What a captive is
The National Association of Insurance Commissioners describes a captive, in its simplest form, as a wholly owned subsidiary created to insure its non-insurance parent company or companies. Instead of paying premium to an unrelated insurer and never seeing it again, the owners pay premium into their own insurance company. That company pays the claims, buys reinsurance for large losses, and holds what is left.
The trade-off is direct. In a year when losses run lower than projected, surplus builds inside the captive and can eventually come back to the owners. In a year when losses run higher, the owners feel it. A captive rewards consistent risk control over several years. It does not make a bad loss year disappear.
The main captive structures
“Setting up a captive” does not always mean forming a new insurance company. For most mid-size businesses, the realistic first step is joining a structure that already exists.
| Structure | How it works | Usually suits |
|---|---|---|
| Single-parent | One business forms and owns its own licensed captive and bears all of its costs and capital. | Larger organizations with enough premium to carry the fixed costs alone |
| Group captive | Several unrelated businesses, often in the same industry, jointly own a captive and share in pooled results. | Mid-size businesses with strong loss history that want to share costs with similar operators |
| Cell captive | A sponsor runs an existing captive divided into cells. Each participant funds its own cell, and the law in the domicile keeps each cell’s assets separate from the others. | Businesses that want their own results without forming a company, or that want to start one participant at a time |
| Risk retention group | A member-owned insurer organized under the federal Liability Risk Retention Act. It is limited to liability coverage, which excludes workers’ compensation, and must file its plan of operation with each state where it offers coverage. | Groups with a shared liability exposure that want to insure it across several states |
Cell and established group captives trade some control for a lower cost of entry. Forming a standalone captive, or a new group captive, typically needs considerably more capital and takes longer to license. Some programs start with individual cells and form a dedicated captive only once enough participants have joined.
Who a captive tends to fit
Signs it may be worth studying
- Several years of losses that beat your industry’s typical results
- Meaningful, stable premium across liability, auto or workers’ compensation
- A safety program with management attention behind it
- Capital you can commit, and a horizon of several years
- Frustration with pricing that ignores your own results
Signs to wait
- A new venture or less than a few years of loss history
- Volatile losses or a recent severe claim still developing
- A need for lower insurance spend next year specifically
- No room to absorb a worse-than-expected year
- Interest driven mainly by tax savings
For businesses that are not ready, a better-structured traditional program, such as a higher deductible matched to cash flow, can be a way to start retaining risk and building the loss data a future captive study would need.
How Glacier Point helps you evaluate and set up a captive
Glacier Point advises businesses on whether a captive fits and, when it does, helps carry it from feasibility study through setup. The work is led by our principal, who has helped establish captive and other risk-financing programs in prior in-house risk management roles. You work with someone who has been through the process from the owner’s side and who can also place the insurance the program depends on.
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1. Readiness review
We start with the data you already have: premium by line, several years of loss runs, your safety program, and how much capital and year-to-year swing you can accept. You get a plain answer on whether a feasibility study is worth commissioning or whether a better-structured traditional program is the smarter next step.
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2. Feasibility study
We scope the study, assemble and organize the loss and exposure data, and bring in the actuary and captive manager who build the projections. Then we walk through the results with you: expected losses, required capital, operating costs, and how the program performs in good and bad years.
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3. Structure and domicile
We compare joining a cell or an established group captive with forming your own, and weigh domicile options against your risks and goals, with your tax advisor and attorney reviewing the choice.
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4. Setup
As a licensed broker, we market the fronting insurer and reinsurance. We coordinate the business plan and regulatory application with the captive manager and keep service providers, capital funding and policy issuance working from one plan.
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5. After launch
We stay involved at each renewal, reviewing fronting and reinsurance terms, loss results, and whether the program is still doing what it was formed to do.
Actuarial, captive management, tax and legal work is performed by qualified specialists in those fields. Participation in any captive depends on the feasibility study, regulatory approval and underwriting by the captive, fronting insurer and reinsurers. Nothing on this page is a promise that a captive will be available to your business or will reduce its costs.
How setup proceeds
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1. Gather your premium and loss history
Several years of loss runs, premium by coverage line, fleet or location schedules, and a clear description of safety and claims practices. A captive study is only as good as this data.
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2. Commission a feasibility study
An actuary projects expected losses. A captive manager models required capital, operating costs and results under good and bad years. Your tax advisor and attorney review the structure. The study should be able to conclude that a captive does not fit.
