Consider a Single Parent Captive in a Soft Insurance Market

With a new insurance cycle, many forward-looking organizations are leveraging current conditions and exploring long-term risk strategies, particularly the use of a single-parent captive.

A Softening Market

In a soft insurance market, you typically see greater carrier competition, broader appetites, and lower rates. Clients benefit from more options, reduced premiums, and broader coverage terms. But as history has shown us, these conditions don’t last. Insurance market cycles inevitably tighten and turn hard again, marked by reduced capacity, a selective appetite, tighter terms, and increased rates. For businesses with consistent risk exposure, relying solely on the traditional market can leave them vulnerable to future premium spikes or coverage limitations.

In addition, some industry segments, such as hospitality, retail, and construction, continue to contend with reduced coverage availability or increased scrutiny of General Liability and Excess policies. In these sectors, even a soft market may not deliver meaningful relief.

That’s where a captive strategy begins to stand out.

What Is a Single-Parent Captive?

A single-parent captive is a wholly owned insurance company formed by one organization to insure its own risks. Unlike a group captive, a single-parent captive offers maximum control, flexibility, and customization.

Captives allow businesses to retain underwriting profits, build surplus, and exert direct influence over coverage design and claims handling. And while setting up a captive has traditionally been a response to hard markets, doing so in a soft market can offer significant strategic advantages.

Why Now Is a Strategic Time

A common misconception is that captives make sense only when rates are high. But soft markets present a powerful opening to fund a captive under more favorable conditions.

• Premium Savings: With lower market rates, businesses can redirect premium savings into capitalizing on a captive.
• Build Surplus Before Rates Rise: By creating a captive now, a company can accumulate surplus during benign loss years and be better positioned when the market hardens.
• Budget Certainty: Captives help smooth premium volatility over time, providing predictability in budgeting and expense management.
• Control over Terms: Businesses can design their own policies, exclude restrictive market conditions, and manage claims directly.
• Customization by Coverage: From Workers’ Compensation and Auto to General Liability, Property, Professional Liability, Cyber, and even Trade Credit, a single-parent captive can address various risk categories tailored to the business’s needs.

How Single-Parent Captives Compare to Group Captives

While group captives remain a valuable tool, especially for small to mid-sized businesses, they typically focus on a limited set of coverages, usually Workers’ Compensation, Auto Liability, and General Liability. A single-parent captive, on the other hand, can handle a broader range of exposures and provide holistic risk management solutions.

With a single-parent captive, businesses have greater autonomy to structure policies, shift risk retention levels, and integrate specialized coverages that group captives may not support. These might include high-deductible Property, Excess Liability, Cyber, Directors & Officers Liability, and Subcontractor Default Insurance.

It’s important to note that captives, particularly single-parent structures, also require collateral to secure future claim obligations. Collateral is typically in the form of a letter of credit, cash, or reinsurance trust, and should be factored into upfront planning.

Considerations for Mid-market and Upper Mid-market Firms

 The most successful single-parent captive candidates typically have:

• At least $80 million to $100 million in annual revenue
• A premium spend of $1 million or more across their insurance program
• Healthy profitability and stable cash flow
• A long-term view of risk management, not just reactionary responses to short-term rate spikes

A single parent captives may also benefit companies that  operate in high-risk sectors or face frequent pricing or coverage disruptions in the commercial market.

Setting Up a Captive

Establishing a captive is not an overnight process. McGriff often advises clients to start small, placing several lines of coverage with prudent limits in the captive initially and scaling up and further diversifying over time. This crawl-walk-run approach helps mitigate capital constraints, builds internal expertise, and allows the captive to accrue surplus.

Hidden Benefits: Financial Flexibility

In addition to premium savings, captives offer a financial cushion. Well run captives accumulate reserves and investment income that can be used in lean years or for extraordinary claims. For instance, McGriff cited a client that used its captive to cover significant business interruption losses during the pandemic, an option unavailable through the traditional market.

Captives also enable coverage for otherwise uninsurable or niche risks. And because claims are paid from the captive, companies gain faster resolution and have fewer surprises compared to dealing with external insurers.

Our Holistic Approach

McGriff’s captive consulting team works closely with each client to:

• Determine the feasibility of a captive for the organization
• Understand the business’s long-term goals
• Identify appropriate lines of coverage for inclusion in the captive
• Build a customized road map for growth and surplus development
• Provide education and ongoing support to ensure the captive aligns with evolving needs

By viewing the captive not just as an insurance tool but as a long-term financial asset and risk strategy, McGriff empowers clients to control their insurance destiny—even in a fluctuating market.