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.
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:
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.
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:
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:
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.
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:
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.
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.
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:
Make sure your client understands the risks, responsibilities, and realities before pulling the trigger.
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:
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.
Join Captive Coalition for FREE to access in-depth resources, tools, webinars, and training. Equip yourself to guide clients through the captive decision-making process and protect your book of business.