The hospitality sector has seen significant growth in captive insurance options, extending beyond employee benefits to property and casualty coverages. This includes workers’ compensation, general liability, property insurance, and other specialized lines such as management liability and contingent business interruption insurance.

For Tribal-owned hospitality businesses—including restaurants, hotels, and casinos—captive insurance structures offer a unique way to transfer risk from their operations to a captive entity. But what exactly is a captive, and is it the right choice for your business?

Understanding Captive Insurance

Originally developed to cover uninsurable risks faced by large companies, modern captives act as alternative insurance companies that fund their owner’s risks. In recent years, captives have gained traction due to tightening commercial insurance markets and limited traditional insurance options. They now cover additional insurance lines and provide broader capacity with lower premiums, making group captive solutions accessible to a wide range of industries for shared risk management.

Businesses establish captives for several reasons, including reducing overall risk costs, covering gaps where commercial insurance is unavailable, capturing underwriting profits and investment income, and accessing reinsurance markets. Captives are typically set up in jurisdictions with favorable regulations and low capital requirements, which helps streamline regulatory processes compared to traditional insurers. These jurisdictions also offer established support networks for management, legal, and actuarial services.

Benefits of Captive Solutions

For hospitality companies, managing an array of risks is increasingly difficult in the conventional insurance market, both in terms of securing coverage and managing rising costs.

With frequent natural disasters like wildfires, earthquakes, and extreme weather pushing up insurance costs in the U.S., captive insurance can be especially beneficial for hotels, casinos, and restaurants located in high-risk areas. The lack of contingent business interruption coverage in the traditional market has also fueled interest in captive solutions for hospitality businesses.

A captive allows hospitality firms to retain a portion of their risk while pre-funding anticipated losses. This approach provides access to a wider reinsurance market with capacity that may otherwise be unavailable. Captive members can also benefit financially from any underwriting profits if actual losses are lower than predicted by actuarial analyses.

Tribal businesses may also partner with independent third-party administrators, offering greater control over the claims process and potentially enhancing the captive’s profitability.

Is a Captive Right for Your Business?

While captives can meet risk management and financial goals for many restaurant, hotel, and casino groups, they are not a one-size-fits-all solution.

Businesses with strong risk management practices are generally better suited for captives. Hospitality firms should consider the following when evaluating captive options:

• Financial Readiness: Captive members must be able to allocate enough collateral to pre-fund their risk exposure for at least three years, along with paying standard premiums.
• Loss History: Captives allow companies with lower claims frequency to potentially recoup some premium costs. Businesses with a history of high claims and a loss ratio above 60% may not benefit from captives.
• Strength of Risk Management: Since captive members retain significant risk, firms must have confidence in their risk management processes and be comfortable with their loss projections.
• Consultation with Experts: Engage a captive consultant to evaluate the company’s fit and learn about captive structures and available coverage. Consultants often review the past five years of loss history to help determine whether a captive solution is suitable.
• Finding the Right Partners: Since captives involve risk-sharing, it’s crucial to select a captive with members that also prioritize risk management.

By working with a knowledgeable consultant and exploring options that align with their risk management goals, Tribal-owned hospitality businesses can assess whether a captive insurance model is the right strategic move.