Captive Education Starts Here.
Find the basics of captive insurance here with explanations of why companies form captives, different captive types, common misconceptions and more. This is your Captives 101 course and we have ample additional resources to provide you.
What is captive insurance?
Captive insurance is a unique risk management strategy where a company creates its own insurance company to cover specific risks faced by the parent organization. Unlike traditional commercial insurance purchased from external providers, a captive insurance company is essentially a wholly-owned subsidiary designed to insure the risks of its parent company or a group of related companies.
Benefits of Captive Insurance
Financial Optimization
Captive insurance delivers comprehensive financial benefits, including cost control by eliminating traditional insurance carrier profit margins, potential tax advantages, and the ability to retain underwriting profits and investment income.
Strategic Risk Management
Gain unprecedented insights into your risk profile with customized coverage tailored to your specific business needs. Captive insurance enables more proactive risk mitigation, allowing for precise protection and enhanced loss prevention strategies.
Business Control
Transform your approach to risk management with complete strategic control. Captive insurance puts you in the driver's seat, allowing for more informed decision-making about risk transfer, claims management, and long-term financial strategy.
Curious where to start?
Reach out to the Vermont regulatory team or take a glance at the general application for admission
Types of Captives
Different captive types exist to address varied business needs, risk profiles, and organizational structures. The diversity of captive formations allows organizations to find the most appropriate risk management strategy tailored to their specific circumstances. Please note, this is not an extensive list. For a complete breakdown of different captive types domiciled in Vermont, visit the State of Vermont Department of Financial Regulation's website.
Owned and controlled by one parent company to insure its own risks and those of its subsidiaries. The 2023 Vermont DFR Captive Insurance Aggregate Report lists that of the total 632 active captives domiciled in Vermont, 405 of them are pure, single-parent captives. In fact, of the 38 new Vermont captive formations in 2023, 24 of them were pure.
Facility allowing participants to segregate assets and liabilities into separate cells, allowing multiple insureds to “rent” the captive while keeping their risks and assets distinct.
Enable insurers to securitize complex risks through innovative capital market transactions that fund comprehensive reinsurance obligations. Predominantly formed by commercial insurance companies, SPFIs leverage securities, letters of credit, and alternative assets to strategically transfer and distribute financial risks. The global alternative risk transfer market, which includes SPFI mechanisms, exceeded $90 billion in 2022, underscoring the growing importance of these specialized financial engineering tools in modern risk management.
A group captive is an insurance company created and owned by multiple businesses within the same industry or with similar risk profiles to collectively manage and finance their insurance risks. By pooling their resources, these companies can gain greater control over their insurance costs, improve risk management strategies, and potentially access more favorable coverage terms than they could achieve individually. Group captives allow participants to share both the financial benefits of successful risk management and the administrative responsibilities of operating an insurance company, creating a collaborative approach to managing complex business risks.
Type of group captive owned by its members, typically from the same industry, formed to provide liability coverage and manage risks collectively. Read more on RRGs from Captive Review or head to the VCIA media library for more content on RRGs. RRGs are the second most popular captive, besides single-parent, domiciled in Vermont.
A sophisticated risk management vehicle that allows large corporations to directly control and finance their insurance programs, with approximately 35% of Fortune 500 companies utilizing this approach. These captives are typically formed by organizations with annual premium spending exceeding $500,000, enabling them to customize insurance coverage precisely to their unique operational risks while potentially generating significant underwriting profits. By providing direct risk management control and financial optimization, industrial insured captives have become a strategic tool for corporations seeking more comprehensive and cost-effective approaches to managing complex insurance needs.
Who Uses Captive Insurance?
A wide spectrum of industries leverage captive insurance for its tailored financial and risk management solutions. Here are five examples of how different sectors benefit:
Manufacturing
Manufacturing
Manufacturing
Manufacturers face complex risks that traditional insurance often overlooks. Captive insurance allows these companies to design coverage for specialized equipment breakdowns, supply chain interruptions, and industry-specific liability exposures, providing more precise protection and potential cost savings.
