Legal & Regulatory

Captive Insurance

A captive insurer is a wholly owned subsidiary or association-owned insurer formed to self-insure the risks of its parent or member organizations, providing an alternative to commercial insurance markets.

Last reviewed: May 2026 · Editorial methodology

Definition

A captive insurance company is a licensed insurance entity formed and owned by one or more businesses (or an association of businesses) primarily to insure the risks of its owner(s), rather than writing insurance for unrelated third parties as a commercial insurer would. Captives allow organizations to retain underwriting profits they would otherwise pay to commercial carriers in the form of premiums, access reinsurance markets directly at wholesale rates, customize coverage for risks the commercial market doesn't adequately cover, and create a long-term funding mechanism for retained risks. There are several captive structures: a single-parent (pure) captive insures only its parent company's risks; a group captive insures the risks of multiple unrelated companies in the same or similar industries; a cell captive (or protected cell company) allows multiple insureds to maintain segregated risk pools within a single legal entity. Popular captive domiciles include Vermont (the largest US captive domicile with over 1,000 active captives), the Cayman Islands, Bermuda, and Delaware. The IRS closely scrutinizes small captive insurance arrangements (particularly 831(b) election captives with premiums under $2.4 million) for potential tax abuse; the IRS listed certain micro-captive arrangements on its annual list of 'dirty dozen' tax scams from 2014–2023. Captive insurance is most suitable for large to mid-size organizations with sufficient risk volume to spread losses—typically companies with $5+ million in annual commercial insurance premiums.

Where this term matters

Business Insurance →Insurance Companies →

Tip

Glossary definitions are educational. Always check your own policy language — insurers can define common terms differently from one another. When in doubt, request a written explanation from your agent.

Related terms

ReinsuranceReinsurance allows primary insurers to limit their exposure to large or catastrophic losses by ceding a portion of premium and liability to reinsurers—enabling them to underwrite more risk than their capital alone could support.Treaty ReinsuranceTreaty reinsurance is a blanket reinsurance arrangement where the reinsurer automatically accepts all risks within defined parameters from the cedent's book of business, without individual risk-by-risk evaluation.Admitted CarrierAdmitted carriers have met state licensing, financial, and regulatory requirements and are subject to state oversight of their rates, forms, and claims practices—giving policyholders access to state guaranty fund protection.Surplus Lines InsuranceSurplus lines insurance fills coverage gaps in the standard market, allowing policyholders to obtain coverage from non-admitted carriers for unusual, high-risk, or newly emerging exposures.RBC (Risk-Based Capital)Risk-Based Capital (RBC) is the NAIC's statutory solvency framework that determines how much capital an insurer must hold, scaled to the types and levels of risk in its business—triggering regulatory intervention when capital falls too low.
Source: Cover Forge USA editorial team|Last verified: May 2026|Methodology
Definitions are educational and may be simplified. Always refer to your policy contract and consult a licensed agent for terms that affect coverage decisions.
CF

Cover Forge USA Editorial Team

Editorial Lead

This article was researched and written by the Cover Forge USA editorial team against federal sources (NAIC, CMS, FEMA, DOL, SSA, state DOIs) and standard policy forms. Bylines organize content by topic — they do not assert individual licensure. See our editorial-policy for details.

Reviewed June 2026

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