The Upfront Costs of Joining a Captive Insurer

Independent agents tend to hesitate to discuss captive insurance with their clients because the costs can potentially feel overwhelming. Questions about collateral, upfront fees, and financial readiness can leave many unsure of how to discuss the financial aspects with their clients. At the same time, their clients are already frustrated with the unpredictability and lack of control in the traditional market. They’re looking for alternatives, though they might still be intimidated by the costs.

At Captive Coalition, we understand and can break down the costs of joining a captive insurer to make it palatable for your clients. While it can be costly to enter a captive, your client will likely see cost savings over time.

In this article, we’ll go into the upfront costs of joining a captive insurance program. You’ll learn about collateral, risk management audit fees, and other expenses. You will also understand how to frame these costs as long-term savings investments.

Upfront Costs with Captive Insurers

Here are the costs that need to be considered when joining or forming a captive insurance company:

Initial Collateral Requirements

Collateral is one of the top upfront costs when joining a captive insurer. Collateral ensures the financial security of the captive and its participants. For your clients, collateral requirements can vary in ranges based on the captive type:

• Group Captives: Typically require 15-30% of gross premium as collateral.
  
  
• Single-Parent Captives: This can be anywhere between 15 and 90% of the annual premium, depending on whether there are high-risk exposures.

Example: A client paying $1 million in premiums might need $150,000 to $900,000 in collateral. This range depends on their risk profile and the captive’s structure. 

Risk Management Program Audit

Before entering a captive, most businesses must undergo a risk management audit. 

• Cost: Approximately $4,995, often paid in two installments—a $2,000 deposit and the balance upon joining. 

• Purpose: Identifies risks, sees if a client is a good fit, and optimizes their operation to align with captive requirements. 

Operational Fees and Contributions

Aside from collateral and the risk management program audit, captives may charge:

• Participation Fees: These are common in group captives. They typically cost $30-40k one time to purchase the equity share and receive dividends.
  
  
• Loss Control Contributions: The costs for safety training audits typically range between $2,000-$10,000, depending on the business size and industry. 

You might wonder about the total cost your client would need to be a captive member. Use the calculator tool to get those results. 

Why These Costs Matter

Let’s be realistic: your clients will have some pause for cost. After all, it’s their business. However, these costs exist for a reason. Not to mention your client can see significant long-term savings.

Justification for the Investment

While the upfront costs will be high, they make it so your client will see long-term savings as time goes on. 

• Premium Reduction: Captive participants typically experience a 28% reduction in premiums over the first 2-3 years.
  
  
• Underwriting Profit: Clients with low claims often receive a share of the underwriting profits. 

Addressing Client Concerns

Be ready for your clients to experience some hesitation. You want your clients to feel confident about their decision to join a captive.

Financial Readiness

Not every client is fit for a captive. Here are three questions to see if they qualify:

1. Is your client profitable to the insurance industry with a stable cash flow?
2. Are they willing to take on some risk for greater control and transparency?
3. Do they value risk management and safety as tools for cost reduction?

Are you curious to see if your client qualifies for captive insurers? Use this assessment tool to get those results.

Ease Their Worries

Clients might fear that they’re stuck in a captive once they join. Let them know:

• Exit Options: Exiting a captive is possible, though collateral may be held until the policy years close (typically 5-7 years).

• Stability Over Time: Captives provide transparency and predictability, helping your clients avoid the unpredictable rate hikes they would see with traditional insurance. 

Explaining the Cost Benefits to Clients

Focus on how upfront costs translate to long-term value:

• Control: Captives provide clients with transparency over their insurance dollars.

• Savings: Reduced premiums and potential profit-sharing offer measurable benefits.
  
  
• Custom Solutions: Captives adapt to your client's specific risks and goals. 

Are Your Best Clients Ready for Captive Insurers?

Joining a captive insurance program involves several upfront costs, including collateral, risk management audit fees, and operational expenses. However, these upfront costs can offer businesses long-term benefits and savings later, including reduced premiums, greater control, and transparency. Being upfront about cost can allow your clients to critically consider and provide solutions that meet their needs. 

Next, read our article on how captives help your clients with cash flow. Also, read our other article on the financial advantages and disadvantages of captive insurance. That way, you can fully understand how your client can be financially impacted and benefit from captive insurers. 

If you want to have access to more tools and educational resources to see if captives work for your clients, sign up and become a member of Captive Coalition!