Captive Insurance 101: Is It Right for Your Construction Company?

A captive is a licensed insurance company used to finance the risks of its owners or participants. It can give a contractor more control over coverage and claims, but it also puts real capital at risk. A captive should be tested against the contractor's loss history and a fully priced commercial alternative, not sold as a guaranteed way to lower premiums. The NAIC overview of captive insurance explains the basic structures and regulatory obligations.

Which structure fits the business?

• Single-parent captive: One corporate family owns the insurer and bears its results. It offers control but requires capital, management, and regulatory capacity.
• Group captive: Unrelated members share a program. Review how losses, surplus, dividends, and a departing member's obligations are allocated.
• Protected cell: A participant uses a cell within a sponsored captive. Review the domicile's segregation rules, the sponsoring entity, and what liabilities remain outside the cell.
• Rental arrangement: An existing captive provides capacity. The contract determines the participant's economics and control.

The structure is only the starting point. Ask an actuary to model expected and adverse losses, reserves, reinsurance, collateral, expenses, and cash flow over several years. A lower upfront premium can be offset by retained claims or capital that cannot be released quickly.

Questions for a feasibility study

1. Which specific risks would the captive insure, and what remains in the commercial market?
2. Are several years of credible exposure and loss data available?
3. How would a severe claim or series of claims affect liquidity and bonding capacity?
4. Who controls claims, investments, pricing, and member admission or exit?
5. What independent actuarial, legal, tax, and domicile advice is needed?
6. What is the exit or runoff plan for claims reported after participation ends?

A captive can be a poor fit when a contractor needs its capital for operations, has volatile losses it cannot absorb, or wants a tax result more than an insurance program. The IRS has specific reporting rules for certain micro-captive transactions; a legitimate feasibility study needs independent tax and legal review. No premium threshold or savings percentage works for every contractor.

If you are comparing a captive with a commercial or large-deductible program, start a conversation with the loss data and objectives that matter to your business.