Emerging Trends in the Construction Captive Insurance Market

Construction projects come with highly specialized risks that vary by project type, location, materials, and regulatory environment. Yet, it's often too difficult or too expensive to secure coverage for many of these risks in the traditional market.

That's where captive insurance comes in, enabling a construction company to design its own bespoke coverage that aligns with its specific exposures.

Traditional insurance markets tend to price construction risks conservatively, resulting in high premiums, restrictive terms, and volatile rate changes. Then, there's the issue of how long it takes to get a claim paid. Some insureds with large projects pay the insurer before the build starts. It may take them 3 years to get their certificate of occupancy. A construction defect claim could then be reported in the 9th year of construction, just before the 10-year statute of limitations is up. Finally, the claim might get paid 15 years after the policy was purchased.

With a captive, however, a company can retain its underwriting profits, reduce reliance on fluctuating commercial rates, and gain cost predictability.

"Contractors are dealing with higher premiums, bigger deductibles, and stricter contract terms," said Amber Walsh, captive insurance analyst at the Vermont Department of Financial Regulation's Captive Insurance Division. "By forming their own captive, they gain more leverage when negotiating with reinsurers and fronting companies, which helps customize the coverage and lowers claim costs. Since they have more skin in the game, they're also more motivated to put strong risk management strategies in place."

Steve Bird, director of risk management at Zachry Group, echoed the value of captive insurance, noting, "A captive insurance arrangement provides a tool for a contractor to structure its risk financing program while continuing to satisfy its contractual obligations. Other benefits include greater control over claims management, cost savings, and a more stable, long-term approach to addressing its risks."

Anne Marie Towle, CEO of global risk and captive solutions at Hylant, further highlighted their advantages. "Captives are a wonderful risk financing tool for many industries, particularly the construction industry.

"The benefits of captive insurance for construction risks include customized coverage—captives allow construction companies to tailor their insurance policies to cover specific risks such as extraordinary weather events, regulatory changes, physical damage to equipment, pollution, builders risk, property damage, general liability, supply chain breakdown, mold, legal defense, and employment practices liability.

"The next benefit is cost efficiency. By insuring themselves, companies can potentially reduce insurance costs, manage higher premiums, and avoid the inconsistencies in coverage found in the conventional insurance market.

"Then there is financial stability: captives can accumulate funds from premiums paid by the construction company, which can be used to cover losses. This can lead to better financial stability and the ability to invest surplus capital into other areas of the business."

Types of Construction Captives

There are essentially three types of captives available for construction companies: single-parent captives, group captives, and cell captives.

Each structure has its own benefits and drawbacks. Companies need to choose the right one based on their specific needs, including company size, risk profile, capital availability, financial objectives, and long-term strategic goals. A well-structured captive should ultimately serve the business's rational self-interest by lowering costs, improving risk management, and enhancing financial stability.

A single-parent captive is best suited for companies with sufficient premium volume—typically above $2.5 million—that want full control over their insurance program. This option is ideal for large construction firms or developers with significant retained risk and a long-term commitment to self-insurance. It allows for maximum customization and the ability to capture all underwriting profits.

For midsized construction firms that may not have enough premium volume to justify a stand-alone captive, a group captive provides an effective alternative. By spreading risk among multiple participants, group captives reduce volatility and increase buying power. They are particularly advantageous when like-minded firms share similar risk profiles and maintain strong safety programs.

"Group captives allow businesses to retain more of the underwriting profit and provide greater participation in the claims handling process," explained Jim DeWulf, executive vice president and captive executive at Captive Resources. "This can be especially beneficial for risks such as long haul trucking liability or general liability in high-risk industries like construction, which in the commercial market, tend to be underwritten more as an industry, versus a best-in-class group captive, which underwrites risks based on their own individual risk characteristics and loss history. This means the group captive member can drive its costs down by effectively managing risk and losses.

"Group captives support businesses in implementing more proactive, customized risk management strategies that specifically address their unique exposures. For example, a construction company may have specialized safety and risk mitigation protocols for pollution, construction defects, and contractual obligations, which can be integrated into the captive's coverage structure."

