Captive Insurance and Public Entities: Expanding the Role of Captives in the Public Sector

Captive insurance has traditionally been used by large private corporations seeking greater control over risk financing and insurance costs. In recent years, however, captives have increasingly been explored and adopted by public entities that face many of the same challenges, along with others unique to the public sector.

For public entities, a captive insurance company can provide an alternative mechanism for accessing coverage, supporting stable cash flow, and managing risk retention and transfer over time. Captives can also help public entities contend with structural hurdles that may increase costs or complicate efforts to maintain a functional and comprehensive insurance program.

One commonly cited challenge in the traditional insurance market is insurer hesitation to underwrite public-entity risks. Market participants have noted that public-record requirements can raise concerns for insurers about the disclosure of pricing, underwriting approaches, and policy terms. These dynamics can contribute to narrower coverage offerings or higher costs in the commercial market.

Captives are often viewed as a way for public entities to address these constraints. They can provide greater control over coverage design, create a more deliberate approach to risk financing, and, in some cases, facilitate participation in reinsurance markets. Captives may also support access to certain coverages that can be difficult to obtain consistently in the traditional insurance marketplace.

Captives can further help ensure that funds dedicated to risk financing remain segregated for that purpose. Ongoing capitalization and regulatory requirements are intended to support the captive's ability to meet its obligations over time.

Industry groups say captives align naturally with the risk profiles and governance needs of public entities.

"Captives are uniquely suited to public entity risks because they allow organizations to retain and manage risk in a more stable, long-term, and transparent way," said Dan Towle, president of the Captive Insurance Companies Association. "They also safeguard an organization's assets for insurance, preventing those funds from being used for general fund needs.

"Captives also promote stronger risk management and governance. Because public entities are funding their own risk, there is a natural incentive to invest in loss prevention, claims management, and data analytics. Over time, this leads to better outcomes and more predictable costs."

From a regulatory perspective, captives are often viewed as a practical response to risks that are increasingly difficult to place in the commercial market.

"Public entities often use captives to cover large, volatile, or hard-to-insure risks where commercial insurance is expensive, restricted, or unavailable," said Stephen Taylor, captives director at the Delaware Department of Insurance. "A captive can provide governmental and quasi-governmental entities with greater control over cost, coverage design, and long-term risk financing, in addition to overall risk management benefits."

Market dynamics have further accelerated interest in captive insurance structures, according to industry practitioners.

"The risk landscape for public entities has grown increasingly complex, with traditional insurance markets struggling to keep pace," said Jeremy Colombik, managing partner of Management Services International. "From cyber-security threats and social inflation to natural catastrophes and evolving liability exposures, government agencies and municipalities face mounting challenges that demand adaptive, cost-effective solutions.

"In response, captives have become a cornerstone of alternative risk financing—offering flexibility, control, and alignment with long-term fiscal objectives."

Key Risks for Public Entities

While property risk has often been an early focus for public entities considering captive insurance, captive usage has broadened over time to encompass a wider range of exposures. Common coverages today include general liability, property, workers compensation, and automobile liability and physical damage.

Public entities increasingly look to captives to help address high-severity, low-frequency risks that can strain conventional insurance programs, said Mr. Colombik. These risks may include law enforcement liability, public officials' liability, cyber incidents, property damage associated with natural catastrophes, and healthcare-related exposures within state and municipal systems. Other emerging areas include environmental liability and litigation-driven risks, which can involve unpredictable and volatile claims activity.

"The challenge lies in balancing fiscal restraint with the need for comprehensive insurance protection, navigating complex governance frameworks and maintaining transparency to stakeholders," said Mr. Colombik. "Captive structures allow public entities to deploy risk retention strategies effectively while building reserves over time to reduce reliance on the commercial markets."

With respect to property risk, Daniel Linton, director and consulting actuary at Pinnacle Actuarial Resources, said that captives are particularly valuable for public entities because they typically have less geographic diversification of risk than a commercial insurer and may be exposed to wildfires, hurricanes, convective storms, or other perils. That can make it harder to obtain affordable and comprehensive coverage in the traditional market, positioning captives as a viable alternative due to the greater flexibility and control they offer.

Core Benefits of Captive Insurance

Captives can offer public entities several potential advantages, including the ability to manuscript coverage, retain underwriting results, and respond more quickly to evolving exposures, said Mr. Colombik. They can also support collaboration by allowing similar risks to be pooled across municipalities, agencies, or school districts to help stabilize pricing.

"This flexibility is especially advantageous in periods of market hardening when commercial insurers withdraw capacity or introduce new exclusions," said Mr. Colombik.

From a regulatory perspective, captives are also viewed as a long-term risk financing tool rather than a short-term response to market disruption.

Mr. Taylor added, "Captive insurance companies provide a strategic, long-term solution that enhances financial stability and strengthens risk management, and may save taxpayer funds. A captive also provides the owner with more control over claims and litigation, and offers a better opportunity to tailor coverages to the owner's unique risks.

"A captive also may provide the owner with a source of funds to finance future risks. Finally, a captive provides access to the reinsurance market, where the public entity may be able to obtain increased capacity and better pricing for its risks."

From an actuarial standpoint, captives can give public entities greater flexibility in how risk is structured and managed over time.

Mr. Linton said, "It allows public entities to do what the private sector has been doing for some time. It allows them to tailor how they manage their overall risk profile. The risks they handle are just as sophisticated as those in the private market, and having greater control over how policy terms are written can benefit them greatly."

