Captive insurance is not a new concept in the insurance industry; it’s based on old principles of pooling and separating risks by transferring them to an independent company. In recent years, captive insurance coverage has grown in popularity as a viable alternative to traditional insurance procurement options and can perform wonders for a company’s bottom line.

Although captive insurance risk management is not a new idea, it is a strategy that is often misunderstood. To help you better understand how to benefit from captive insurance companies, here are eight common myths and the truth behind them.


Myth #1: Captive Insurance is Only for Large Corporations

Many people still associate captive insurance with large corporations. Although captive structures have traditionally been favored by big businesses, it would be incorrect to believe that they cannot offer substantial benefits to smaller companies.

For example, rather than rely on the traditional insurance market, a group of small businesses in the same industry might decide to form a group captive, sharing costs and risks across the board. This allows them access to many of the benefits of captive insurance—tailored coverage, cost savings, and potential profitability—that might be economically out of reach on an individual basis.


Here are a few more ways smaller companies can benefit from captive insurance:


  • An insurance plan that is owned by the company can be used to cover all its employees.
  • The company’s insurance company can be used as a service provider for other small businesses in the same industry.
  • The company’s captive insurance company can help them with their own risk management practices.
  • Captive insurance companies can provide a more cost-effective solution for small businesses that need certain types of coverage.
  • Captive insurance companies allow business owners to diversify their portfolios.


Myth #2: Captive Insurance is Too Complex and Costly to Set Up

Captive insurance companies are incorporated and regulated by a state’s Division of Insurance. They can be set up in any kind of business, including small businesses, large corporations, and nonprofit organizations.

To set up a captive insurance company, you need to:


  1. Choose a parent company that will be the main shareholder in your insurance corporation. This must be an existing company with a permanent address.
  2. Choose an agent who can help you with the process of setting up your corporation and filing paperwork with the state government. The agent usually charges a fee for this service. Fees vary depending on the agent’s experience and expertise with the process of forming different types of insurance companies.
  3. Choose an underwriter who will review your application and give you a quote for how much they’ll charge for reinsurance coverage for your company’s policies (or how much they’ll pay out if you make claims).


While initiatory expenses can be considerable, the crucial point to consider is captive insurance’s long-term benefits. Over time, captive insurance coverage can lead to significant cost savings, as it helps to control risk and retain profits from good risk management. For businesses with a good safety record and effective risk management strategies in place, these savings could justify the initial cost.


While setting up a captive does involve legal, regulatory, and financial complexities the process can be streamlined significantly with expert captive insurance guidance.


Myth #3: Captive Insurance is a Tax Shelter

The notion that captive insurance is principally a tax shelter originates from past misuse by some companies. While captives can provide tax benefits under specific circumstances, these are a by-product of smart risk management and not the primary motivation for forming a captive insurance company. Moreover, ongoing changes in tax regulations have made compliance even more critical, invalidating the use of captives as an illegal tax shelter. Unlike illegal tax havens, legitimate captive insurance companies provide benefits rooted in good risk and cost management strategies.


Myth #4: Captive Insurance Always Leads to Financial Gains

Captive insurance doesn’t always result in financial gains. Like any business venture, captive insurance carries risk –and a major claim or multiple claims could significantly impact the captive’s financial stability.

Companies should focus on creating a strategic risk management plan, with captive insurance as one component. Careful risk analysis and prudent decision-making, combined with continually adjusting business practices in response to market changes and new insights, are still required for success.


Myth #5: Captive Insurance Replaces the Need for Traditional Insurance

Captives are often seen erroneously as an absolute replacement for traditional insurance. In fact, they should be seen as a supplement to—and not a replacement for—traditional insurance.

For instance, a business might use captive insurance to cover specific, hard-to-insure risks while relying on the traditional market for more typical property, liability, workers’ compensation, or other types of insurance. Balancing traditional insurance and captive insurance coverage allows businesses to create a holistic and effective insurance strategy.


Myth #6: Captive Insurance is an Easy Way to Make Quick Profits

Some perceive captives as a quick profit scheme—an inaccurate portrayal. Setting up, running, and profiting from a captive entails considerable time, effort, and resources. It’s more aptly characterized as a long-term risk management solution where returns are seen over time.

Captives are a strategic decision made for long-term risk and cost management. And like any strategic decision, patience, planning, and precision play a fundamental role.


Myth #7: Captive Insurance is Risk-Free

It’s vital to grasp that captive insurance is not without risks. A significant claim occurrence, poor market investments, regulation changes, or economic downturns could result in financial challenges for the captive.

The key is to recognize these risks and manage them meticulously, understanding that captives are a part of the risk management strategy—not a magic bullet that eradicates all risks.


Myth #8: Captive Insurance is One-Size-Fits-All

No business is identical, so why would their insurance needs be? Captive insurance risk management plans can be highly customizable, making them a great fit for those businesses with unique risk management needs. For example, a company that own several different types of businesses with different risks may be able to purchase one policy for all of those businesses. Or if a business has a particularly high-risk profile, it may make sense for that business to have its own policy separate from the rest of the organization’s policies.


What industries might benefit from captive insurance? Consider the following examples:


  •  Healthcare. Hospitals and healthcare facilities, along with physicians and other medical professionals, often face unique liability issues. To manage these risks, they can create a captive insurance company and tailor the coverage to protect against medical malpractice, professional liability, and other related risks.
  • Construction. The risk landscape in the construction industry is vast, covering everything from workplace injuries to construction defects to contractual disputes. With a captive insurer, construction companies can have the flexibility to insure these risks, which might be expensive or impossible to cover in the traditional insurance market.
  • Manufacturing. Manufacturers face a wide range of risks, from product defects and recall events to equipment breakdowns. By forming a captive, manufacturers can design customized coverages that meet their specific risk management needs.
  • Technology. As our dependency on technology escalates, so does the number and complexity of relevant risks. Cybersecurity, in particular, is a rapidly evolving risk that tech firms commonly face. An industry-specific captive insurance can provide solutions against data breaches, hacking incidents, and other technology-associated liabilities.


Captive insurance coverage isn’t for everyone. It requires effort and planning, not to mention the considerable costs involved in setting up and maintaining a captive insurance company. But if you’re an SME owner, looking to set up a targeted insurance portfolio for your business, it’s important that you understand whether captive insurance can benefit your business. By understanding its true nature and limitations, businesses—regardless of size—can harness its power to create tailored, effective risk management strategies.


Schedule a Consultation with a Top Captive Insurance Company Today

Begin the process of properly integrating captive insurance into your business strategy by scheduling a consultation with Odell Studner, a leading captive insurance expert. Our services ensure you navigate the captive market with ease, retaining predictable losses while insuring catastrophic claims.


Taking action to reduce risk accelerates growth and increases profitability. Help your company strike a balance between growth and risk—contact us today.