Rob Walling, principal and consulting actuary at Pinnacle Actuarial Resources, echoed this sentiment, noting, "There are a number of highly effective contractor-specific group captives. All of the participants improve each other through developing best practice safety and loss control for the whole group."

For companies seeking the advantages of a captive without the administrative burden and capital requirements of a stand-alone structure, a cell captive offers a flexible option. It provides a plug-and-play solution, allowing companies to access captive benefits within an established framework. This model is ideal for firms looking to test the waters before committing to their own captive insurance company.

"We are increasingly seeing a consolidation of company captives into one single entity," observed Mr. Walling. "Previously, companies may have had multiple captives for different uses, but now they seem to be streamlining them all into one."

Traditional and Emerging Risks

Captives offer a flexible and cost-effective solution for both traditional and emerging construction risks. Among the main traditional coverages they can provide are as follows.

• General liability. Covers third-party bodily injury and property damage.
• Workers compensation. Provides coverage for employee injuries on the job.
• Commercial auto and fleet risks. Covers construction vehicles and heavy equipment.
• Professional liability (errors and omissions). Covers design errors, construction defects, and project management failures.
• Surety bonds and performance guarantees. Captives can be used to provide alternatives to traditional bonding solutions, offering more flexibility and potential cost savings.
• Environmental and pollution liability. Protects against hazardous material exposure and environmental damage claims.

"Captives are well suited to address certain types of construction activities for which commercial insurance underwriters have little appetite (for example, where there are substantial wildfire risks, windstorm risks, water intrusion, and other types of construction defect claims)," said Mr. Bird. "A construction contractor can set up a more stable, long-term approach to addressing such risks through a captive insurance arrangement."

As the construction industry evolves, new risks continue to emerge—many of which traditional insurers struggle to underwrite effectively or price competitively. Captives allow companies to fill these gaps and maintain greater control over risk financing. Key emerging risks include the following.

• Supply chain disruptions and material cost volatility. Captives can be structured to address financial losses stemming from delays or price surges in critical materials.
• Cyber-security risks. Captives provide coverage for cyber threats in construction, including data breaches, ransomware attacks, and compromised project management systems.
• Modular and prefabrication risks. Captives offer the flexibility to customize coverage for transportation, assembly, and quality control risks unique to off-site construction methods.
• Liability exposures influenced by social inflation. Captives can help manage the financial impact of rising legal costs, nuclear verdicts, and expanded liability claims associated with social inflation trends.

"Innovation in captives is a frequent topic of conversation amongst risk managers, and many rack their brains to develop strategies for leveraging the captive's powers," said Andy Stoelting, senior director of insurance and risk management at Webcor. "Many contractors have landed on medical stop loss in response to the rising cost of medical coverage.

"Others have taken on the risk of subcontractor default. When these risks are managed appropriately, they can provide a nice complement to tried-and-true construction risks."

Cyber Security

The construction industry faces a complex array of risks that continue to evolve and intensify. Chief among them is cyber security, with 42 percent of construction professionals identifying it as their top risk, according to QBE North America's 2024 Commercial Construction Risk Report. Construction firms have become prime targets for hackers.

This mounting cyber threat exists alongside persistent challenges such as financial pressures, workforce shortages, safety hazards, and supply chain disruptions—all of which collectively threaten project viability and industry stability.

One of the key cyber-security vulnerabilities is the rapid adoption of project management software, remote collaboration tools, and building information modeling technology without corresponding investments in cyber defenses. The risks extend beyond a company's internal systems—construction projects typically involve multiple subcontractors, vendors, and third-party platforms, each creating potential entry points for breaches. Intellectual property, financial data, and sensitive client information are all at risk. A successful cyber attack can disrupt or even cripple entire projects and companies.

To address these threats, construction firms must strengthen network protections, implement encryption protocols, and enforce strict access controls to prevent unauthorized system access. Additionally, companies should provide regular cyber-security training for employees and subcontractors and establish incident response plans that are fast, strategic, and well controlled.

Technology and AI

The adoption of technology, while highly effective and beneficial, introduces a host of new risks. These include emerging liability challenges, cyber vulnerabilities, and unforeseen system failures—all of which can lead to costly disruptions, legal battles, and reputational damage.

