Chris Zumhofe
Vice President
Many senior living operators and managers are seeking more creative insurance options beyond what their brokers typically offer, which often involves raising retention and lowering coverage while still paying high premiums. As a result, partial and self-insurance are becoming more appealing. These options—commonly implemented through captives—may be beneficial in the right situation and for the right buyer. Captive and self-insurance structures must be thoroughly vetted and evaluated by both the buyer and experienced insurance brokers who understand the senior living industry and the mechanics of self-insurance. When an organization acts as the insurance company, it cannot transfer that retained risk to other insurers, thus retaining any damages incurred. Therefore, diligence is essential. In the senior living industry, captives are becoming more prevalent due to nuclear verdicts in challenging venues and social inflation. Increasing premiums and a lack of additional market capacity have driven operators to explore alternative risk financing options.
Understanding captive insurance: single parent and group captives
A single parent captive is an insurance company created and owned by a single organization to insure its own risks, allowing the business greater control over insurance costs and coverage. In contrast, a group captive is formed by multiple organizations that collaborate to share risks and insurance costs—often benefiting businesses operating in the same industry.
Cost control and risk management
Captives may help manage and contain costs, enhance control through additional reinsurance options (especially in claims management), and improve overall risk management. Due to the complex nature and fixed costs of this structure, many buyers should have a risk profile that warrants an investment in the range of approximately $800,000 to $1 million or more—particularly if they are having difficulty securing coverage in the traditional marketplace.
Types of domiciles: domestic and offshore
Domestic domiciles refer to jurisdictions within the United States where captives can be formed and regulated. Many states offer favorable regulatory environments for captives, including supportive frameworks, accessibility, tax considerations, and established credibility.
Offshore domiciles are jurisdictions outside a company’s home country that provide favorable conditions for establishing captives. Common locations include Bermuda, the Cayman Islands, and Guernsey—jurisdictions known for regulatory flexibility, tax considerations, asset protection, and international reach.
Key considerations
The formation of a captive begins with an actuarial analysis of the risk profile, including exposures, historical losses, and financials. Analyzing loss activity—ideally over ten years, though a five-year lookback can be acceptable—helps identify trends and develop a loss profile (frequency and dollar amount per year). Regularly run capital stress tests, scenario drills, and outside governance reviews to check funding, spot weaknesses, and make sure the captive can handle major or long-lasting losses.
Other important considerations:
- Engage a qualified captive manager to oversee the regulatory process in the chosen domicile.
- Ensure the captive is properly funded and passes regulatory approval to confirm its ability to pay claims and remain solvent.
- Provide additional collateral, usually aligned with the primary liability occurrence or aggregate layer. Collateral needs may differ between single parent and group captives.
- Employ a Third-Party Administrator (TPA) to manage claims and ensure efficient, accurate claims processing.
While the initial motivation for forming a captive often stems from high insurance premiums or lack of coverage, there are additional benefits to consider: greater control over premium fluctuations and market disruptions, freedom to choose vendors and service providers, customizable reinsurance structures, potential tax advantages in specific situations, and the opportunity to create a new profit center rather than simply paying increasing reserves with limited claims control.
Risks and mitigation
A captive structure can be a valuable alternative for the right buyer, but it is not without risks. Mitigating potential downsides requires careful attention to the captive’s formation, governance, funding, and claims management processes to preserve its advantages.
In an ideal scenario—where mechanisms operate smoothly and claims projections based on historical losses are accurate—a captive model can provide opportunities for senior living operators or managers to succeed both now and in the future, helping secure their long-term viability.