That flexibility often extends to how public entities choose to structure their captive programs.

Common Captive Structures

The benefits public entities seek through captive insurance often influence the structures they choose to adopt.

Single-parent and cell captives are the most commonly favored structures for public entities. Single-parent captives tend to work best for large state systems or entities with sufficient premium volume to justify dedicated infrastructure.

"Having a single-parent captive enables them to set up their own board of directors and make their own decisions without others influencing them," said Mr. Linton.

Cell captives, particularly those within established protected cell companies, offer scalability by allowing public entities to form segregated programs with lower up-front costs and reduced regulatory complexity.

"Smaller public entities that want to enter the captive space may be better suited to a cell captive insurance company because of lower capital requirements and fewer barriers to entry," said Mr. Linton.

Examples of Public Entity Adoption

Across the US, captives have been used by states and municipalities to help stabilize property programs following periods of reinsurance volatility, to support cyber-risk management strategies, and to address long-tail liabilities involving law enforcement or employment practices. Public school systems have also explored captives as a mechanism for managing workers compensation and employee benefits.

"There are many examples of captives successfully supporting public entities when commercial markets have failed to provide sustainable solutions," said Mr. Towle. "Public entity captives have played a critical role in maintaining affordable coverage for law enforcement liability, particularly during periods when insurers withdrew or imposed restrictive terms.

"Captives have also been instrumental in stabilizing workers compensation programs, reducing claim costs through proactive safety initiatives and returning underwriting results to members rather than external insurers.

"In each case, captives have enabled public entities to remain resilient, protect taxpayers, and maintain essential services without being subject to the volatility of the commercial insurance market."

In higher education and athletics, captives have also been explored as part of broader risk management strategies following pandemic-related disruptions. Industry observers have noted that captive structures may offer organizations greater flexibility in addressing event cancellation and other nontraditional risks.

Other public-sector examples include transportation and housing authorities that use captives or risk retention groups to address high-severity or specialized exposures related to infrastructure, construction, and liability.

Key Captive Domiciles

While Delaware does not currently oversee any captives owned directly by public entities, Mr. Taylor said the state does oversee a large single-industry captive that insures power plants, some of which have public-sector ownership interests.

Jeff Wilson, captive insurance director at the Iowa Insurance Division, said Iowa does not currently have public entity captives but continues to monitor how such structures are being used in other jurisdictions. If a public entity captive were proposed, he said regulatory review would focus on appropriate structuring, capitalization, governance, and long-term financial sustainability.

"Public entities tend to approach strategic initiatives in a deliberate and methodical manner, which aligns well with the level of planning and discipline required to operate a captive insurance company," said Mr. Wilson. "When structured properly, a public entity captive can enhance transparency, strengthen governance standards, and promote long-term financial responsibility."

Future Outlook for Public Entity Captives

Looking ahead, Mr. Colombik noted that the convergence of technology, climate-related risk, and social risk is likely to further shape how public entities use captives. He pointed to potential growth in parametric structures, greater use of data analytics, and increased collaboration between state risk pools and captive programs.

"Over the next 12 months, market experts predict continued growth in cell-based structures, greater use of captives for cyber and environmental exposures, and ongoing pressure for transparency as regulators refine guidelines for public sector captive governance," said Mr. Colombik. "Ultimately, captives will remain a vital tool for enabling public entities to manage volatility proactively and build long-term financial stability."

From a regulatory standpoint, Mr. Taylor said public entities are also likely to expand both the scope and structure of their captive programs.

Mr. Taylor added, "I believe we will see more public sector captives, as well as existing captives adding additional retentions and lines of business. Public entities will use the flexibility of captive insurance programs to address risks exposed to rising market pressures and volatility, increasing and merging exposures, and a strategic desire for stability, control, and additional risk management options."

Beyond traditional governmental risks, captives may also play a growing role in addressing employment-related exposures in collegiate sports, particularly as name, image, and likeness (NIL) arrangements continue to evolve, said Julia Rosen, consulting actuary at Milliman.

"The potential classification of college athletes as employees—driven by recent legislation and ongoing debates—could require universities to provide workers compensation insurance for sports injuries, a risk they have not previously faced," said Ms. Rosen. "The NIL era also introduces new exposures such as employment practices liability and errors and omissions related to NIL contracts.

"Over the next 12 months and beyond, captives may need to evolve to address these emerging risks and offer tailored coverage for public universities navigating these complex challenges."

Industry leaders expect these trends to continue shaping captive formation and expansion decisions.

Mr. Towle concluded, "Over the next year, we expect continued growth in captive formations, expansions of existing captives into new areas of coverage, and increased use of group structures. Longer term, captives will play an even greater role in addressing emerging and nontraditional risks, supported by improved data analytics, governance practices, and collaboration between public entities.

"Ultimately, captives are becoming a core component of public entity risk financing strategies, not just an alternative, but a proactive and sustainable solution for managing risk in an increasingly complex environment."

From an actuarial perspective, Mr. Linton said these pressures are likely to further accelerate captive adoption.

Mr. Linton added, "Public entity captives will become increasingly more ubiquitous, with municipalities, counties, and school districts all forming their own captives, especially as the risk landscape continues to evolve, with the impact of climate change and ongoing nuclear verdicts continuing to be an issue. Public entities also aren't immune from litigation financing, so there's going to be pressure from plaintiffs' attorneys on their overall claims costs, and having a captive that can step in and manage those risks is only going to benefit them."