To manage these risks, construction companies need to be proactive. This includes ensuring clearly defined liability terms in contracts with technology providers, conducting rigorous testing and monitoring of new systems before full deployment, and integrating cyber-security measures into every phase of technology adoption.

Artificial intelligence presents both significant opportunities and emerging risks for the construction industry. While artificial intelligence (AI) has the potential to transform operations, it also raises concerns around liability, data privacy, and decision-making authority—issues the industry has not yet fully addressed.

Additionally, the rapid evolution of AI capabilities is outpacing current regulatory frameworks and standard construction contract language. This creates potential gaps in risk allocation and responsibility, with the possibility of substantial financial and legal consequences for construction companies adopting these technologies.

Financial Pressures

In addition to technological risks, construction companies face significant economic pressures. High interest rates, contract disputes, and lingering inflation contribute to inflated budgetary costs, putting heavy strain on already narrow margins.

"Without aggressive financial risk management, cost overruns can spiral, destabilizing projects and even threatening contractor solvency," said Wesley Sierk, managing director, Risk Management Advisors. "The solution? Tighter cost controls, strategic risk transfer, and proactive contract management—because hoping for budget stability isn't a strategy."

He added, "Interest rates are more than just an economic talking point—they directly impact project feasibility, capital availability, and investment decisions across the sector. Higher borrowing costs shrink margins, stall projects, and push already stretched budgets to the brink. For many firms, the real challenge isn't just managing today's interest rates but staying financially resilient amid unpredictable economic swings."

Financial stress is also hitting subcontractors hard. According to Billd's 2023 National Subcontractor Market Report, 46 percent of subcontractors cited cash flow issues as a major challenge. Additionally, 28 percent of subcontractors who did not plan to grow their businesses in 2023 pointed to limited access to financing and inconsistent cash flow as key reasons. For large projects, this risk is even more pronounced, with a handful of key subcontractors carrying substantial financial weight. If one fails, it can send shockwaves throughout the project, leading to costly delays, contract disputes, and performance security concerns. To mitigate this risk, construction firms must proactively assess subcontractors' financial stability before bringing them on board.

Labor Costs and Shortage

The construction industry is facing significant labor challenges. According to Associated Builders and Contractors (ABC), the industry will need to attract an estimated 439,000 new workers in 2025 just to meet demand. Compounding the issue, nearly 1 in 4 construction workers—22.7 percent—are over the age of 55, based on data from the US Bureau of Labor Statistics. As retirements accelerate, firms are struggling to recruit replacements, leading to delays, cost overruns, and fierce competition for talent.

To retain workers, companies are raising wages, enhancing benefits, and offering retention incentives—steps that, while necessary, drive labor costs higher and squeeze already thin margins.

"Fewer skilled workers mean more inexperienced personnel on-site, leading to lower productivity, as training needs slow down workflows, and higher accident rates, as newer workers struggle with safety protocols," said Mr. Sierk. "It also results in increased liability exposure, with a greater risk of costly claims, and without strong training programs and proactive risk management, labor shortages aren't just [a human resources] problem—they're also a financial and operational crisis."

Construction workers also face hazards that can result in both immediate injuries and long-term health issues surfacing years later. Exposure to silica dust, asbestos, chemicals, noise, and ergonomic stressors contributes to chronic conditions such as respiratory diseases (including silicosis and lung cancer), hearing loss, and musculoskeletal disorders from repetitive strain.

"These aren't just human costs—they're financial liabilities," said Mr. Sierk. "Firms that fail to protect workers today may face massive legal claims down the road, just as industries like manufacturing and mining have seen."

Regulatory Hurdles

Construction firms must constantly adapt to evolving building codes, safety standards, and environmental laws. High-profile failures, such as the Grenfell Tower fire in the United Kingdom and the Surfside condominium collapse in Florida, have led to heightened regulatory scrutiny. Grenfell Tower prompted sweeping regulatory reforms in the United Kingdom, including the Building Safety Act 2022, while Surfside accelerated conversations about stricter safety inspections and recertification requirements in various US jurisdictions, particularly Florida.

Failure to comply with these changing regulations can result in fines, legal penalties, and project shutdowns. To navigate this regulatory minefield, companies need more than just a checklist mentality—they must foster a culture of compliance at every level.