Healthcare
Healthcare
Healthcare
Healthcare organizations confront extraordinary liability and regulatory risks. Captive insurance enables providers to create nuanced coverage strategies addressing medical malpractice, regulatory compliance, facility-specific risks, and emerging challenges like telemedicine liability, while potentially stabilizing long-term insurance costs.
Construction
Construction
Construction
Construction companies operate in a high-risk environment with project-specific challenges. Captive insurance allows contractors to develop flexible risk management strategies that adapt to different project types, geographic regions, and specialized work conditions, providing targeted protection and potentially returning underwriting profits.
Technology
Technology
Technology
Technology firms face rapidly evolving risks related to intellectual property, cybersecurity, and product liabilities. Captive insurance provides these companies with customizable coverage that can quickly adapt to emerging technological risks, offering more comprehensive protection and potentially more favorable pricing structures.
Energy
Energy
Energy & Natural Resources
Energy and natural resource companies deal with extreme operational risks and complex regulatory landscapes. Captive insurance allows these organizations to create highly specialized insurance programs that address unique exploration, extraction, and environmental risks while providing greater financial control and responsive coverage.
Vermont is the Captive Domicile Gold Standard
Why? A relentless pursuit of excellence, an optimization and upgrade of captive legislation each year, a robust infrastructure of service providers, a true captive community spearheaded by VCIA, and, perhaps above all, the best and most accessible captive regulators in the world.
In on the ground floor
Vermont is recognized as the first U.S. state to establish modern captive insurance legislation and attract captive formations, with its pioneering legislation passed in 1981.
The rigors of regulation
The Vermont captive regulation team, led by Sandy Bigglestone, is unmatched in their having created a flexible and sophisticated regulatory framework. As a responsive and expert regulatory staff, they provide a consistent, predictable regulatory approach, with personalization to your business situation being key.
The captive infrastructure
Vermont boasts a strong service provider ecosystem—captive lawyers, managers, auditors, and more—and has a stable political and economic environment that organizations can trust to establish and operate their captive in.
A proven captive track record
Vermont and its 680+ active captives make it the largest captive domicile in the world. This result is a unique combination of regulatory innovation, professional expertise, and strategic economic development. Simply put, Vermont does not rest on its laurels.
How captive insurance works
From formation to operation and wealth management:
The mechanics of captive insurance
Formation
Risk Assessment
Premium Funding
Risk Retention
Profit and Loss Management
Common Misconceptions
Captives face common misconceptions. Here are the most frequently encountered.
Reality: Captives can be suitable for businesses of various sizes, as small to mid-sized companies can benefit from tailored solutions for different risk profiles.
Reality: Captives are closely regulated by each state domicile and are also recognized by the National Association of Insurance Commissioners (NAIC). They are formed to meet the unique risk-management needs of the owners or members. Once established, a captive operates like any commercial insurance company and is subject to state regulatory requirements including reporting, capital and reserve requirements. In fact, captives must have legitimate risk management strategies, genuine insurance functions and transactions, and are subject to IRS regulations and scrutiny.
Reality: As much as genuine captive insurance companies are not tax shelters, they are also not get-rich-quick schemes. Savings depend on multiple factors and requires careful analysis and implementation. For one, captives best function when an organization is invested in the program long-term. Plus, captive lines of coverage are not automatically less expensive than traditional insurance, so it's important your risk management team weigh your options and potentially "mix and match" your captive lines of coverage and your commercial ones, based on market conditions and other circumstances.
Reality: Forming and operating a captive is a complex process requiring detailed feasibility studies, regulatory compliance, significant initial investment, and professional expertise—also known as service providers who help a captive function and thrive.
Reality: Starting a captive requires you to first assess your organization's risk management needs and objectives and then investigate if the captive model would be an appropriate framework. There's a saying in the industry that, "When you've seen one captive, you've only seen one captive," meaning each captive can really be customized and have different structures for different business needs (see different captive types in the above block). Also, sometimes a captive is just not a good fit for your organization, depending on a number of factors, including lack of upfront capital and lack of C-suite buy-in.
