Joining a Captive Insurance Company

Many agents tend to refrain from discussing captive insurance with their clients. From our experience, many admit they aren’t entirely confident explaining captives. As a result, this can leave their best clients in the dark about an option that might best fit their insurance needs. The role of the agent is crucial in this process. If/when clients don’t hear about captives from their agents, they might seek out other agencies offering these solutions.

We don’t want this to be the same for you. At Captive Coalition, our sole purpose is to educate independent insurance agents about captives so that they can help their best clients. Captive insurance is our bread and butter. We want to work with agents like you who can understand captives and help your clients with their insurance needs. 

This article will explore the essential questions you and your best clients must answer before joining a captive. By the end, you’ll not only understand what being “captive ready” means but also be equipped to guide your clients towards insurance options that not only fit their needs but also offer potential benefits of control and transparency.

Why Can’t My Clients Just Join a Captive Insurer?

Your clients might assume that joining a captive is as simple as signing up for a new insurance policy. In reality, becoming part of a captive means owning an insurance company, which involves financial risk and regulatory responsibility. Clients need to evaluate whether they’re ready for this commitment. 

Some key questions to consider:

• Does your client have a stable insurance history with low claim rates over the past five years?
• Has their risk management been intentional, or have they just been lucky?
• What type of captive will best suit their business?

While these questions come off as surface-level, they’re actually essential in determining whether your client is ready for captive ownership.

You might be wondering if your best clients are good enough to join a captive. Use this captive assessment tool to get the results.

Evaluating Your Client’s Insurance History

In order to join a captive, your client’s business must prove it’s capable of managing its own risks and profitability. A good starting point is a five-year proforma, which assesses whether their premiums have consistently exceeded claim expenses. They’re more likely to perform well as a captive owner if they have a solid history. However, if their success is from luck rather than a structured risk management program, they need to address the issue. 

For clients considering a pure (single-parent) captive, a more robust feasibility study is necessary to ensure their financial health aligns with the risks they want to manage. 

Is Your Client’s Risk Management Ready?

Even with a good insurance history, assess whether the company’s risk management is repeatable. A solid program isn't built on chance. It’s built on documented processes, training, and accountability. Clients should have written standards and procedures that reflect best practices for managing risk, and if they don’t, get them in place now. 

Without this foundation, their entry into a captive could be more of a gamble than a strategic move. Investing time in strengthing their risk management will help your clients substantially.

Choosing the Right Type of Captive

There is no one-size-fits-all when it comes to captives. Whether your client is considering a single-parent captive, a cell captive, or a group captive, each option offers different levels of flexibility, investment, and control.

• Single-parent captives offer full control but require significant capital commitment.

• Cell captives offer more flexibility and shared resources, which can lower the barrier to entry.
  
  
• Group captives allow businesses with similar risks to pool their resources, offering collaboration but less autonomy.

The type of captive your client chooses should align with their risk tolerance, financial situation, and desire for control. 

What Happens After Your Client Decides to Join a Captive?

Once a business owner has answered these key questions, the next step is to bring their application to the risk committee (for a group captive) or the captive manager (for a cell captive). The captive underwriting process begins, which can be a make-or-break moment for your client’s entry.

They’ll receive an offer to join the captive if the application is approved. This will include details on the entry premium (usually equal to what they’ve been paying in traditional insurance) collateral requirements, and the maximum possible premium obligations for the first year.

Once these financial commitments are met, your client will officially be a captive owner. They’ll also be invited to participate in the captive’s board meetings and risk control workshops, where they can collaborate with other members and help shape the direction of their insurance program.

Is Your Client’s Business Big Enough for a Captive?

One of the most common questions clients ask is whether their business is large enough to join a captive. While larger companies may find it easier to justify upfront costs, captives aren’t just for big corporations. Businesses spending at least $250,000 annually on insurance premiums are often good candidates for captives. Businesses should spend $1,000,000 minimum to establish a single-parent captive.

Exiting a Captive: What Happens If It’s No Longer the Right Fit?

Joining a captive is a big decision, but what if it’s no longer right for your client’s business later? The good news is that they can exit a captive if needed. The bad news is there are financial obligations that remain until all policy years are closed. Typically, this can take five to seven years, during which the business’s collateral—essentially a security deposit that ensures claims can be paid—is held. 

However, exiting is possible if the captive no longer aligns with their needs or if the business itself undergoes major changes like a sale or restructuring. It’s important to explain these exit strategies upfront so your clients feel reassured about their decision. 

Preparing Your Clients for Captive Success 

Becoming a captive owner isn’t a quick or simple process. That said, it can offer more to businesses looking to take control of their insurance. Captive insurance offers transparency, potential savings, and the ability to directly manage risk–things many of the best clients seek.

Up next, read our article on the financial advantages and disadvantages of captive insurance. That way you and your clients can weigh the pros and cons to see what would work best for their business. 

For any other questions or to schedule a consultation, click the button below to speak with one of Captive Coalition’s captive consultants.