Skip to content
× FreshBooks App Logo
Official App
Free - Google Play
Get it
You're currently on our US site. Select your regional site here:

Captive Insurance Company Definition & What Do They Do

Updated: February 6, 2023

There are many different types of insurance and insurance companies out there. And while some might think that captive insurance is relatively new, it dates back to the 19th century. It’s continually evolving and several Fortune 500 companies maintain them.

So what exactly is a captive insurance company and how does it work? Keep reading our guide that will cover everything you need to know, including the benefits and primary roles they play.

List IconTable of Contents


    • A captive insurance company is a subsidiary that’s wholly owned by a larger firm. Its main purpose is to write and create insurance policies for the parent company. It doesn’t do this or provide insurance to any other companies.
    • Captive insurance companies are common for large corporations to benefit from some of the tax advantages that can come with it.
    • Insurance costs can be reduced by the captive insurance company and it can provide specific types of coverages.
    • There is often additional overhead when a captive insurance company gets created.

    What Is a Captive Insurance Company?

    A captive insurance company works to help provide risk-mitigation services for the company that owns it. This can either be by a single company or a group of companies that are related in some way. Captive insurance companies are usually formed if there isn’t an outside firm that is suitable to protect from business risks.

    As well, they are often created if the premiums that get paid either create or increase tax savings and if the insurance premiums are more affordable. Plus, a captive insurance company will likely offer better coverages for the risks the parent company could face.

    It’s important not to confuse a captive insurance agent with a captive insurance company. These are two completely separate things. A captive insurance agent is a specific type of insurance agent that works for a single insurance company. They end up being restricted from selling competitor insurance products.

    Fresh Starts Deserve FreshBooks

    How Does a Captive Insurance Company Work?

    Essentially, a captive insurance company is a type of self-insurance. It can come with other financial benefits since it becomes a separate entity from the parent company. But, it will also come with additional overhead and administrative costs to consider.

    And since captive insurance companies are common among larger corporations, there can also be certain compliance issues to understand. When a captive insurance company gets created, they only insure its parent company and don’t provide insurance to any other companies.

    But, there can be tax issues that arise from this. When the parent company pays their insurance premiums to the captive insurance company, they’re going to want to deduct the premiums they pay. But, this is likely to lead to taxes that are higher since the home country will often be a high-tax jurisdiction.

    One way that corporations try to get around this is by locating the captive insurance company in tax havens. Some of the more common tax havens include the Cayman Islands and Bermuda. They do this to try to avoid certain adverse tax implications.

    The formation of captive insurance companies is allowed across most US states. And corporations benefit from this since there is added protection from things like tax assessments.

    However, with all of that said, the parent company will only realize tax breaks depending on the classification of the insurance that the company uses. The Internal Revenue Service (IRS) requires that risk shifting and risk distribution get considered in any transaction. This is so that companies follow the proper rules when it comes to categories of insurance.

    If a company is suspected of abusive tax evasion, the IRS will take action. And this can lead to substantial risks that can result in big expenses that are unaffordable.

    Basically, captive insurance companies get used by companies that put their own capital at risk. As well, captive insurance helps when a company works outside of its commercial insurance marketplace.

    What Are the Advantages of Captive Insurance?

    Since captive insurance is a company that’s fully owned and controlled by its insured, it can bring a range of advantages to benefit from. But more often than not, the main purpose is to help with risk management. Companies are able to lower their insurance costs compared to the premiums they might pay to a commercial insurer.

    So captive insurance can provide coverage that otherwise might not be attainable in a private market. As well, the parent company ends up being able to have more control over certain claims deductions.

    Here are a few of the other main advantages of captive insurance companies:

    • Coverage: There are always factors that go into getting insurance coverage. Things like having high-risk ventures or an unfavorable loss history can impact this. Captive insurance is able to provide a more tailored, unique approach. This helps companies plan for their risk exposures more effectively.
    • Capital: One of the biggest challenges with normal insurance is the increased premiums that the insurer can charge. This can happen due to a poor investment market or even the total volume of claims they process. Having well-operated captive insurance leads to higher profitability and reduced risk.
    • Control: Every company wants to have more control. Captive insurance provides the opportunity to have this control of things like claims administration, losses, and safety. As well, it also provides an incentive to create safer workplaces since the capital belongs to the parent company.
    Get A Headstart On Your Accounting

    Who Uses a Captive Insurance Company?

    The most common types that use captive insurance are ones that have a steady cash flow and are larger companies. As well, companies that have a low claims frequency and high insurance premiums will also often use captive insurance.

    A company that’s looking to combine enterprise risks will also commonly go this route for insurance. Enterprise risks can include things like healthcare and workers’ compensation and employee benefits.

    Here are some other indicators that a company might use captive insurance:

    • If they have a desire to limit the reliance they have on commercial insurance or private insurance
    • If they have a diverse workforce that requires a varying degree of preferences and medical needs
    • If they have a consistent and sustainable operating profit of over $500,000
    • If they have a leadership group that wants to explore having more asset protection

    A captive insurance company can be a great choice if you’re looking to protect your company from risks. Oftentimes, these risks can come from areas that commercial insurance markets just aren’t able to cover. And when the insurance policy is properly designed, the advantages that come with it will help limit risk exposure.


    A captive insurance company gets created to help with risk mitigation for its parent company. This is often a single company, but it can also be for a group of companies that are related. Captive insurance often gets used to help create or increase tax savings.

    This is because they’re usually going to offer better coverage for any potential risks. Some commercial insurers might not be able to cover these.

    When a company establishes captive insurance, it provides them with more control, coverage, and capital. As well, companies that have steady cash flow and previously high insurance premiums are some of the most common to use captive insurance. This regularly includes Fortune 500 companies.

    Hit The Ground Sprinting

    FAQs About Captive Insurance Company

    What Is an Example of a Captive Insurer?

    Jupiter Insurance is a well-known captive insurance company. They made headlines when the Petroleum oil spill happened in the Gulf of Mexico. This is because BP created this captive insurance company to help mitigate potential, or in this case actual, risks.

    Is Captive Insurance a Good Idea?

    Many companies benefit from the use of a captive insurance company. It allows them to generate an increased level of coverage and additional capacity. As well, it provides captive owners with an opportunity to have investment income fund potential losses.

    What Are the Two Major Types of Captive Insurance Companies?

    A captive insurance company can often take on different forms depending on its captive program. However, the two most common types in the captive insurance industry are group captive insurance companies and single-parent captives.

    What Is the Difference Between Captive Insurance and Self-Insurance?

    While they are similar, the main differences come down to how they’re set up. With self-insurance, money gets put into a type of savings account by the owner to help cover potential claims. Captive insurance is an actual type of small insurance company.


    553 HRS


    $ 7000




    Try It Free for 30 Days. No credit card required. Cancel anytime.