Insurance Agency Can Control Their Destiny Through Captives

Insurance Agent Doing Paperwork

Agents and brokers, many of whom are looking to increase control over their own destiny, are entering alternative markets through the establishment of captive solutions. This involves risk sharing that provides opportunity for the agent/broker to recapture lost income from the decreased commission income, along with the reduced contingency income resulting from the company’s reserve strengthening.


Today, much of the captive market is centered on middle market accounts. As a result, creative approaches such as group and association captives have begun to flourish, as have rent-a-captives where multiple owners are involved in the process.


Another type of captive that has been introduced since the original concept is the agency captive, which allows for establishing a long-term profitable relationship with organizations familiar with the alternative market. Through the use of a captive a producer can establish a fully owned captive or utilize the services of an existing captive (rent-a-captive).


From an operational expense perspective, owning a captive can be more efficient; however, this may require greater capitalization than using a rent-a-captive. The agency owned captive versus the rent-a-captive option should be explored on an individual basis, as buyers have normally formed captives only after a thorough analysis of individual circumstances was complete.


How captives work to the benefit of the members


Agency captives are not designed to provide insurance for their owners. Instead, they benefit the insurer, agent, or broker that owns the company. Agents and brokers are often compelled to form captives to provide markets for their clients when the insurance market is in a “hard cycle.” In any case, an individual producer or a group of agent/producers, which band together for the basis of pooling a portion of their business, can better utilize a captive.


The agent/broker acts as a reinsurer through the establishment of an agency captive (or purchases an interest in an agency rent-a-captive). Ownership in the captive can include producers, sub-producers and insureds. Another emerging alternative in the marketplace is the group agency captive. When further economies of scale are desirable, small groups of agents with significant books of business, whether homogeneous or heterogeneous, may pool their resources to form such a captive.


The captive is created so that agents/brokers can participate in the underwriting income and investment profits generated by their book of business. When the agent/broker has an ownership interest in the agency captive, this often results in an extremely profitable book of business with better risk characteristics.


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