Supply Chain Issues

Material prices continue to be one of the most significant budget disruptors in construction. According to the Associated General Contractors of America, construction material costs increased by over 19 percent in 2022, and while inflation has eased since, prices remain elevated and unpredictable in 2024.

Contractors are often faced with a difficult choice: absorb rising prices and see profit margins shrink, or pass costs on to clients and risk losing bids.

"Long project timelines make cost estimation a gamble," said Mr. Sierk. "Prices can shift dramatically between bid and execution, leaving firms exposed to financial risk. The smartest construction companies are adapting with early procurement to lock in prices before volatility strikes and price escalation clauses to shift risk contractually.

"They are also using alternative materials that offer more cost stability and hedging strategies to mitigate extreme price swings. At the end of the day, budgeting in construction isn't about predicting costs—it's about managing the unpredictability."

Quality Control

Cutting corners on quality is a fast track to costly rework, warranty claims, and legal disputes. According to a 2023 Dodge Construction Network report, construction defects, poor specifications, and material failures are leading contributors to project disputes and increased costs. The biggest risks stem from substandard materials, rushed schedules, lack of proper oversight, and inadequate quality control processes. Quality failures not only impact the bottom line—they can also damage a firm's reputation and client relationships.

To mitigate these risks, construction companies must set clear quality standards from the outset, verify materials, and enforce proper installation practices. Frequent inspections at each stage of the project, along with thorough testing and commissioning before project handoff, are essential.

Another concern is subcontractor default, where a subcontractor's actions result in a claim after they've completed their portion of the project—leaving the general contractor responsible for the liability.

"General contractors may need to deal with the risks of their subcontractors in various forms, which introduces other parties into the equation," said Aaron Koch, principal and consulting actuary at Milliman. "Finally, construction is one of the rare industries where the insurance risk doesn't end when the product is complete, as various defect-related liability exposures may exist for a period of years after project completion.

"I'd say it's these latter two aspects (the complex web of parties that can be involved and some of the post-project exposure with a 'long tail' of years where risk may emerge) help set apart construction-related insurance from peer industries."

Design-Build Risks

Design-build and integrated project delivery (IPD) models offer the promise of greater efficiency and collaboration, but they also introduce unique risks.

In a design-build model, the owner signs a single contract with one entity—the design-builder—that handles both the design and construction phases of the project. This streamlines communication and can accelerate timelines, but it also blurs the lines of responsibility between design errors and construction defects.

In IPD, the owner, contractor, designers, and often key subcontractors or suppliers all enter into a shared contract. Under this model, all parties share risks, rewards, decision-making, and financial incentives. While highly collaborative, IPD contracts can create complex liability exposures and require careful coordination.

Key risks associated with these models include the following.

• Limited insurance coverage. Many standard policies are not designed to fully address the combined design and construction liabilities in design-build and integrated project delivery models. Without tailored coverages, firms may face gaps, particularly in areas like professional liability.
• Cascading delays and liquidated damages. A single issue can ripple through the entire project, triggering costly penalties and contractual fines.
• Complex risk concentrations. Larger, more integrated contracts mean higher stakes, tighter margins, and greater financial exposure.

"Success in design-build requires more than just coordination—it demands advanced risk management," said Mr. Sierk. "That requires stronger design review processes to catch potential flaws early, clearly defined roles and responsibilities to avoid liability disputes, and specialized insurance solutions that address the unique risks of integrated delivery.

"Done right, design-build streamlines projects and drives innovation—but without proper risk controls, it can quickly become a financial minefield."

Insurance Squeeze

The construction insurance market is tightening, with premiums rising—driven in part by the growing frequency of nuclear verdicts. Jury awards exceeding $10 million in cases involving jobsite injuries, defective construction, and environmental damage are becoming increasingly common. For contractors already working with slim margins, these soaring insurance costs add yet another financial strain.

At the same time, coverage limitations and exclusions are leaving firms exposed to significant gaps. Design-build risks remain particularly difficult to insure, often forcing companies to self-insure or assume more risk themselves. Additionally, heightened underwriting scrutiny means contractors must demonstrate strong risk management practices to access favorable terms and pricing.

