Article

The current insurance environment continues to reshape how middle-market companies think about risk. The prolonged hardening market in casualty lines, especially auto and general liability, is pushing buyers to look beyond traditional insurance and toward structures that provide more stability, control, and long-term value.​

Captive insurance continues to be the most powerful tool in that toolbox. Growth in captive formations has accelerated over the last several years, and the trend is especially pronounced among middle-market organizations that historically relied solely on guaranteed-cost or small deductible programs.​

Hard market challenges in auto and liability

Commercial auto and liability have been at the center of the hard market and continue to present significant challenges for buyers. Loss costs in commercial auto have risen due to more frequent and more severe accidents, higher repair and replacement costs, rising medical expenses, and the ongoing impact of social inflation. As a result, many insurers have sustained years of underwriting losses, prompting sustained rate increases and tighter underwriting standards.​

General and excess liability lines are experiencing similar pressures. Nuclear verdicts, litigation funding, and an increasingly aggressive plaintiff bar have driven up severity and made it harder for insurers to project ultimate loss costs with confidence. Carriers have responded by pushing rates higher, increasing attachment points for excess layers, cutting available limits, and in some cases withdrawing from particularly challenging classes of business.​

Middle-market buyers are feeling these changes in several ways:

• Premiums rising year after year despite stable or improving loss experience.​
• Larger deductibles and retentions, shifting more risk back to the insured.​
• Narrower coverage, more exclusions, and reduced capacity at the top of towers, especially for auto and umbrella.​

For many organizations, the frustration is not just price, it is the lack of predictability and control. This is precisely the gap that captive solutions are increasingly designed to fill.​

The case for entering a captive during a soft market

Hard markets tend to spur interest in captives and are without a doubt a good time to evaluate a captive, but the strategically optimal time to form a captive is often during a soft market, when pricing, collateral, and reinsurance terms are more favorable. As captive premiums at the outset of the arrangement are generally closely aligned with market rates, insureds can take advantage of lower premiums in a softer phase of the cycle and obtain premium stability when another hard market arrives. The current property market is a great example, with decreasing rates across the board, a captive is now a great time to evaluate. Lastly, insurers and reinsurers are generally more willing to deploy capacity, negotiate terms, and offer more flexible program structures.​

Entering a captive under these conditions offers several advantages:

• Lower premiums and more favorable collateral requirements, which make it easier to build surplus and stabilize the captive’s financial position.​
• As captives generally provide premium stability, this allows the insured to have more predictable renewals without being at the mercy of a standard commercial carrier.
• Better access to reinsurance capacity at more competitive pricing, including excess casualty, which is critical for long-tail lines like auto and general liability.​
• Time to accumulate data, refine underwriting and claims protocols, and build comfort at the board and management level before the next severe hardening of the market.​

When the market inevitably swings back toward a hard phase—as seen from 2018 onward—companies that already have a mature captive in place are in a much stronger position. They may choose to:

• Retain more risk in the captive while purchasing less expensive excess layers.
• Use captive surplus to help offset rising commercial premiums.
• Negotiate from a position of strength because they have demonstrated risk discipline and data-driven decision-making.

Industry data underscores this dynamic. The number of captives worldwide and in U.S. domiciles has continued to grow, with AM Best and other observers noting that captives have captured a growing share of global re/insurance premium, driven in part by sustained rate hikes in the traditional market. For middle-market organizations, entering a captive in “good” times is less about reacting to pain and more about building a durable risk-financing platform that will carry them through future cycles.​

The Importance of Independent Evaluation

Despite the clear growth and advantages of captives, they are not a universal solution. A disciplined evaluation process is essential, especially for middle-market companies that may be forming a captive for the first time. This is where an independent captive consultant delivers distinct value.

