Reviving Dormant Captive Insurance Companies: Risks and Options

An increasing number of companies are forming new captive insurance entities even as older ones are placed into dormancy.

A dormant captive insurance company is no longer actively underwriting policies or engaging in insurance operations. While forming a new captive may offer strategic or structural advantages, leaving an existing entity inactive can mean forgoing potential tax efficiencies, capital flexibility, and cost optimization opportunities.

Despite growth in new formations, many captives established decades ago—particularly in offshore domiciles such as Bermuda and the Cayman Islands—now sit in runoff or inactive status. Some industry sources estimate that a meaningful portion—potentially as much as 20 percent—of single-parent captives are currently dormant.

Dormancy Risks

The risks associated with maintaining an older dormant captive insurer can be significant. These may include exposure to long-tail claims, loss of institutional claims knowledge and records, and legacy policy structures—including policies written without aggregate limits or with broader coverage triggers—that may not reflect current risk management practices. Regulators may also continue to require annual filings, tax returns, and license fees, particularly if the captive retains liabilities.

At the same time, there can be strategic reasons to maintain a captive in dormant status. For example, a captive formed during a hard market and later placed into dormancy during softer conditions may provide flexibility if market conditions harden again. Because a dormant captive is not actively writing new business, its accumulated assets are not being deployed to support new underwriting risk, allowing owners time to determine its future role.

However, long-term dormancy can ultimately create challenges, including regulatory pressure to either reactivate, formally run off, or liquidate the entity.

Kevin McGinley, vice president—captive insurance at Risk Management Advisors, said there are three primary risks associated with leaving a captive dormant. One is regulatory: If a captive remains inactive for an extended period, a domicile regulator may decide to revoke its license.

He also noted that even in dormancy, captives must comply with applicable regulations, including maintaining minimum capital—typically around $25,000—and filing annual reports. Failure to meet these requirements can result in fines, penalties, or suspension of the captive's license.

In addition, Mr. McGinley pointed to ongoing administrative expenses. Although some domiciles may waive audit requirements, actuarial opinions, and premium tax, dormant captives still incur annual management and compliance costs, which can accumulate over time and, in some cases, exceed the cost of a formal liquidation.

Daniel Chefitz, partner at Morgan, Lewis & Bockius, noted that the risks facing a dormant captive are highly dependent on its historical risk profile. Factors such as when coverage was issued, the types of risks insured, whether the captive wrote direct coverage or reinsured a fronting insurer, and whether insured entities remain affiliated all influence the exposure landscape.

Based on those variables, potential risks may include claims from companies that have been sold or spun off, trapped equity, lost tax opportunities, ongoing administrative expense, and long-tail liabilities such as environmental, asbestos, talc, or public nuisance claims.

Jeremy Colombik, managing partner of Management Services International, emphasized that placing a captive into dormancy does not eliminate the underlying risks that led to its formation. If those exposures remain, the organization must find alternative ways to manage them, often without the benefit of the captive's established underwriting framework or historical claims data.

Over time, he noted, the institutional knowledge built through the captive's operations can fade, reducing its practical value if the entity is later reactivated.

"Dormancy also does not eliminate legacy obligations," said Mr. Colombik. "A captive may continue to carry responsibility for historical claims or long-tail exposures, requiring ongoing capital, solvency monitoring, and prudent reserve management. This ties up funds that could otherwise support operational needs or investment opportunities."

Jason Flaxbeard, executive managing director—alternative risk at Brown & Brown, added, "There could be tax implications depending on the elections made by the captive. In some domiciles, audit and actuarial services can be waived, which may reduce costs. The entity may need to file with the state, utilize a captive manager, and consolidate into the parent. The main downside is that the captive may have dwindling capital if these service providers need to be paid."

Gary Osborne, vice president—alternative risk at Risk Partners, said that the main risk of retaining a dormant captive is the unnecessary expense of keeping it open beyond its required lifespan.

"There should be no ongoing liability after being allowed to go dormant," said Mr. Osborne. "There is always a slight chance a claim could arise late depending on the form and exposure and statute of limitations on the policies issued, but the claim would still need to be addressed by the captive owner regardless."

Strategic Opportunities

Rather than placing a captive into runoff or entering a formal solvency scheme, some organizations choose to repurpose dormant entities as part of a broader risk management strategy. Reactivating an existing captive can provide a mechanism to address both legacy and emerging liabilities while potentially improving capital efficiency and cash flow, depending on how the structure is implemented.

"The benefits come from being able to respond to market cycles," said Mr. Flaxbeard. "If you can't place property coverage, for instance, in a hard market, the captive can request approval from the regulator—which may take 30 days—to write the coverage, allowing the captive parent to retain its property tower at an appropriate price. We have seen dormant captives being used for medical stop-loss coverage, as that market hardened in 2025. Captive owners then have a few months to review their medical stop-loss (MSL) program and structure a deal that performs more effectively in the marketplace."

Mr. McGinley identified three key benefits to reviving a dormant captive. Most immediately, he noted, reactivation is typically more cost-effective than forming a new entity and can often be accomplished more quickly, given regulators' familiarity with the captive's ownership and structure.

He added that a dormant captive with a strong capital base can serve as an efficient vehicle for retaining risk and supporting collateralization of fronted insurance programs. Reactivation may also provide a mechanism for addressing emerging risks that were not contemplated when the captive was originally formed.

"When a company decides to place a captive into dormancy, it may not be thinking about risks that aren't yet significant to the business," said Mr. McGinley. "Over time, however, exposures such as changing weather patterns, flooding, wildfires, or cyber threats can become material. Having an alternative insurance vehicle available to address those risks can be extremely valuable when commercial market capacity is limited."

Mr. Chefitz noted that dormant captives can be turned to their owners' advantage through either thoughtful repurposing or careful dissolution. The appropriate strategy depends on the captive's age and its potential exposure to long-tail legacy liabilities.

"A captive with potential legacy liability exposure should be isolated from a company's ongoing operations through a ring-fenced structure," said Mr. Chefitz. "It can then deploy its capital to support the issuance of new coverage addressing additional legacy liabilities within that ring fence, including those arising from discontinued operations.

"Using a captive in this manner offers several benefits: liability protection where the captive writes insurance against legacy exposures unavailable in the current commercial market; preservation of the value of noncaptive historical insurance, as new captive policies are written excess of other available coverage; and potential tax benefits arising from the issuance of new policies."

Mr. Colombik noted that for owners preparing to retire or transition out of an industry, a captive can become a strategic asset for prospective buyers. A well-run dormant captive—particularly one paired with a commutation of liabilities—may demonstrate that historical risks were formally addressed, while also providing flexibility for future operations.

Mr. Osborne added that reactivating a dormant captive may involve fewer structural steps than forming a new entity, although regulatory approvals are still required.

"Many states have made it easier by relaxing reporting requirements and requiring only a small capital balance," he said. "However, there is still some work involved in restarting a dormant captive.

"I have been asked whether a dormant captive could be sold, and while the answer is yes, there is generally limited value in doing so compared to forming a new entity. Changing ownership involves a fair amount of work, and the time savings are not substantial."