"To stay ahead, firms must take a strategic approach to risk transfer," said Mr. Sierk. "That means they must work closely with insurance advisers to structure tailored coverage, strengthen internal risk management programs to secure better terms, and explore alternative risk solutions, including captives, to regain control over rising costs.

"Insurance is no longer just a cost of doing business—it's a strategic asset that, if managed properly, can protect margins and keep projects moving.”

Managing Construction Risks

Mr. Sierk emphasized that when handling construction risks, companies should take a proactive, data-driven, and financially strategic approach. This ensures that risks are not only transferred but also effectively mitigated—and, in some cases, strategically retained.

Mr. Sierk recommends a five-step approach to managing construction risks. The first step is risk identification and assessment. Companies should conduct thorough pre-project risk assessments to identify potential exposures, such as safety, contractual, environmental, and financial risks. They should also use historical claims data, site-specific factors, and industry trends to quantify those risks.

The second step involves loss prevention and safety programs. Firms need to implement strict safety protocols and enforce Occupational Safety and Health Administration-compliant procedures, as strong safety protocols contribute to the long-term financial success of any project. Training programs, on-site audits, and technology tools—such as wearables, drones, and AI analytics—should be used to improve safety. Companies can also create incentive programs to encourage employees and subcontractors to prioritize safety.

The third step focuses on contractual risk transfer, insurance, and captives. This includes ensuring ironclad contract language that clearly defines risk allocation between owners, contractors, and subcontractors. Firms should use hold harmless agreements, indemnity clauses, and appropriate insurance policies to minimize liability exposure. Structuring a captive insurance program allows companies to retain predictable losses and cover risks that are expensive or unavailable in the commercial market. Firms should also optimize the balance between self-insurance, excess coverage, reinsurance, and alternative risk transfer mechanisms, such as parametric insurance.

The fourth step is active claims management and loss control. Companies should maintain control over claims handling and litigation strategy to reduce costs and ensure fair resolutions. Establishing a dedicated claims team for rapid response and mitigation is essential. Early intervention strategies help prevent minor claims from escalating—many employees don't want to sue; they simply feel unheard and see litigation as their only option. Predictive analytics, telematics, and AI-driven risk modeling can be used to forecast and mitigate high-risk scenarios before they occur.

The fifth and final step involves financial considerations and risk diversification. Companies should fund their captives adequately, contributing premium levels comparable to traditional insurance, particularly in the first few years. Setting up loss reserves within the captive will help smooth out risk volatility over time. Where possible, firms should diversify risk across multiple projects and geographies to avoid overexposure in a single area or market cycle.

Mr. Koch further emphasized the importance of grounding risk management strategies in solid data. "The first question we ask when looking at a construction program is 'What is the best historical data that is most comparable to this project (or set of projects) for the upcoming year?'" he explained. "Sometimes it's directly what the contractor has done in prior years; sometimes they're working in a newer area, and we need to bring in industry information.

"Having a good initial estimate of the project(s) size and time to completion is also essential, so that we can appropriately model out the risks that are expected to emerge during the course of the project (e.g., slips and falls or injuries to passersby) versus the ones that might emerge after the project is complete (e.g., defects in construction)."

Future of Construction Captives

Looking ahead, Mr. Sierk anticipates continued growth in the use of captives, with more firms—particularly midsized contractors—turning to group captives and cell structures to help offset rising insurance costs. He also expects to see an expansion in the types of coverages captives provide, extending to areas such as design-build liability, subcontractor default, professional liability, and supply chain risks.

As captives become more widely adopted, Mr. Sierk noted that they will likely face increased scrutiny from state regulators and tax authorities. This will require firms to ensure their captives are properly structured and compliant with regulatory expectations.

Looking further ahead, Mr. Sierk predicts, "Firms will expand captives to cover cyber security, environmental liability, and reputational risks—areas where traditional insurance markets are weak.

"More captives will integrate data-driven parametric insurance solutions to cover weather-related delays, supply chain disruptions, and other event-based risks.

"As more firms seek captive solutions, expect cooperative captives where multiple construction firms pool risk for better economies of scale."