What is an employee benefits captive?

Health plan decision-makers at midsize employers have more funding options than ever, but most come with significant tradeoffs. 

• • • • • Fully insured health plans offer predictable, fixed premiums, but employers have little visibility into what’s driving healthcare costs.  
        • Traditional self-funded health plans provide transparency and the potential for savings but expose employers to volatility when large claims hit.  
        • Level-funded health plans are the worst of both worlds; some risk with little reward. 

As medical and pharmacy costs continue to rise and large claims become more common, employers find these tradeoffs harder to accept.

Employee benefits captives have emerged as a strategic alternative that preserves the savings potential of self-funding while reducing volatility through shared risk. This article explains how captives works and why more CFOs and HR leaders are evaluating captives as an alternative to traditional health insurance. 

Key takeaways 

• • • • • Employee benefits captives apply a member-owned, group self-insurance structure to healthcare, allowing employers to self-fund while pooling risk with other employers. 

        • When combined with stop-loss insurance that caps catastrophic claims, the captive serves as a shock absorber for healthcare costs, absorbing volatility from mid-sized claims while protecting against large, unexpected claims. This keeps healthcare costs more stable and predictable over time. 

        • Size and scale are essential in a benefits captive because they spread risk across a larger pool, enabling protections no single employer can get alone. In a small captive, one or two large claims can destabilize the entire pool. A smaller captive can mean more rate volatility for everyone, even employers with good performance. 

What is captive insurance? 

Captive insurance is a group self-insurance arrangement owned by members. Captive members pool resources to self-insure collectively. Pooling risk means that one member’s high claims are offset by others with lower claims, reducing year-to-year cost volatility for all members. Because the captive is member-owned, profits (if any) from the risk pool are reinvested or returned to members, creating added value beyond typical insurance. Members also share losses.

Where did the term “captive” come from?

Captive insurance gets its name because the insurance company is captive to its members. It’s owned and controlled by the employers it covers. Therefore, it exists solely to serve member needs, not outside customers or shareholders. 

What is an employee benefits captive member? 

An employee benefits captive Member is an employer that joins a group-owned captive insurance company to self-insure health benefits alongside other like-minded employers. Members contribute capital, share in the risk pool, and gain access to protections and savings unavailable in traditional insurance.

What are the most common types of captives?  

The three most common uses of captive insurance include:  

• • • • • • Employee benefits captives: Are member-owned insurance entities that allow small and midsize employers to self-insure employee health benefits—primarily medical and pharmacy claims—while pooling risk with other employers. These captives offer enhanced protection from large claims, reduce volatility, and provide access to cost-containment strategies typically only available to large organizations.
          • Property & casualty captives: Are member- or company-owned insurance entities formed to self-insure traditional business risks such as workers’ compensation, general liability, auto liability, and professional liability. These captives allow businesses to retain underwriting profits, gain greater control over risk management, and reduce insurance costs over time.
          • Captives for emerging or hard-to-insure risks: Used to insure harder-to-cover or emerging risks, such as cybersecurity, supply chain disruption, environmental liability, or other operational risks. 

What is an employee benefits captive? 

An employee benefits captive is a captive insurance arrangement used to manage and finance employee benefit programs. 

Employee benefits captives may be: 

• • • • • • Owned by one or more employers, or  
          • Sponsored or owned by a broker, carrier, or third party 

How do employee benefits captives work? 

Employee benefits captives are structured in three layers designed to balance cost, risk, and control. 

Employer layer	Small, routine claims	Employers self-fund their health plan, paying routine medical and pharmacy claims directly rather than fixed premiums to an insurance company. A third-party administrator (TPA) processes medical claims, and a pharmacy benefit manager (PBM) manages prescription drug programs and rebates.
Captive layer	Mid-sized claims	Employers contribute to a shared risk pool that covers mid-sized claims across all captive members. When claims are lower than expected, savings are shared; when claims are higher than expected, losses are shared up to the pool’s defined limit.
Stop-loss insurance layer	Large, unexpected claims	A stop-loss insurance carrier covers large, unexpected claims above what the captive layer covers. This places a clear cap on each employer’s maximum annual liability.

 

What is a third-party administrator (TPA)?

A TPA runs the day-to-day administration of a self-funded health plan, including claims processing and member support. The TPA does not insure the plan. In a self-funded plan, the employer funds the claims and stop-loss insurance protects against large, unexpected claims.

What is a pharmacy benefit manager (PBM)?

The PBM manages prescription drug programs on behalf of insurance plans. They determine which drugs are covered, negotiate rebates with manufacturers, and work to control costs for employers and employees.

What is a stop-loss insurance carrier? 

A stop-loss insurance carrier is an insurance company that protects self-funded employers by covering large or unexpected claims.

What is a shared risk pool and why does the quality matter? 

A shared risk pool is used to cover a defined layer of healthcare claims, allowing risk to be spread across the group rather than a single employer. 

The quality of a risk pool depends on its size and diversification. Smaller or less balanced pools are more susceptible to cost swings. Comparatively, larger, more diversified pools can absorb claim variability more effectively. This makes healthcare costs more predictable from year to year. 

When evaluating employee benefit captives, employers should look for a captive that is: 

• • • • • • Designed specifically for employee benefits
          • Built with sufficient size and scale
          • Proven to perform to weather volatility

What happens when claims perform better (or worse) than expected?  

When claims are lower than expected, the participating employers keep the savings the captive generates (rather than an insurance company).

When claims are higher than expected, costs within the captive are shared across the group. This reduces the financial impact on any single employer. Stop-loss insurance protects against claims that exceed the captive’s coverage. This places a clear limit on how much an employer can be responsible for in a given year. 

Some captives collect more funding than necessary and return excess dollars later. While this can look like savings on the surface, it ties up employer capital and reduces the overall efficiency of the arrangement. A well-managed captive is designed to strike the right balance, funding enough to manage risk without consistently overfunding or underfunding.  

Things to look for in a well-performing captive 

Not all employee benefit captives are created equal. Structure, governance, and scale matter as much as the concept itself.  

Some captive arrangements marketed as employee benefits captives are property and casualty (P&C) captives retrofitted for healthcare, which can create risk structures that aren’t well suited for healthcare. P&C captives were originally designed to cover rare, unpredictable events, like property damage or lawsuits.

Healthcare costs work very differently. They occur frequently and follow more consistent patterns. When a P&C captive structure is used to manage and finance employee benefit programs, it can add unnecessary complexity, require more capital, and make it harder for employers to see what’s truly driving healthcare costs. 

Other employee benefits captives lack sufficient scale or diversification, leaving members exposed to volatility and the potential for a “death spiral,” where higher claims drive employers with lower risk out of the captive.

For midsize employers, the question is not “should we consider a captive?” but “which captive structure is built to perform over time?”   

What is a ParetoHealth captive? 

ParetoHealth unites employers with 50-1,000 employees into one strong, like-minded community that unlocks a better way to reduce volatility and lower overall health benefits costs. 

In healthcare, scale matters. As the largest and fastest growing community of its kind, ParetoHealth’s scale gives employers greater negotiating power, stabilizes the risk pool, and unlocks access to cost-saving and benefit-enhancing solutions that would otherwise be out of reach. 

Instead of managing through reactive annual cycles of unexpected traditional health insurance premium increases, employers who self-fund with a ParetoHealth captive can redirect those efforts into building and executing on a multiyear strategy to reduce healthcare costs. 

What makes ParetoHealth different from other employee benefits captives?  

The proven power of the ParetoHealth captive model lies in its unmatched scale, the industry’s strongest risk protections, long-term healthcare cost reduction, and the strength of the ParetoHealth community. 

Scale to weather the storm

The ParetoHealth captive is three times larger than any other employee benefits captive. That scale is what gives our Members the strength to absorb volatility, avoid catastrophic surprises, and plan confidently for the future.

The industry’s strongest risk protections

ParetoHealth’s Risk Shield offers the best protections on the market including:  

• • • • • • • Stop-loss rate caps that limit how much an employer’s stop-loss premium can increase at renewal.
            • A guaranteed no new laser policy for the lifetime of an employer’s ParetoHealth membership.   

Other employee benefits captives may reference stop-loss rate caps or no-new-laser protections, but these are often limited to a single year. ParetoHealth has an unmatched track-record in offering these protections because of our size and scale.  

What is a laser?  

A laser is when a higher deductible is assigned to a specific individual in a stop-loss policy. For example, an employer could have a specific deductible at $50,000 and one enrollee lasered at $200,000. The employer is responsible for up to $50,000 for every enrollee except the lasered individual, for whom the employer is responsible for up to $200,000. A laser increases the risk exposure for an employer. 

Long-term healthcare cost reduction 

ParetoHealth’s Savings Engine addresses the root causes of high-cost claims. Backed by data, analytics, and in-house clinical experts, the ParetoHealth Savings Engine delivers curated programs and multiyear strategies that lower healthcare costs over time.

Strength of the Pareto Health community 

ParetoHealth unites thousands of like-minded employers who are committed to reducing healthcare costs, eliminating volatility, and taking control of their benefits strategy. This is more than a pooled risk arrangement. It’s a community of forward-thinking leaders who share a long-term mindset and a belief that better is possible. Through ongoing collaboration, data transparency, and proven cost-containment strategies, Members support each other’s success.

Our annual Members’ Meetings are one of many ways this community connects—offering peer insights, strategic guidance, and shared momentum to continue driving healthcare costs down.

What type of employer is a good fit for the ParetoHealth captive?  

The ParetoHealth captive is designed for midsize employers (50–1,000 employees), regardless of how they are funded today. It’s a strong fit for employers who fall into any one of the following categories: 

• • • • • • Employers who are fully insured, looking to lower fixed costs, gain claims and pharmacy rebate transparency, and access strategic levers to reduce healthcare spend. 
          • Employers who are in traditional self-funded arrangements, tired of volatility, exposure, and unpredictable stop-loss lasers. 
          • Employers who are level-funded, tired of high fixed costs and feeling stuck in the worst of both the traditional fully insured and self-insured worlds. 
          • Employers who participate in other captives that lack ParetoHealth’s size and scale, cost containment solutions, and community. 

The common thread? They’re midsize businesses with 50 to 1,000 employees asking two strategic questions: 

1. What can I do to lower my healthcare spend? 
2.  How do I get more value from every dollar I’m spending on healthcare? 

Learn more about employee benefits captives 

Employee benefits captives offer a proven middle ground for midsize employers stuck between the rising cost and limited control of fully insured plans and the volatility of traditional self-funding. They provide the transparency and flexibility employers want, while adding the shared risk and stop-loss protection needed to manage healthcare costs with greater confidence. 

ParetoHealth helps small and midsize employers achieve better outcomes than traditional insurance, reducing volatility and improving long-term healthcare cost performance. Thousands of employers have already joined the ParetoHealth community, and that shift continues to accelerate. 

Watch this short video to learn more about how employee benefits captives work.