Why Form a Captive?

There usually are many reasons a company considers forming a captive insurance company. While a desire to have broader insurance coverages is often an initial reason, careful consideration usually results in the identification of other important factors.
  • Clients come to learn that the many hidden risks inherent in their business are capable of being reduced through a more comprehensive insurance program;

  • Some hidden risks are best addressed through an alternative risk financing program, rather than purchasing traditional insurance, or simply absorbing such risks as they arise;

  • Several clients wish to smooth out earnings fluctuations caused by otherwise insurable events;

  • Clients come to understand a basic tenet of insurance, that risks inherent in their businesses are otherwise capable of being insured with tax-deductible premium dollars that then are available to satisfy future losses; and

  • Clients learn that significant tax advantages exist in pre-funding losses through a captive insurance company.


Four critical factors traditionally prompt a company to seek alternatives to conventional insurance:

  • Availability problems - The lack of consistently available coverages from year to year is a constant concern of insureds. Product liability coverages are a case in point. As insurers pull back during the usual insurance cycle, certain coverages either are not available, or are not available with reasonable coverage terms and/or prices;

  • Pricing inequity - Some companies believe that insurance rates are higher than what is appropriate based on their incurred and projected losses;

  • Lack of flexibility - An insured's need for coverage doesn't always dovetail with conventional coverages. Terms and conditions of conventional insurance coverages and the lack of flexibility in conventional insurance policy language to address particular risk concerns sometimes leads to alternative risk planning. Forming a captive often results from the desire to tailor coverages to a company's specific concerns and/or anticipating losses which are currently thought otherwise uninsurable; and

  • Lack of certainty of coverages being honored - Especially in the case of significant commercial losses, the result of a claim being submitted is often the unjustified denial of coverages followed by another long, expensive suit, this time against a well-financed insurance juggernaut. Instances of this include the Exxon Valdez coverage litigation against a Lloyd's of London syndicate arising out of that tanker's grounding, or Traveler's perceived national policy of denying advertising injury claims and litigating aggressively rather than paying such claims.
Additional insurance-related issues a company may consider in
forming a captive are: