Resilience and growth: Captives.Insure’s Reznicek on the US captive landscape

How would you characterize the current state of the US captive insurance market?

The US captive market continues to demonstrate remarkable resilience and growth, even in the face of increased regulatory scrutiny. What we're seeing is a market that has reached approximately 8,000 captives globally, with the US representing the dominant force in that growth. The sector has matured significantly, and we're collectively writing over $50 billion in premiums. More importantly, captives are consistently outperforming their commercial market counterparts, which validate the fundamental value proposition these vehicles provide. 

Can you elaborate on that performance differential? What specific metrics are driving this outperformance?

The numbers are quite compelling. According to AM Best's latest analysis, US captives maintained a five-year average combined ratio of 88.0 compared to 97.0 for commercial casualty insurers. Despite experiencing a 14% decline in net income in 2024 to $1.3 billion—which followed a remarkable 51% increase the previous year—captives continue to demonstrate superior operational efficiency. 

What's particularly striking is the value retention. Between 2019 and 2024, the captive composite added $4.6 billion to year-end surplus while returning $2.0 billion in dividends to shareholders. That represents $6.6 billion in insurance cost savings that organizations retained rather than paying to commercial insurers. When you consider that our clients typically retain 60 to 85 percent of their gross written premiums as reinsurance premiums, the value proposition becomes crystal clear. 

What market conditions are driving continued captive formations despite this scrutiny?

The traditional insurance market's ongoing challenges continue to fuel captive interest. We're seeing property reinsurance markets experience gradual softening, with risk-adjusted rate reductions benefiting buyers with favorable loss histories. However, casualty reinsurance remains challenging, with rates rising at double-digit levels driven by social inflation, adverse loss development, and escalating litigation costs. 

These conditions position captives as increasingly essential risk management tools. Vermont alone licensed 26 new captives by May 2024, bringing their total to 690. Cell captives are dominating new formations, while group and single-parent captives each account for an even split of the remainder of the market. Established domiciles like Tennessee, Utah, and North Carolina are also reporting strong growth. 

How have the recent court decisions in Swift v. Commissioner and CFM v. Commissioner affected the industry?

These decisions represent critical inflection points for the industry, and frankly, they've provided some much-needed clarity—albeit not the kind many hoped for. The Fifth Circuit's affirmation in Swift represents the IRS's ninth consecutive victory in micro-captive litigation. But it's important to understand that these cases extend beyond questionable structures to affect how all captive evaluations are conducted. 

The Swift decision introduced several significant analytical shifts. Most notably, the Fifth Circuit's categorical rejection of promoter advice as a basis for reasonable cause defenses creates unprecedented barriers to penalty relief. This emphasizes the critical importance of obtaining truly independent professional guidance rather than relying on potentially conflicted captive professionals with financial incentives tied to formation and ongoing management fees. 

The CFM decision represents a fascinating study in contrasts—it had everything Swift lacked yet still resulted in an IRS victory. Unlike previous cases, CFM featured credible expert actuarial testimony, with the court noting the "extremely unusual battle of the experts" as the Commissioner failed to provide his own expert calculations for reasonable premiums. Most significantly, the court categorically rejected the novel argument that Utah's regulatory determination of CFM as an insurance company should receive McCarran-Ferguson Act deference, emphasizing that state insurance regulation and federal tax qualification are entirely separate determinations. However, despite these structural strengths and expert support, CFM ultimately failed due to operational deficiencies.

Can you explain what you mean by ‘conflicted captive professionals’ and how that impacts the industry?

The court's analysis reveals how taxpayers' ability to utilize advice from conflicted professionals has become severely limited. The Swift decision establishes that reasonable cause defenses cannot be based on advice from promoters who benefit financially from the arrangement's implementation, regardless of their technical qualifications. This creates a fundamental challenge because many traditional captive service providers have inherent conflicts—they profit from formations and ongoing management regardless of whether the captive truly serves the client's best interests. 

Now, more than ever, it’s critically important that prospective captive owners engage with truly independent advisors to obtain unconflicted opinions. We regularly tell potential clients that captive insurance isn't appropriate for their situation. That's something you're unlikely to hear from a service provider whose revenue depends on completing the transaction.

What about operational standards? How has CFM v. Commissioner changed the landscape?

The CFM decision provides an even more detailed examination of what constitutes legitimate captive operations. Judge Holmes noted that while CFM was organized and regulated as an insurance company and was adequately capitalized, these positive factors were outweighed by fundamental operational deficiencies. 

The most striking aspect was the captive's president testifying that "he knew little of the operations" and "even forgot that he had appointed himself as CFM's president". This extraordinary testimony exemplifies how inadequate management involvement can undermine otherwise properly structured arrangements. 

The court identified several critical operational failures: failure to regularly issue valid and binding policies, untimely premium collection, and particularly problematic "haphazard handling of the few claims that CFM received". These deficiencies demonstrated that CFM failed to operate as a normal insurance company would, despite meeting formal requirements. 

What lessons should the industry take from these court decisions?

The fundamental lesson is that operational excellence must be the foundation of any captive program. The CFM decision is particularly instructive because it represents "a much closer call than is usual in microcaptive cases," yet still resulted in disallowance due to operational deficiencies. 

The court's analysis provides a roadmap for proper captive management: timely policy issuance, systematic premium collection, rigorous claims handling, and active management oversight by knowledgeable principals. These operational requirements reflect the principle that captives must function as genuine insurance companies, not merely tax-advantaged vehicles.

Both cases underscore that successful captive arrangements require more than structural compliance—they demand operational excellence and genuine business substance. Organizations considering captive solutions must prioritize operational substance over tax optimization and are strongly encouraged to engage with truly independent captive professionals during the due diligence process.

Where do you see the market heading for the remainder of 2025?

I expect continued captive market expansion driven by persistent commercial market challenges, recognition of captives' strategic value, and an ever-increasing risk tolerance of well-managed insureds. However, growth must be built on operational excellence and legitimate risk management needs rather than purely tax-motivated structures of nefarious promoters.

Leading domiciles continue attracting high-quality formations while the industry is becoming increasingly sophisticated. In the past 12 months, several US captive insurance domiciles have updated their statutes to enhance competitiveness and operational flexibility. Vermont, Louisiana, Tennessee, Connecticut, Delaware, and Utah have updated statutes. Notably, Alabama implemented a moratorium on new captive filings in March 2025 to ensure adequate regulatory infrastructure.  

Not quite for 2025, but myself and many others in the US are paying close attention to the regulatory framework that is developing in the UK.  There is still a long road ahead but, if implemented effectively, these reforms could reshape the competitive landscape of the captive insurance marketplace, offering new opportunities and challenges for US-based captives and the broader risk management community.

Any final thoughts on what distinguishes successful captive programs in today's environment?

Successful captive programs require three critical elements: experienced professional guidance from truly independent advisors, robust operational procedures, and genuine commitment to insurance business practices. The recent court decisions emphasize that quality beats quantity in every aspect of captive operations.

Organizations must prioritize operational substance over tax optimization and ancillary benefits. This means ensuring arrangements can withstand regulatory scrutiny while delivering genuine risk management benefits. The captive insurance market's continued strength reflects the fundamental value proposition these vehicles provide: enhanced control, cost efficiency, and strategic flexibility in an increasingly complex risk environment.

For sophisticated businesses evaluating captive solutions, the current environment presents compelling opportunities—provided they commit to the operational discipline and professional standards necessary for long-term success. As we often tell clients, captives aren't about what you can get away with; they're about what you can accomplish when you do everything right.

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