Why More Fleets Are Looking at Captives

To understand why captives and alternative risk structures are drawing so much attention from fleets right now, it helps to start with an uncomfortable fact about the insurance industry itself: commercial auto liability hasn’t been profitable on an underwriting basis since 2010, when the loss ratio came in at 97.1%. That’s a razor-thin 2.9% margin.

So how do insurance companies stay in business? Frank Kneeland, Senior Vice President of Sales at Reliance Partners, says the answer has less to do with underwriting than most fleet owners realize.

“Most of these insurers are essentially massive banks or investment firms,” Kneeland said. “They’re investing the premium dollars they collect, which is part of why many require a finance agreement or payment in full. They want that money working for them as soon as possible. That’s how they turn a profit even in a bad underwriting year.”

Captive and alternative risk structures are designed to change that dynamic. Rather than handing premium dollars to a traditional insurer and hoping for the best, a fleet that joins a captive retains more responsibility for its own losses. In exchange, the fleet shares in the financial results of the program.

“You’re returning the underwriting profit, the unspent premium, and the investment income that accrued over the term back to the fleet instead of the insurer,” Kneeland said.

According to Kneeland, this has a massive effect on the entire interplay between a fleet and its broker. “It changes the conversation from simply comparing premiums to looking at the fleet’s total cost of risk: claims, expenses, reinsurance, performance, all of it,” Kneeland said. 

That, in turn, changes what a broker actually needs to understand about a client’s operation. 

“We have to understand how the fleet operates, how claims are handled, and whether its leadership is prepared to manage risk over the long term,” Kneeland said. “A captive can create more control and more upside, but it also requires engagement and discipline.”

Explained simply, a captive gives a fleet a more active role in funding its own insurance losses. In the standard market, performance is pooled whether a company likes it or not.

“Everyone in the standard market is affected if the larger group of insureds performs poorly. Even the best operators running clean can see an increase because of everyone else in the pool,” Kneeland said. “Generally, the bottom 30% of performers end up offsetting everyone else, because auto claims can be so large.”

A group captive narrows that pool dramatically. “When you enter a group captive, you’re shrinking the group down to a very limited pool of best-in-class operators,” Kneeland said. “You’re cutting off the members who were dragging down the standard market the most, while allowing everyone left to share in the underwriting profit and keep rates stable year over year.”

That stability, Kneeland said, draws in the fleets who ultimately become strong candidates. It inherently appeals safety-focused operators who feel like they’ve been subsidizing worse performers for years.

Even among brokers, Kneeland said, there’s a persistent misunderstanding about what a captive actually promises. 

“The goal isn’t really about hoping to share in some theoretical underwriting profit,” Kneeland said. “In reality, you’re retaining a higher level of risk, making the interest on your insurance dollars work for you instead of the insurer, and building a claims team you can actually hire and fire as needed. That’s something you never had that level of control over in the standard market.” 

The predictability is just as vital as the cost. One of the biggest goals of a captive program is a renewal that fleets can plan around, rather than the kind of blindside still common in the standard market. Many carriers give no indication that anything unusual is coming, then deliver a massive increase just days before the policy renews. A surprise like that can be devastating to a fleet, especially given the thin margins and bottlenecked cash flow that characterize the industry.

Control extends well beyond the balance sheet. Kneeland points to the connection between safety performance and insurance outcomes as one of the most underappreciated benefits of moving into a captive. 

“In the standard market, a fleet may feel like its investment in safety isn’t reflected in its pricing,” Kneeland said. “In a captive, members have much more visibility into the program’s losses.” 

The advantages apply to a lot more than cost control, too. Fleets that make the move also gain better access to claims data, more active loss-control support, and a longer-term view of their own risk profile.

If your fleet is exploring a captive for the first time, Kneeland breaks the process into three stages: discovery, quoting, and timing.

Discovery starts with understanding a fleet’s operations, current program, financial capacity, and goals, followed by a review of loss history and standard underwriting information to determine whether the risk is even suitable for the structure. From there, the quoting process involves underwriting, actuarial analysis, a review of the captive’s rules and financials, collateral requirements, and working through reinsurance and fronting arrangements.

How long that takes depends heavily on the path. “If a fleet is joining an established group captive, the process may take a few months, depending on how quickly we’re able to get the necessary information,” Kneeland said. “A new program or structure can take considerably longer.”

Timing the start of that process matters just as much as the process itself. 

“I like to start this mid-term rather than trying to line it up with the renewal date,” Kneeland said. “This is a more complex product, and clients join because of the benefits it provides, but there’s generally more up-front cost because of collateral requirements. Not being boxed in by a deadline lets the company really learn and understand the commitment before the pressure of a renewal is bearing down on them.”

If there’s one blind spot Kneeland keeps running into, it’s a fixation on premium at the expense of everything else. “Total cost of risk — that’s the piece so many fleets miss, because they’re so focused on the premium number that they don’t look at the full picture,” he said. 

The full picture includes losses retained through deductibles, funding collateral, and the expenses that come with absorbing claims.

Kneeland sees one trend in particular gaining traction for the wrong reasons: Risk Retention Groups. 

“These are a hugely important part of the conversation right now,” Kneeland said. “A lot of these have incredibly weak financials, an enormous number of exclusions, and no backing from any state guaranty fund.” 

Saving a small amount on premium can be a poor decision if a fleet hasn’t actually evaluated the program. 

“The right comparison isn’t one premium against another,” Kneeland said. “It’s the full cost, the protection being provided, and how the structure fits the fleet’s risk and financial capacity.”

Why Now

The trucking insurance market’s volatility over the past several years hasn’t gone unnoticed, and Kneeland sees a direct line between that volatility and the growing interest in alternative risk. “When the traditional market gets volatile, fleets start asking whether there are other ways to finance risk and gain more control over their insurance costs,” he said. “Alternative risk structures give qualified fleets a way to take a longer-term view and connect their own performance more directly to their insurance results.”

What’s the underlying cause? “Honestly, I just think the traditional market is such a mess right now that more companies than ever are trying to find ways to control their costs and get rewarded more fairly for their safety efforts,” Kneeland said.

Getting Started

If you’re a fleet owner or manager and you’re sitting on the fence, Kneeland’s advice starts before any underwriting data gets pulled together. 

“Have a very honest conversation about your fleet’s current safety program and your overall cost of risk,” he said. “Without a strong safety program, this isn’t going to be the right fit.”

From there, timing becomes the central issue again. “We have to start these conversations early, so the fleet actually understands its options,” Kneeland said. “We don’t want to start this a month before renewal and expect results. Most brokers don’t even present this option or explain it the right way, so education and really understanding the risk matter enormously.”

And for fleets that wait too long to have that conversation, Kneeland said the cost is easy to overlook because it’s invisible. “If you’re a best-in-class operator paying standard market rates with practically no claims, you’re losing underwriting profit, losing the investment income on your own premium, and you’re probably still getting rate increases anyway.”

If you want to dig deeper into captives and alternative risk, you can follow Kneeland’s weekly breakdowns on LinkedIn, where he regularly unpacks these structures for the trucking industry.

Click here to learn more about Reliance Partners.