A clear and friendly guide to understanding captive insurers and why some companies create their own insurance companies.
A captive insurer is an insurance company that a business creates to insure its own risks. Instead of buying coverage from a traditional insurance company, a parent company forms a separate insurance entity—called a captive—to handle the risks that come with running its business.
This might sound unusual at first, but many large companies use captive insurers because it gives them more control, better cost management, and coverage tailored to their unique needs. Let’s break it down in simple, everyday language.
Understanding What a Captive Insurer Does
A captive insurer is essentially an in-house insurance company. The parent company sets it up solely to insure its own exposures—things like property damage, employee injuries, liability risks, or industry-specific dangers.
The parent company:
-
Establishes the captive insurer
-
Pays premiums to it, just like it would to a normal insurer
-
Uses the captive to cover various business risks
The key difference is ownership. With a traditional insurer, a company pays premiums to an outside organization. With a captive insurer, those premiums stay within the parent company’s ecosystem.
Why Companies Create Captive Insurers
Businesses often choose a captive insurer because it offers benefits that traditional insurance may not always provide.
More Control Over Coverage
A captive insurer allows the parent company to design insurance policies that perfectly match its needs. This is especially helpful for businesses with unusual or hard-to-insure risks.
Cost Savings
Insurance premiums can be expensive, especially for large companies. With a captive insurer, the parent company can potentially save money by keeping a portion of the risk “in-house.” If fewer claims occur, the savings stay with the company instead of going to an outside insurer.
Long-Term Stability
Premiums with traditional insurers can rise unexpectedly. A captive insurer offers more predictable, stable costs, which can help a business manage its budget better.
Better Risk Management
Since the company essentially insures itself, it often becomes more focused on preventing accidents, losses, and other costly events.
A Simple Example
Imagine a large shipping company with thousands of trucks. Insurance for such a company can be costly because the risks—accidents, weather issues, cargo problems—are high.
To manage this better, the company creates its own captive insurer. Instead of paying millions to an outside insurance company each year, it pays premiums to the captive. The captive then handles claims related to accidents, property damage, or other issues.
If the company has a good year with fewer accidents, the savings stay within the business instead of becoming profits for a third-party insurer.
Types of Risks a Captive Insurer Covers
A captive insurer can cover almost any type of exposure the parent company faces, such as:
-
Property and equipment damage
-
Employee injuries
-
General liability
-
Cybersecurity risks
-
Product liability
-
Transportation risks
The flexibility is one of the biggest advantages—coverage can be tailored specifically to the business.
Benefits and Potential Challenges
Benefits
-
Customized insurance coverage
-
Potential cost savings
-
More control over claims
-
Stable, predictable premiums
-
Profits stay within the company
Challenges
-
Requires significant setup costs
-
Needs strong management and regulatory compliance
-
The parent company takes on more financial risk if large claims occur
Because of these factors, captive insurers are more common among medium-to-large businesses rather than small companies.
Is a Captive Insurer the Same as Self-Insurance?
Not exactly. While both involve taking on risk internally, a captive insurer is a formal, licensed insurance company. It operates under insurance regulations, files reports, and follows industry rules—just like any other insurer.
Self-insurance, on the other hand, is simply setting aside money to cover potential losses.
A captive insurer is a more structured and strategic version of self-insurance.
Final Thoughts
A captive insurer allows a business to create its own insurance company to manage the risks it faces. By insuring itself in a formal, regulated way, a parent company can gain financial control, tailor coverage, and potentially save money over time.
While it isn’t the right choice for every business, captive insurers play an important role in helping companies handle risk efficiently and intelligently.
Want to explore something else? Here’s another article you might enjoy:
