Written By: Alysha Webb
For more control and flexibility dealerships should consider alternative ways to finance risk, one of which is a captive insurance company.
Hurricanes in Florida and the southeast, wildfires in California, massive cyberattacks, and rising liability claims. These are just a few of the issues dealerships must insure against. With insurance premiums climbing and traditional coverage offering less certainty, dealerships are rethinking how they manage risk.
One way to mitigate the risk of rising insurance costs is to accept more risk. Such a strategy, sometimes known as a captive insurance company, isn’t for every dealership, but a captive does have significant benefits for those with the right profile.
In the recent webinar Transforming Risk Into Opportunity, Casey Fernandez, a client executive at global insurance company Hylant and Ken Rosenfield, founding partner at Rosenfield & Co., discussed the dealership insurance environment in general and how forming a captive may be the right move for some.
A captive is a tool, or one way to look at financing your risk, because that's all insurance is.
Captives are formed, he said, because a dealership figures it can beat the market in terms of how it controls that risk and, long-term, receive the underwriting profit an insurance company usually keeps.
A captive can save money and give a dealership more control and flexibility where its insurance is concerned.
On the cost side, a dealership or group with a lower-than-average claim history can recoup up to 40 percent of its insurance spend “rather than just giving that away to an insurance company,” Fernandez said.
The Benefits of Control and Flexibility
On the control side, the ability to construct an insurance policy with the desired capacity is one benefit.
Consider dealers in California, Fernandez said. Given the magnitude of the losses during the wildfires in Southern California, insurance companies may cut the amount of insurance coverage they are willing to give dealerships in 2026.
Or the insurance firms may pull out entirely, Fernandez said.
“So, there might be a real issue for some dealers out in California to get capacity that they need,” he said.
That has happened in Florida due to hurricanes, Rosenfield said.
With a captive, dealerships can craft their own policy with the proper capacity to address specific issues.
An good example is insurance to cover business interruption losses. To calculate lost business in Florida after hurricane season, most insurance companies want to look back over the last few months, Rosenfield said.
But those are the months when sales are generally lighter in Florida, he said. The big sales haven’t come yet.
However, “in the wintertime in Florida, service departments are really rocking and rolling,” Rosenfield said.
So, does the contract state that the interruption insurance looks forward for your busiest time or does it look backward to your slowest time?
“That can make a huge impact on what your reimbursement is,” he said.
Or consider the CDK outage, Fernandez said. Dealerships lost millions in sales to other dealers when those using CDK couldn’t process vehicle orders or repair orders for extended warranties, among other losses.
Not all dealers were covered for such losses, Fernandez said, as Contingent Business Interruption is not on all policies.
And even if they thought they were covered, to receive reimbursement dealers had to have taken specific actions upfront and followed specific rules.
Even when such “disasters” were covered, dealers couldn’t control how fast their insurance companies reacted, he said.
Do it Alone or with a Group?
There’s a phrase in the insurance world. If you’ve seen one captive, you’ve seen one captive. Captive insurance companies come in all flavors and types.
Insurance can be written to ensure against a multitude of events, but an event generally has to have actually happened in the past so an actuary is able to put a price on it.
Beyond that, there are single cell and group captives.
A single cell captive is like a single-family home, Fernandez said. You own it and can put whatever roof you want on it and paint it green or with polka dots so long as you take care of it.
If a dealership group opts for a single-cell captive, it should be spending at least $1,000,000 in premiums, Fernandez said, including Garage Keepers, Workman’s Comp and Dealer’s Open Lot, among others.
A group captive plan is more like an apartment within which you are renting space, he said. There will be rules to comply with. On the flip side, before joining a group insurance plan, do due diligence on the other members to ensure they are all financially sound, he said.
To have all the actuarial work done to set up a group plan, “you’re probably looking at $80 to $100 grand just to get out the door,” Fernandez said.
For a single point dealership or a group with a few rooftops that is spending up to $250,000 on insurance, spending as much as $100,000 to assess if a captive works “makes no sense,” he said. “The repayment of the benefit might be four, five, six years down the road. And that’s if you have a clean history.”
If a dealership is spending $400,000 to $500,000 on insurance, a group captive could be a good option, Fernandez said. “With most group captives, the good news is that the cost to entry is much lower than a single cell.”
Regardless of the type of captive, “you need to have a strong balance sheet, and you need to be available or be prepared to write a check if you have a big claim,” Fernandez said.
The CPA POV
There are potential tax benefits to forming a captive insurance company, including the ability to deduct premiums as expenses.
But there are upfront costs to establishing a captive, which will impact a dealership’s financial statement, Rosenfield said.
“But at the same time, if you’re doing self-insurance, you’re going to be moving liquidity to another section of your balance sheet to help pay for future losses,” he said.
Be sure to comply with individual state tax laws pertaining to insurance companies, or the country the captive is domiciled in, Rosenfield said.
“Each state’s different, so you’d have to comply with the state you’re domiciled in or if you’re offshore, there are other issues,” he said.
Tax benefits are not the main reason to form captive insurance company, however, Fernandez said.
“The reason to get into captive is you’re looking to transfer risk in a smarter, better way for your organization, and you get to reap the benefits, some of which include tax benefits,” he said.
As the insurance landscape grows more complex, forward-thinking dealerships are looking beyond the status quo. While captive insurance may not work for every dealership, understanding your options — and their financial implications — is the first step toward smarter risk management.
Whether you’re exploring alternative coverage models or simply want more control over your insurance spend, collaborating with both a knowledgeable risk advisor and your CPA can help you make the best move for your bottom line.
Did you miss the webinar?
Catch the full recording of “Transforming Risk into Opportunity” and download the slide deck to explore the key concepts behind captive insurance and what it could mean for your dealership.
🎥 Watch the replay
📊 Download the slides
Have questions or want to talk it through? Contact a member of our team for questions and expert guidance.