications, regulatory environment and operational considerations. Before deciding whether an insurance captive is the ideal solution for your company’ s risk management needs, it is important to carefully weigh its advantages and disadvantages.
One of the main advantages of forming an insurance captive is that it can measurably reduce your annual insurance spend. This cost reduction is achieved by self-insuring some of your risk while transferring other risk to third party reinsurers. In addition, you will incur reduced cost when claims are mitigated via your unbundled risk mitigation resources.
Additionally, the captive structure allows participation in investment income that will reduce your overall cost of risk by inherent design embedded in the captive insurance structure.
Insurance captives also offer companies access to more competitive pricing options than traditional insurers while providing greater control over claims-handling processes, and captive plans have potential tax benefits to customers.
On the other hand, there can be drawbacks with captive set up costs, possibly including capitalization requirements. Additionally, formation expenses and regulatory requirement costs for some captive structures can be cost prohibitive, unless you are considering an agency captive structure whereby these are common costs of doing business expenses that are embedded in the agency captive structure.
The Future Is Bright for Captive Expansion
The volatility of the underwriting cycle in traditional insurance markets has been a driving factor for captive growth in the past, and the recent hard market was no exception. The number of captive domiciles continues to expand with both U. S. and Europe onshore captives looking set to thrive in the next few years, while pressures in traditional insurance markets seem set to continue – at least in some lines of business like commercial automobile and trucking.
At the same time, the growing focus on long-term sustainability is opening up opportunities for captives to play even a bigger role.
Much of the recent captive growth has involved U. S. parented captives, and most of that has been onshore in the U. S. Indeed, states have been falling over themselves in the last decade or so to pass captive laws. And, for the first time ever, last year saw Vermont overtake Bermuda and the Cayman Islands to become the world’ s largest captive domicile according to business insurance rankings.
Meanwhile, in the U. K., Lloyd’ s recently announced its first captive for many years, and the U. K. government is being urged to make it even more attractive to host onshore captives in the country.
At the same time, Italy is also being urged to attract new captives and there is pressure growing in Spain and Germany to add new territories to the existing domiciles, such as Ireland, Sweden and Switzerland.
The future being bright is not just about new captives, as perhaps more importantly, companies are putting more businesses through their captives. Indeed, captive premiums grew again in 2023, driven by both existing and new captives.
Lastly, according to expert Ken MacDonald of R13k Consulting,“ history and statistics tell us that captives do not reduce in total numbers in a soft market, or even a prolonged soft market. This is a testament to the totality of the benefits that captives deliver.”
18 l May-June 2025