For an insurance agency, an agency captive can provide an opportunity to have “skin in the game” of its clients’ coverage in exchange for a share of the premiums and investment income the client business generates. The benefits of an agency captive can extend beyond additional revenue streams, however.
A captive insurance company created by an insurance agent or broker or a group of intermediaries, the agency captive is a reinsurer working in concert with a fronting insurance company to underwrite and insure or reinsure client risks. A prime rationale for creating the agency captive is that the agency believes the book of business written in the captive will produce an underwriting profit, providing an additional source of revenue.
Owners of an agency captive often will rely on a captive manager to handle the entity’s day-to-day operations, while the fronting insurer is responsible for the underwriting process. Together, the agency and the insurer share the profit or loss on the book of business written in the agency captive, with the captive obligated to pay a share of claims.
A variety of lines of coverage could be written using an agency captive, though the most common are businessowners policies, general liability, errors and omissions, package, workers compensation, and auto liability.
For the insurance buyer buying a policy that involves an agency captive, the experience is no different than purchasing coverage through a traditional structure, with the fronting insurer providing the paper and the client-agency dealings unchanged. The agency should be sure to disclose the agency captive arrangement to the client, however.
The agency captive concept isn’t new—it goes back decades, as many insurers over the years have worked with agencies to create captive arrangements. In recent years, the concept has seen fresh momentum, however, as a number of US captive domiciles have joined the ranks of those licensing agency captives. Vermont, Connecticut, Georgia, North Carolina, and South Dakota are among the states that have passed legislation enabling the formation of agency captives in the past few years.
While agency captives provide an additional revenue stream for the agencies sponsoring them, they can also serve to tighten relationships with both clients and insurers.