Captive Insurance Evolves: From Deductible Reimbursement to Reinsurance Models

The deductible reimbursement model (DRP) has long been a common structure for captive insurance programs, but it is increasingly viewed as outdated amid the evolving property and casualty (P&C) insurance landscape. DRPs involve an insured purchasing a high-deductible policy from an AM Best-rated carrier and then creating a reimbursement policy within the captive to cover the deductible layer. While conceptually simple, this approach restricts economic benefits since premium credits to the captive are only a fraction of the premium value and deductible levels are capped by commercial carriers, limiting the risk assumed by the captive. Additionally, DRPs create contractual and regulatory challenges due to the captive's position outside the primary insurance contract. Proof of coverage from an unrated captive may be rejected by third parties such as lenders or landlords. Non-admitted placements can also trigger complex self-procurement taxes and increase compliance burdens. An alternative gaining traction is utilizing captive insurance as a formal reinsurer through a fronting arrangement with an AM Best-rated carrier. Here, the fronting carrier issues the policy and cedes risk to the captive via a reinsurance agreement. This structure delivers superior premium allocation, allowing the captive to capture full economic value and accelerate surplus accumulation and investment income, driving long-term program sustainability. Such reinsurance models enhance market credibility and access by issuing policies on rated paper, which are readily accepted by regulators and counterparties. Moreover, captives gain direct access to global reinsurance markets, bypassing retail markups and securing favorable terms. The approach supports specific and aggregate reinsurance capacity, enabling precise risk management and surplus protection without reliance on third-party placements. Industry data reflects measurable operational outperformance using reinsurance structures, with captive groups achieving combined ratios around 88% compared to 106% for traditional commercial auto carriers. This illustrates the efficiency and aligned incentives inherent in captive reinsurance frameworks. As captives mature, structuring as reinsurers is becoming a strategic priority rather than a technical detail. This evolution allows captives to optimize premium economics, access reinsurance capacity and protections, and enhance overall program performance beyond the limitations of deductible reimbursement models.