When clients look at captive insurance, the question they tend to ask is, “Am I putting my business at risk?” It’s a fair question. Captives require clients to take on more responsibility, more control, and more risk compared to the traditional insurance market.
As their agent, you’re the one they’ll turn to for honest answers. And the truth is this: while captives carry more financial responsibility, the risk of bankruptcy is incredibly low, especially when clients are prepared and taking action.
At Captive Coalition, we work exclusively with independent agents to help them educate and prepare clients considering captive insurance. We understand the intricacies of captives and the preventative measures they take to prevent businesses from going bankrupt due to claims.
We’ll show you why well-run captives don’t bankrupt businesses, what protection mechanisms are built into every captive, and how you can help your client make an informed decision.
Captive Insurance is About Risk and Reward
Captive insurance shifts clients from simply purchasing insurance to actively managing risk. In a captive, the client owns the insurance company (either alone or as part of a group) and takes on more control and responsibility. They also gain the ability to earn underwriting profits, stabilize premiums, and coverage centered more toward their needs.
This isn't about gambling. It’s about rewarding well-managed businesses that consistently control risk. Captives are designed for clients who already have strong safety and risk management practices or are willing to make them stronger.
Help clients understand that captives are a long-term business, financial, and insurance strategy.
Financial Stability and Claims Management
In a captive, your client has full transparency into where their premiums go. This is unlike the traditional market where pricing and decisions can feel arbitrary. But that added clarity comes with added responsibility.
It’s natural for agents and clients alike to wonder: Could a big claim year jeopardize the business?
Here’s the reality: while captives carry more risk than traditional insurance, the structure is designed to protect the business. Not bankrupt it.
Captives are built around financial safeguards that minimize exposure, even in bad years. Your client doesn’t just “hope for the best.” They plan for the worst through smart capital management, risk-sharing, and layered protection.
Can Claims in a Captive Bankrupt My Client’s Business?
Short answer: It’s incredibly unlikely.
Captives aren’t structured to leave members exposed to runaway losses. But it’s still important your client understand where the pressure points are:
- Cash Flow: Clients with poor cash flow or limited reserves may feel the strain after a bad claims year, especially in a group captive where they may owe the maximum premium (potentially 45% above their standard premium).
- Claims Frequency: A high frequency of small claims is a red flag in any captive. It signals weak risk management and may lead to assessments or even being voted out.
- Claim Severity: Severe losses are shared among the group. While that provides a buffer, multiple severe claims across the captive in the same year can still hit hard.
- Risk Management: Weak risk controls are what truly put a client at risk. Not the captive model itself. The clients who succeed in captives are those actively reducing their exposure through systems, training, and culture.
Captives also buy aggregate excess insurance, which kicks in when catastrophic losses push the captive past its limits. These policies are a backstop so the captive and its members don’t spiral financially.
Preventing Financial Strain in a Captive
The reason captives rarely cause financial ruin is because they’re built with safeguards. They’re designed to be resilient, even when the worst happens:
- Aggregate Excess Insurance: This is the captive’s safety net. If claims exceed expectations, this coverage steps in, ensuring that no single bad year takes down the captive or its members.
- Risk Sharing: In a group captive, members share risk proportionately. While no one likes assessments, spreading the impact across multiple businesses prevents one bad apple from sinking the ship.
- Assessments: If additional funds are needed, captives have the ability to levy assessments. The good news? Assessments are usually spread over several years to avoid causing financial hardship.
- Collateral Requirements: Every member provides collateral upfront. This security deposit ensures that even if a member exits or faces hardship, funds are available to cover claims.
These safeguards, combined with the fact that captives only accept well-run businesses, make it rare for a captive member to face financial distress due to claims.
Help Your Clients Avoid Financial Surprises
Captives reward businesses that take risk management seriously. The more disciplined and prepared your client is, the less likely they’ll ever face financial strain within a captive. The structure is built to handle tough years. Captives favor businesses that are proactive, not passive.
If your client is asking, “Could this bankrupt us?” the real question is, “Are we prepared to run a safer, more intentional business?” If the answer is yes, then a captive could be the best move they ever make.
For the next steps, check out our article: “Is Captive Insurance Right For My Client’s Business?” That way, you can see if your best clients qualify and are the right fit for captives.
Want to learn more about captives? Become a member of Captive Coalition for FREE to access additional resources, tools, webinars, and training to help your best clients and maintain your book of business.
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