Captive Insurance for Contractors
A Risk Management and Risk Retention Strategy
Why Contractors Explore Captive Insurance
For many contractors, insurance challenges are not driven by a lack of safety or poor operations. They are driven by scale, payroll growth, fleet size, and recurring loss patterns that make traditional insurance increasingly inefficient.
As construction firms grow, they often experience:
• Large deductible or self-insured workers compensation programs
• Volatile auto liability losses across expanding fleets
• Repetitive general liability claims tied to similar operations
• Limited or expensive umbrella and excess capacity
• Insurance costs that increase faster than actual loss experience
Captive insurance is one strategy some contractors evaluate when they are intentionally retaining risk already, but want greater structure, control, and long-term stability around that retention.
What Is Captive Insurance
Captive insurance is a formal risk-financing strategy in which a company owns or participates in a licensed insurance entity created to insure its own risks.
Unlike informal self-insurance, a captive:
• Issues regulated insurance policies
• Collects actuarially determined premiums
• Pays covered claims
• Maintains capital and surplus
• Operates under insurance regulatory oversight
For contractors, captives are typically used to insure defined layers of workers compensation, auto liability, or general liability, while higher-severity losses are transferred through reinsurance or excess insurance.
Captive insurance is not a replacement for traditional insurance. It is an extension of risk management.
How Captive Insurance Fits Into a Contractor Risk Program
Most contractors already operate within layered risk structures, even if they do not label them as such.
Examples include:
• Large deductible workers compensation programs
• Self-insured retentions on liability policies
• Project-specific insurance requirements
• Contractual risk transfer to subcontractors
• Excess and umbrella stacking
A captive insurance program formalizes this approach by clearly defining:
• Which losses the contractor retains
• Which losses are transferred
• How retained losses are funded and managed
• How volatility is controlled
The goal is not to eliminate risk, but to retain risk that is predictable while protecting the balance sheet from severe losses.
Retaining and Transferring Losses
In contractor captive programs, retained losses typically include higher-frequency, lower-severity claims such as:
• Workers compensation losses within a deductible
• Auto liability losses below excess attachment points
• General liability claims tied to routine operations
Losses above the captive’s retention are transferred through per-occurrence or aggregate excess reinsurance or excess insurance.
Some captives also incorporate structured reinsurance or parametric tools to manage volatility, particularly where loss timing or severity can fluctuate due to weather, labor conditions, or project mix.
Retention levels must align with cash flow, risk appetite, and claims management capabilities.
Captive Structures Used by Contractors
Captive insurance is no longer limited to large national contractors.
Common structures include:
Single-Parent Captive
Often used by larger contractors with consistent loss data and strong internal controls.
Group Captive
Multiple contractors with similar operations pool risk to achieve scale and stability.
Cell or Protected Cell Captive
Allows contractors to participate in a segregated structure without forming a standalone insurer.
Rent-A-Captive
Provides access to captive mechanics with reduced startup complexity.
Each structure involves different governance, capital, and risk-sharing considerations.
Regulatory and Tax Considerations
Captive insurers are regulated insurance companies. Requirements vary by domicile and may include capitalization, reporting, governance standards, and limits on permissible coverages.
Tax treatment of captive insurance is highly fact-specific and subject to scrutiny. Captives must demonstrate legitimate insurance characteristics, including risk transfer and risk distribution, to be respected under guidance from the Internal Revenue Service.
Captive insurance should never be implemented solely for tax purposes and should always involve qualified legal, tax, actuarial, and captive management professionals.
Technology and Claims Oversight
For contractors, captive performance is heavily influenced by claims oversight and loss control.
Modern captive programs rely on:
• Detailed loss data and trend analysis
• Active claims management
• Safety and return-to-work programs
• Ongoing evaluation of retention levels
Technology improves visibility, but disciplined operations determine results.
When Captive Insurance Makes Sense for Contractors
Captive insurance is not appropriate for every contractor.
It is typically evaluated when:
• Loss experience is stable and measurable
• The contractor already retains meaningful risk
• Safety and claims controls are mature
• Leadership understands long-term risk retention
• Traditional insurance pricing or structure no longer reflects actual risk
Captives are long-term risk tools, not short-term cost solutions.
Our Role in Captive Risk Strategy
We do not form captives, manage captives, or provide tax advice.
Our role is to help contractors evaluate whether captive insurance fits within their broader risk management strategy and to coordinate with qualified specialists when appropriate.
Captive insurance decisions should be deliberate, data-driven, and aligned with operational realities.
Start With a Contractor Risk Review
Before considering a captive, contractors should start with a structured review of:
• Loss history and severity trends
• Existing deductibles and retentions
• Claims management practices
• Contractual risk transfer effectiveness
• Capital tolerance and cash flow impact
Captive insurance is one tool among many. Used correctly, it can support long-term stability. Used incorrectly, it can increase complexity and exposure.
Frequently Asked Questions About Captives
Is captive insurance a way to avoid traditional insurance?
No. Captive insurance works alongside traditional insurance. Most contractor captives rely on reinsurance and excess policies to protect against large or catastrophic losses.
Does captive insurance guarantee lower insurance costs?
No. Captives can improve long-term cost stability when losses are well managed, but poor loss experience can increase total cost of risk.
Is captive insurance primarily a tax strategy?
No. Captives must be formed for legitimate risk-financing purposes. Tax treatment depends on specific facts and circumstances and should be evaluated by qualified tax advisors.
Are captives only for large contractors?
No, but captive insurance is not appropriate for every contractor. Group captives and cell structures have expanded access, but suitability depends on loss history, scale, and risk controls.
Can captive insurance replace workers compensation or liability insurance?
No. Captives typically insure defined layers of risk while higher-severity losses are transferred through excess or umbrella coverage.
Who should not consider captive insurance?
Contractors with unstable loss experience, weak claims controls, or limited financial capacity are usually better served by traditional insurance solutions.
Coverage availability, terms, and conditions vary by insurer and policy form. All coverage is subject to underwriting approval and the actual policy language.
