What is a Property Captive?

Accessing information and educational materials about property captives can come at a cost when there’s already a lack of knowledge out there. With rising property premiums, strict requirements, and limited policies in the traditional market, agents and their clients are looking for better options. If you’re unfamiliar with property captives, you might be missing a solution to help your best clients.

We at Captive Coalition work to educate independent agents on captive insurance, whether it's property or liability coverage. That way, independent agents can properly and confidently help their best clients with insurance solutions that fit their businesses. 

By the end of this article, you’ll understand what property captives are, how they work, and why they matter. Knowing this information will allow you to have productive conversations with your best clients to see whether or not property captives will work for their business. 

What is a Property Captive?

A property captive is an insurance solution in which a business forms its own insurance company to cover its property risks. Property captives allow a business to retain premiums while taking a portion of the risk. They are a way to finance property risks, especially when the business has a large property schedule or faces volatile market rates.

How Do Property Captives Work?

Property captives use different approaches to manage risks: 

• Risk Layers: Instead of insuring every property for full replacement cost, captives rely on a probable maximum loss (PML) study. This determines the highest expected loss across a portfolio and suggests coverage based on exposures to certain perils, like windstorms or floods. The PML is a computer model using historical events and other factors.

• Premium Allocation: Captives allocate premiums by layer, with higher premiums tied to initial layers where loss probability is highest. Businesses retain a portion of the risk in these layers while accessing reinsurance for higher layers. 

• Partnerships: Captives require partnerships with fronting carriers and reinsurance providers to maintain compliance and stability.
  
  
• Client Ownership: Businesses own and control the captive, meaning they can influence risk management decisions and premium allocation.

They’re unlike other captives that cover workers’ compensation, general liability, and auto liability. They specialize in physical assets, which require a better understanding of probable maximum loss and reinsurance markets. 

Benefits of Property Captives for Clients

Here are some advantages property captives can offer your clients:

• Cost Stabilization: Captives can level out premium fluctuations caused by hardening markets. One of the reasons your client might be looking at property captives is because of rising premiums when they have no claims. 

• Transparency: Clients know where every cent of their premium goes when insuring their property. This is rarely seen in the traditional market.

• Efficiency: Instead of paying the full replacement cost on every property the business owns, the PML study suggests a limit of insurance to cover the portfolio based on maximum probable loss. This is typically lower than the total insurable value of the portfolio.

• Accommodates Smaller-Sized Businesses: While captives were used in the past for larger companies, they’ve become more accessible to small and mid-sized businesses in the modern day more than ever. Businesses see success when they have sophisticated risk management practices. Significant property risk can also succeed with captives.

Challenges Agents and Clients Should Be Prepared For

Property captives have their own sets of challenges, including:

• Collateral Requirements: Captives require higher upfront costs such as collateral—a line of credit or cash used to secure claims payments. The upfront commitment can start at a significantly high cost and must be replenished after a loss. 

• Cost Feasibility: In low-risk areas with competitive traditional insurance rates, captive insurance may not always make financial sense. Clients need a strong balance sheet and a willingness to invest long-term. The upfront costs and collateral expenses will be higher in the early years than with traditional insurance. 

• Setup Complexity: Agents must guide clients through feasibility studies, PML analysis, and compliance processes, which could be daunting for your clients. 
  • Captive Coalition walks you through this process so it isn’t overwhelming. 

When a Property Captive Could Make Sense For Your Client(s)

Property captives won’t work for everyone. You can see them working well in these scenarios:

• Large, Diverse Property Portfolios: Businesses with multiple properties spread across regions can use PML studies to avoid over-insurance and reduce overall costs.

• Catastrophe-Prone Areas: For businesses operating in regions susceptible to hurricanes, wildfires, or earthquakes, property captives allow coverage for those risks.
  
  
• Bank-Required Insurance: Your clients must meet specific insurance standards set by lenders. Property captives can fulfill these requirements while offering cost control and policies tailored to their needs.

Example Case: A property management company with $300 million in total insured value (TIV) across several buildings in hurricane-prone regions used a property captive to retain the first $5 million of risk. They structured reinsurance to handle catastrophic losses, saving millions in annual premiums while maintaining the required coverage for their lenders.

Steps to Set Up a Property Captive

• Conduct a Feasibility Study: Determine whether a property captive aligns with your client’s financial goals and risk profile.

• Perform a PML Study: It is important to understand the amount of coverage that is needed and avoid unnecessary costs.
  
  
• Partner with Experts: Work with experienced fronting carriers, actuaries, and reinsurance providers to structure and manage the captive effectively.

Do Property Captive Insurers Work for Your Clients?

Property captives are specialized insurance solutions that help your clients take control of their property risks. Property captives can let businesses stabilize costs, gain transparency, and have coverage of these risks when you focus on probable maximum loss (PML) studies, layering coverage strategically, and leveraging partnerships with fronting carriers and reinsurers.

Again, they are not for everyone, especially considering their upfront costs, collateral requirements, and complexity. However, they are suitable for businesses with substantial property portfolios in catastrophe-prone areas.

Next, read our article on fronting carriers and why they’re essential for captive insurance, regardless of the type of captive.

To gain more in-depth access to tools and resources about captives, become a member of Captive Coalition.