If you've only been hearing the upside about captives, it's no surprise that your clients might be thinking this alternative to traditional insurance sounds too good to be true. As an independent agent, you know that when something sounds too good, then it usually is. That's the feeling many agents get when they first compare captives to traditional insurance options.
The short answer? Captives can be as good as they sound, but only for clients willing to strengthen their safety and risk management programs. Like anything, you get out what you put in.
At Captive Coalition, agents often ask us, “How can this captive thing really be possible?” or, “I’ve heard there’s no downside.” Our first response is always to raise a cautionary hand. There are always two sides, and captives are no exception. After helping countless agents and their clients understand captives, we understand the intricacies and the realities of what makes captives work.
In this article, you'll get the truth about how captives work, how to spot when someone isn’t telling you (or your client) the whole story, and the questions every agent should be asking before recommending captives. That way, you can guide your clients more effectively and know if a captive is truly a fit.
What could clients realistically expect if they were to join a captive?
A captive is, at its core, an insurance company owned and controlled by its insureds, a.k.a. your clients. Its primary purpose is to insure the risks of its owners. If well-run, with best practices applied, a captive can be a highly effective risk financing and management tool. It’s no wonder most Fortune 500 companies have captives.
That said, captives are not “set it and forget it.” Problems arise when captives are poorly managed, implemented for the wrong reasons, or when clients fail to take safety seriously.
For agents, the conversation with clients needs to start with realism. There are three essentials a client must have before considering a captive:
- A detailed assessment of the client’s risk exposures and current risk management program.
- A willingness to retain risk and manage a captive with a long-term strategy.
- A genuine commitment to safety and loss control.
Captives are a long-term play. Clients who panic during market cycles and rush back to the traditional market often lose out. Agents should help clients stay focused on the rewards of consistency and discipline inside a captive.
If you're unsure whether your client would thrive in a captive, use our assessment tool to evaluate their fit.
Is captive insurance a good idea? Are there disadvantages of captive insurance?
Captives can absolutely be the right fit for your clients, but only if they’re being given the full picture. If someone’s only telling them the upsides, they’re not being honest.
Yes, the benefits are strong:
- Broader, more coverage specific to your client.
- Predictable costs shielded from market volatility.
- Direct access to reinsurers.
- Improved cash flow and potential for underwriting profit.
- More control over how claims are handled.
- Some tax advantages (when structured appropriately).
But clients need to understand: captives aren’t magic. If your client becomes a captive owner, they take on responsibilities the traditional market used to handle. That means:
- Coordinating regulatory and financial filings.
- Staying compliant with insurance and tax requirements.
- Managing actuaries, claims administrators, auditors, and more.
Not all of that has to be done in-house. Many clients outsource to captive managers. Even with support, someone needs to stay engaged. There are also new costs and the risk of being underinsured if the captive is poorly structured.
Captives work, but only for clients who are prepared to do the work.
Could joining a captive bankrupt my client’s business?
This is a common fear. Frankly, an understandable one. Captives are often misunderstood, especially by those who only see the upfront costs and responsibilities.
In reality, captives have proven to be more cost-effective and stable over the long term compared to the traditional market if they’re used properly. What causes problems isn’t the captive itself but poor management or entering the model for the wrong reasons.
Here’s the truth:
- Traditional insurance has unpredictable premiums, limited flexibility, and rewards the carrier—not your client—for good loss history.
- A captive aligns premiums more closely with the client’s own performance, not the market’s.
- Yes, there are upfront costs, but those costs are an investment that pays off through stability, control, and long-term savings.
The real risk is if the captive is underfunded, mismanaged, or improperly capitalized. That’s why reserves matter. A well-managed captive maintains a robust loss reserve as a safety net. Clients who dip into this reserve irresponsibly or ignore actuarial recommendations are the ones who find themselves exposed.
Your clients need to understand: you don’t go into a captive blind. You go in with a plan, with advisors who know what they’re doing, and with the discipline to treat it like the insurance company it is.
But what if your client has an unexpected accident or large claim?
This is one of the most common and valid concerns agents hear when discussing captives with clients. The good news is that well-managed captives are designed to prepare for exactly these situations. A properly run captive will have a carefully established and maintained loss reserve. This reserve is the primary safety net, protecting against severe or unexpected claims.
For captive owners, the loss reserve is often the largest liability on the balance sheet. It’s the fund that ensures that when a bad year or a catastrophic claim hits, the captive can handle it without financial devastation.
The most common reason for captive insolvency isn’t necessarily the size of the claim; it’s inadequate reserving. This is why your clients must be disciplined about letting the loss reserve do its job. Tempting as it may be to dip into it after a good year, it should be left intact and allowed to grow with interest.
This approach creates long-term stability, enabling your clients to manage both routine claims and worst-case scenarios with confidence.
Read our article on how captives handle large or multiple claims in a captive.
What questions should your client be asking about the captive option?
When done right, captives deliver control, stability, and financial rewards. But this isn't plug-and-play insurance. Your clients need to do their homework. Here are the questions they should ask before they even think about setting up a captive:
- What is the maximum possible premium in a given year?
Captives aren’t a great fit for businesses spending less than $250,000 annually on insurance. Underfunded captives struggle when losses hit. - What does their loss history look like?
If they’ve had consistently low losses, great. But if it’s just luck without any real risk management, the captive’s risk committee won’t be impressed (nor should they). - How much collateral will they need?
Collateral is a reserve fund. The general rule is about 36% of the annual premium, but this varies. They need to be ready to put up capital upfront and replenish it if needed. - How much risk is too much risk?
This isn’t just about money; it’s about mindset. Are they prepared to accept that they’re now the insurance company? If they’re not comfortable with that, captives may not be the move. - Who is managing the captive?
A captive needs experienced managers, captive specialists, and senior leadership engagement to function effectively. If your client isn’t prepared to oversee or delegate management properly, the captive could be more of a burden than a benefit..
Make sure your client understands the risks, responsibilities, and realities before pulling the trigger.
So, could a captive really be the right solution?
When formed for the right reasons and managed properly, captives are a performance-based, long-term insurance solution. Unlike traditional insurance, where premiums become sunk costs, captives can:
- Generate a return on investment
- Reduce long-term insurance costs
- Improve cash flow
- Allow members to share in underwriting profits. These are profits that would otherwise go straight to a third-party insurance carrier
But captives are not a universal fit. They require commitment, discipline, and a willingness to actively manage risk and insurance. If your client is ready to invest in robust safety and risk management programs, a captive could be a strong alternative to the traditional market.
Read about the financial advantages and disadvantages of captive insurance so your client can consider the up and downsides.
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