Captive insurance is provided by a company that has been formed by a larger parent company specifically to care for risk management needs. This sort of insurance is not given to the public, but instead serves as an alternative risk management solution for companies who do not want to use traditional insurance. Large and small businesses alike stand to benefit financially and otherwise by using captive manager to handle their risk management in house.

A few companies have found that the costs of purchasing an insurance policy actually outweigh their potential losses. Forming captive manager companies permits a business to notably reduce its spending on insurance policies. Insurance rates are calculated using the financial risks of a company, but if one business has much less risk than another in its industry, it may wind up paying more than is necessary simply because of insurance company policies. They also have to add to premiums and rates in order to make up for overhead costs and make a profit. This pricing inefficiency does not occur with the agencies. Captive agencies are able to make operating policies that are not full of the legal red tape that make most insurance policies so hard to deal with.

Captive insurance arrangements must come under the requirements of contract, insurance, and tax laws. For example, if an established business forms a sister company for use as a captive manager company, the two must be completely separate in legal and tax terms. The captive company must be handled as an insurance company in order for the insured to claim deductibles for their payments on their taxes.

There are several different types of captive insurance agencies. When a single parent captive agency is formed, it sells its policies only to its parent company. An association captive company is created by several different companies in an industry; the insurance they provide benefits their members. Normal insurance companies can also protect themselves from the risk of many clients simultaneously demanding huge compensation payments. To care for this financial risk, they form their own agency captives. If an insurance company has enormous losses, they can share those losses with their subsidiary captive agency.

Captive insurance can allow a company to form a strong risk management plan without requiring them to pay exorbitant rates to insurance companies. These subsidiary companies make possible insurance for employee benefits, product liability, physical property damage, professional indemnity, and more.