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3. Choose the structure and domicile
Own captive, group captive or cell. Each domicile sets its own minimum capital, reporting and governance rules by captive type, so the right domicile depends on the structure and the risks involved. Utah’s Captive Insurance Companies Act is one example of how a domicile writes those rules.
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4. Arrange fronting and reinsurance
Some coverages have to be issued by an insurer licensed where the risk sits, or must satisfy a customer, lender or franchisor that asks for a rated carrier. In those cases a fronting insurer issues the policy and passes the risk to the captive. Fronting insurers commonly charge a fee and require collateral. Reinsurance caps the captive’s share of large or catastrophic losses.
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5. Apply, license and capitalize
The application to the domicile regulator typically includes a business plan, financial projections, the actuarial study and the names of the manager, auditor and actuary. Capital is funded as part of that approval.
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6. Operate it
A captive needs claims administration, annual audited financials, actuarial reviews, regulatory filings and board meetings every year it runs. Governance is part of what keeps it a genuine insurance company.
What you will pay for
Costs vary widely by structure, domicile and program size, which is why the feasibility study prices them for your situation. Expect to budget for:
- Formation: feasibility study, legal work, regulatory application fees
- Capital and collateral: the regulator’s required capital plus any collateral a fronting insurer requires
- Annual operations: captive management, audit, actuarial opinion, claims administration, board and regulatory costs
- Risk transfer: fronting fees and reinsurance premium
- Taxes: premium taxes that apply to the program, discussed below
Most of these costs do not shrink with your premium. That is the main reason captives rarely work for small insurance budgets, and why shared structures exist.
Tax and California issues to review first
Captives marketed as tax shelters draw IRS scrutiny
Small captives can elect to be taxed under Internal Revenue Code section 831(b). On January 14, 2025, the Treasury Department and the IRS published final regulations identifying certain of these micro-captive arrangements as listed transactions and others as transactions of interest. Both are reportable transactions: participants and material advisors must file disclosures, and failing to disclose carries penalties. A captive should exist because the insurance makes sense. Review any tax position with your own tax advisor.
California taxes insurance bought from unlicensed insurers
Captives serving California businesses are commonly domiciled in other states. When a California home-state insured independently procures insurance from an insurer not admitted in California, Revenue and Taxation Code section 13210 imposes a 3 percent gross premium tax that the insured pays. How that applies depends on how the program is structured, including whether a fronting insurer issues the policy. Confirm the tax treatment with your tax advisor before binding.
Common questions
Can Glacier Point help set up a captive?
Yes. We review whether a captive fits, scope and coordinate the feasibility study with an actuary and captive manager, compare structures and domiciles, place the fronting and reinsurance as a licensed broker, and coordinate setup through launch. Actuarial, captive management, tax and legal work is performed by qualified specialists in those fields.
Is a captive the same as self-insurance?
It is related but more formal. A captive is a licensed insurance company owned by the businesses it insures, so it carries capital, files with a regulator and issues or reinsures real policies. Simply keeping a large deductible does none of that.
How much premium does a business need for a captive?
There is no fixed number. Formation, management, audit, actuarial and fronting costs are largely fixed, so they are hard to justify on a small premium budget. Joining an established group or cell captive lowers that bar compared with forming your own. A feasibility study using your own loss and premium data is how to find out.
Can a trucking company or restaurant group use a captive?
Yes. Group and cell captives exist for both industries. Fit depends on loss history, safety practices, premium size and willingness to put up capital, not on the industry alone.
What is the difference between a group captive and a risk retention group?
A group captive is licensed in its domicile and usually relies on a fronting insurer to issue policies elsewhere. A risk retention group is organized under the federal Liability Risk Retention Act, is limited to liability coverage and cannot write workers' compensation, and must file its plan of operation with each state where it offers coverage.
Will a captive lower my insurance costs?
Not necessarily. Owners share in the results, so a captive can return money after better-than-expected years and cost more after worse ones. It suits businesses that expect their losses to beat the market average over several years and can absorb a bad year.
Are captives a tax strategy?
A captive has to be genuine insurance first. In January 2025 the IRS finalized regulations treating certain small captive arrangements electing section 831(b) as listed transactions or transactions of interest, which carry disclosure requirements and penalties for failing to disclose. Any tax position should be reviewed by your own tax advisor.