An independent consultant’s role typically includes:

• Conducting a feasibility study that examines historical loss data, exposure trends, projected losses, capital requirements, and tax and regulatory considerations.​ C.I. offers upfront viability assessments for no cost, allowing your business to evaluate the captive structure prior to spending a penny on feasibility
• Comparing potential structures—single-parent, group, cell, or rental captive—against the company’s premium volume, risk appetite, and long-term goals.​
• Advising on domicile selection, governance requirements, and integration with the organization’s broader enterprise risk management framework.​

Independence matters because many market participants such as fronting carriers, captive managers affiliated with insurers, or single-provider platforms—have inherent incentives to steer clients toward their own structures or capacity. An independent advisor can survey the full landscape of fronting partners, managers, actuaries, and reinsurers and build a best-in-class team around the client’s needs rather than a prepackaged solution.​

For middle-market leadership teams and boards that may be new to captive concepts, this independent perspective reduces execution risk and improves internal buy-in. A well-articulated feasibility study and financial model help stakeholders understand:

• How much capital is needed and how it will be deployed.
• The expected volatility of captive results over time.
• The potential savings and strategic benefits relative to staying fully in the traditional market.

This kind of rigorous, unbiased evaluation is often the difference between a captive that becomes a long-term strategic asset and one that never fully meets expectations. C.I. takes an education first approach. Understanding the captive concept, flow of funds, potential for loss, and all key players involved is paramount for long-term success.

The use of fronting and reinsurance

Fronting and reinsurance are core building blocks in most captive programs, particularly when middle-market buyers need admitted paper or access to broader markets.

A fronting carrier is a licensed, admitted insurer that issues policies to the insured but then transfers most or all of the risk to the captive via a reinsurance or indemnity agreement. This arrangement allows the insured to:​

• Satisfy contractual or regulatory requirements that call for insurance from an admitted, rated carrier.​
• Maintain control of underwriting, claims oversight, and risk-financing strategy within the captive.​

The fronting carrier typically charges a fee for its role, licensing, and balance sheet exposure, but cedes the underlying risk to the captive. This can be more cost-effective than securing licenses in every jurisdiction where the insured operates and building a full in-house insurance infrastructure.​

Reinsurance then sits behind the captive to manage large or catastrophic losses and to smooth results over time. In many structures:

• The captive takes a defined retention per claim or in the aggregate (for example, the first $350k per occurrence).
• Excess layers are placed with reinsurers that specialize in casualty, auto, or other relevant lines.​

This layered approach allows middle-market captives to:

• Retain predictable, working-layer losses where they can benefit most from their own risk improvements.
• Protect capital against infrequent but severe events that would otherwise threaten the captive’s solvency or the parent’s balance sheet.​

Regulators and rating agencies recognize well-structured fronting and reinsurance programs as a strength, particularly when counterparties are well-rated and contracts are carefully crafted. For middle-market buyers, these partnerships are often what make a captive solution practical and scalable.​

The current hard market in auto and liability lines has exposed a fundamental vulnerability in traditional insurance buying strategies: heavy dependence on external pricing cycles and carrier appetites. Middle-market organizations face rising premiums, tightening capacity, and mounting uncertainty, even when they manage their risks responsibly.​

Captive insurance offers a way to regain control. By retaining a meaningful slice of risk in a well-structured captive, companies can better align cost with performance, capture underwriting profit over time, and build a more resilient risk-financing platform. The most successful captive strategies tend to share several traits:​

• Formed by high performing insureds with low loss ratios that go above and beyond within their risk management protocols. These insureds are hit with rate increases regardless of performance as they are forced to subsidize poor performing insureds within their segment.
• Designed and evaluated with the guidance of an independent consultant who can align structure with strategy and select the right partners objectively.
• Supported by strong fronting and reinsurance relationships that provide admitted paper, regulatory compliance, and protection against severe losses.​

For middle-market buyers looking ahead, captives are no longer a niche tool reserved for the largest multinationals; they are increasingly a mainstream, strategic option. Partner with Captives.Insure to explore how captive participation can position your organization to navigate future hard markets with confidence, stability, and a greater degree of control over their own destiny.