Why More Fleets Are Looking at Captives

To understand why captives and alternative risk structures are drawing so much attention from fleets right now, it helps to start with an uncomfortable fact about the insurance industry itself: commercial auto liability hasn’t been profitable on an underwriting basis since 2010, when the loss ratio came in at 97. 1%. That’s a razor-thin 2. 9% margin.

So how do insurance companies stay in business? Frank Kneeland, Senior Vice President of Sales at Reliance Partners, says the answer has less to do with underwriting than most fleet owners realize. “Most of these insurers are essentially massive banks or investment firms,” Kneeland said.

“They’re investing the premium dollars they collect, which is part of why many require a finance agreement or payment in full. They want that money working for them as soon as possible. That’s how they turn a profit even in a bad underwriting year.” Captive and alternative risk structures are designed to change that dynamic.

Rather than handing premium dollars to a traditional insurer and hoping for the best, a fleet that joins a captive retains more responsibility for its own losses. In exchange, the fleet shares in the financial results of the program.

“You’re returning the underwriting profit, the unspent premium, and the investment income that accrued over the term back to the fleet instead of the insurer,” Kneeland said. According to Kneeland, this has a massive effect on the entire interplay between a fleet and its broker.

“It changes the conversation from simply comparing premiums to looking at the fleet’s total cost of risk: claims, expenses, reinsurance, performance, all of it,” Kneeland said. That, in turn, changes what a broker actually needs to understand about a client’s operation.

“We have to understand how the fleet operates, how claims are handled, and whether its leadership is prepared to manage risk over the long term,” Kneeland said. “A captive can create more control and more upside, but it also requires engagement and discipline.” Explained simply, a captive gives a fleet a more active role in funding its own insurance losses.

In the standard market, performance is pooled whether a company likes it or not. “Everyone in the standard market is affected if the larger group of insureds performs poorly. Even the best operators running clean can see an increase because of everyone else in the pool,” Kneeland said.

“Generally, the bottom 30% of performers end up offsetting everyone else, because auto claims can be so large.” A group captive narrows that pool dramatically. “When you enter a group captive, you’re shrinking the group down to a very limited pool of best-in-class operators,” Kneeland said.

“You’re cutting off the members who were dragging down the standard market the most, while allowing everyone left to share in the underwriting profit and keep rates stable year over year.” That stability, Kneeland said, draws in the fleets who ultimately become strong candidates.

It inherently appeals safety-focused operators who feel like they’ve been subsidizing worse performers for years. Even among brokers, Kneeland said, there’s a persistent misunderstanding about what a captive actually promises. “The goal isn’t really about hoping to share in some theoretical underwriting profit,” Kneeland said.

“In reality, you’re retaining a higher level of risk, making the interest on your insurance dollars work for you instead of the insurer, and building a claims team you can actually hire and fire as needed. That’s something you never had that level of control over in the standard market.” The predictability is just as vital as the cost.

One of the biggest goals of a captive program is a renewal that fleets can plan around, rather than the kind of blindside still common in the standard market. Many carriers give no indication that anything unusual is coming, then deliver a massive increase just days before the policy renews.

A surprise like that can be devastating to a fleet, especially given the thin margins and bottlenecked cash flow that characterize the industry. Control extends well beyond the balance sheet. Kneeland points to the connection between safety performance and insurance outcomes as one of the most underappreciated benefits of moving into a captive.

“In the standard market, a fleet may feel like its investment in safety isn’t reflected in its pricing,” Kneeland said. “In a captive, members have much more visibility into the program’s losses.” The advantages apply to a lot more than cost control, too.

Fleets that make the move also gain better access to claims data, more active loss-control support, and a longer-term view of their own risk profile. If your fleet is exploring a captive for the first time, Kneeland breaks the process into three stages: discovery, quoting, and timing.

Discovery starts with understanding a fleet’s operations, current program, financial capacity, and goals, followed by a review of loss history and standard underwriting informatio