Is it Time to Set Up Your Own Captive Insurance Company?

Last year property insurance rate increases, and rising health insurance costs led more companies to form captive insurance companies.

Captive Insurance

In addition to health insurance, workers compensation and automobile physical damage have typically been good prospects for self-insurance or even creating one’s own captive insurance company. The large number of exposure units in these lines makes it easier to meet the probability threshold needed to predict losses with some level of confidence.

To get an idea of the basic framework for self-insurance, including setting up a captive insurance company, let’s look first at workers compensation self-insurance.

What are the advantages and disadvantages of self-insuring workers compensation?

Most companies purchase workers compensation coverage from traditional providers. Either through a private insurance company or from a state-owned insurance company. You pay your premiums and your insurer takes care of handling and paying all claims, and it bears all financial risk.

Self-insurance unbundles those functions with the primary goal of reducing costs.

What are the Benefits?

  • Taking a pay-as-you go approach to claims rather than paying high premiums frees up cash flow.
  • Claims management expenses are usually lower when managed in-house or by a service company or third-party administrator (TPAs).
  • Administration costs are usually lower because you are not paying for insurance company profits and the insurance company’s higher overhead costs.

What are the Disadvantages?

Most companies have no expertise in claims handling and loss control.

However, there are very workable solutions to these problems. In fact, most self-insureds don’t manage their own claims. They use service companies or TPAs for these and related services.

For example, depending on the industry, specialized medical and legal knowledge may be required. Along with negotiation skills, risk management, safety, and loss control expertise. All these services can be outsourced to reputable and dependable providers.

Severity and Frequency Issues

The other disadvantage to self-insurance is that while most claims are small, a single large injury claim can wipe out whatever reserves you’ve allocated to fund your workers compensation losses in a particular year. Two or more such losses could be devastating. In addition, there could also be an explosion of small claims that add up to breaking the bank as well.

The simple solution to both scenarios is to purchase insurance. Or, as it’s also called, reinsurance (since the primary insurer is the self-insured business). This is not typical workers compensation insurance, however. It’s money to pay the workers compensation losses that you, as a self-insurer, have taken on for yourself if your losses exceed your budget.

Primary Reasons for Employers to Consider Self-Insuring Workers Comp

  • You have good claims experience and think you’re paying too much.
  • There’s a lot of money held up in claims reserves that you are not getting cash flow benefit from.
  • You would like to be more involved in the claims handing experience.

Property Captives

Besides the potential to lower overall costs, setting up a property captive can also achieve certain tactical objectives:

  • When one part of a firm’s risk portfolio presents problems for the marketplace (rates are too high because risk is high), one solution is to create a separate cell for it and self-insurance it so that it doesn’t affect the insurance pricing for the rest of the portfolio. (This is a tactic often used in managing health insurance.)
  • Using a captive can also be a way to access reinsurance when additional capacity is needed. “Property risks also can be covered on a quota share basis in a captive to build more capacity,” according to Michael O’Malley, managing director at Concord, Massachusetts-based Strategic Risk Solutions Inc.


The challenge for setting up a property captive is capitalization. Regulators require higher limits for property captives than for health insurance or workers compensation. “If you’re not talking $5 million and above, you’re probably not making any sort of dent in your commercial market placement,” Jason Palmer, Burlington-based head of U.S. captive management at Willis Towers Watson PLC., told Business Insurance.

Another problem is when a captive needs to be fronted by an insurance company. Often banks and financial institutions won’t accept coverage without a fronting insurer.

Of course, self-insurance is not a practical alternative for most businesses, simply because they are not large enough to scale to the level needed to make self-insurance really work. But even then, it’s good to know about it. Because even if you aren’t big enough now, you may be someday.

Please give us a call if you’d like to explore your self-insurance options and what is the best solution for you.