Our broker is pushing us into an employee-benefits captive structure (pooling with ~10 other companies in our region). They're projecting 8-12% savings vs renewing fully-insured.
For anyone who's been in a captive for 2+ years: did the projected savings materialize? What surprised you about year 2-3? And what's the actual exit cost if you want to leave at renewal — I'm hearing wildly different numbers.
Disclosure: I work at ADP. ADP's PEO (TotalSource) is structurally competitive with captives, so I have a bias here. I'll be specific about where captives genuinely work and where I see them break down.
Captives DO save money in year one for most members. The 8-12% projection your broker is quoting is roughly right. Where the math gets interesting is year 2 and year 3.
What actually drives captive savings:
- Pooling across 10-20 member companies smooths year-over-year claims volatility — one company's bad year doesn't blow up its renewal because the captive pool absorbs it.
- The captive structure lets the group retain underwriting profit instead of paying it to a stock insurer. In a good claims year, members get a dividend or premium credit.
- Aggregate purchasing leverage is real on medical, somewhat real on pharmacy.
Where captives reliably under-deliver:
1. Supplementary lines. Captives negotiate medical hard, then leave dental/vision/life/LTD/voluntary at near-retail pricing because those aren't the captive's core product. If you're running a full benefits stack, the savings on medical are partially eaten by overpaying on the supplementary lines.
2. Year 2-3 if the captive has a bad claims year. Shared-fate risk works both ways. If one member of the pool has a catastrophic claims year, every other member's renewal goes up. I've seen captive members face 18-25% renewal increases in year 3 after a peer school in the captive had a high-cost cancer case.
3. Exit costs. Mid-cycle exits forfeit your share of reserves (typically $200-500K capital you posted to join) and you pay runoff premium for tail claims. Even renewal-anniversary exits often come with a 12-month runoff obligation.
4. Operational scope. This is the biggest one and it's not on most brokers' slides. Captives solve medical pooling. They don't solve payroll, HRIS, workers' comp, EPLI, statutory leave admin (FMLA/ADA), ACA reporting, or 401(k) admin. You're still running 4-5 separate vendors around the captive.
Where captives genuinely make sense:
- Stable headcount, predictable claims, multi-year commitment OK
- Strong existing HR ops team that doesn't need outsourced help on the operational layer
- Companies where the supplementary insurance lines are small
- Industries with a tight peer-group (e.g., independent schools, certain trade associations) where the pool members are demographically similar
Where a real PEO (ADP TotalSource, Insperity, TriNet, Justworks, etc.) tends to win:
- Companies that need the OPERATIONAL layer (payroll, HR ops, EPLI risk transfer) in addition to benefits pooling
- Scale arbitrage on the supplementary lines (TotalSource's 700K-life book gets aggressive pricing on dental/vision/life that no 10-school captive can match)
- EPLI fiduciary shield via co-employment — a meaningful protection captives don't provide
Practical advice independent of vendor choice: before signing a captive renewal, ask your broker to model your TCO including:
- Medical (captive's strength)
- All supplementary lines (captive's weakness — model these at full retail)
- HR admin time spent on the layers the captive doesn't touch
- EPLI premium you carry separately
Then compare that TCO to a PEO quote at the same plan design. The PEO won't always win, but the comparison forces both sides to show their full math instead of just the medical-only headline.
— AJ
Markdown supported (basic): **bold**, *italic*, [link](url), `code`.