The Renewal Conversation Has Changed

If this year's renewal letter landed harder than usual, the data backs up that instinct. Mercer projects a 6.5% average increase in total health benefit costs per employee for 2026 - the largest single-year jump since 2010, more than double the roughly 3% average annual increase the industry had grown used to over the prior decade.

Without any plan changes, Mercer estimates the increase would have approached 9% - meaning the 6.5%figure already reflects cost-shifting and benefit trims employers made just to soften the blow.

Other forecasters tell a similar story from different angles: Aon projects average employer health costs will surpass $17,000 per employee in 2026, a 9.5% jump from 2025, and PwC expects medical trend to surge 8.5% for a third consecutive year. For small and mid-market groups specifically, renewal increases in the 8-15% range have become common, with some employers reporting hikes as steep as 50% on their medical line.

For HR leaders, this shows upas harder conversations with employees about cost-sharing. For CFOs, it shows up as a budget line that no longer behaves predictably year over year. Both functions are increasingly asking the same question: is there a funding structure that offers more control than a fully insured plan, without the full claims volatility of going self-funded alone?

For a growing number of mid-market employers, the answer is a captive.

What a Captive Actually Is

A captive is, at its core, an insurance company owned by the employers it covers. In the employee benefits context, a group of unrelated employers - often in similar industries, of similar size, or simply recruited by the same advisory firm - pool a defined layer of risk into a jointly owned entity. Each member typically remains self-funded for routine, predictable claims, but the captive absorbs claims that fall into a shared, mid-level risk band, with traditional stop-loss insurance still covering the most catastrophic claims above that.

The mechanics borrow from both worlds. Like self-funding, members keep day-to-day control over plan design, vendor selection, and claims data. Like a fully insured arrangement, members get protection from being wiped out by one bad claims year - but instead of paying a carrier for that protection, they're sharing it with other employers and, when the pool performs well, sharing in the underwriting return.

The defining feature isn’t the pooling itself - it’s the layered structure that splits cost, shared risk, and catastrophic protection into threedistinct tiers.

That three-layer structure is what distinguishes a captive from plain self-funding: a retained layer the employer funds directly, a shared layer pooled with other captive members, and a top stop-loss layer that caps exposure to truly catastrophic claims.

Why This Is Surfacing Now

Three forces are pushing captives from a niche strategy into a mainstream renewal conversation.

• Specialty drug and high-cost claim trends. GLP-1utilization, cell and gene therapies, and a growing specialty pipeline are driving more claims into the territory that triggers stop-loss - and stop-loss carriers are pricing accordingly. Pooling that exposure with other employers softens the year-to-year swing any single group would otherwise absorb alone.
• Renewal shock at exactly the wrong moment. With double-digit increases now common, employers who already self-fund are discovering that a single bad claims year can produce a renewal spike a captive would have cushioned. Employers still fully insured are discovering that the "predictability" they paid for no longer buys much predictability.
• A maturing, better-understood market. The captive model has moved well past its early adopters. Group captives are now an establishedpart of the mid-market benefits toolkit, with dedicated underwriters,third-party administrators, and advisory practices built specifically aroundthem - lowering both the learning curve and the operational lift for a newmember employer.

Captive vs. Straight Self-Funding: What Actually Changes

Where the Real Tradeoffs Are

Captives are not a free upgrade. Joining one is a multi-year commitment, not a one-renewal decision ,and most carry a required notice period or minimum participation term - this is not a structure to enter expecting to exit after a single rocky year.

There's also real capital and governance cost. Members typically post collateral and fund their layer of the shared risk pool upfront, which means a captive ties up cash that a fully insured employer wouldn't need to set aside. Some structures, particularly older “A/B fund” models retrofitted from property-and-casualty captives, ask employers to pre-fund both an individual layer and a shared layer, plus post collateral - worth scrutinizing closely, since that combination can leave an employer exposed for a large share of premium before stop-loss actually engages.

Governance is a genuine, ongoing commitment as well: captive members typically sit on a board or committee that reviews claims experience, underwriting decisions, and the performance of the shared pool. That's part of the value - it's real visibility most fully insured employers never get - but it does require HR and finance time that a fully insured renewal simply doesn't.

For employers who self-fund medical benefits in the U.S. and want to bring that coverage into a captive, there's a regulatory step worth planning for early: new captive arrangements that include medical coverage generally require approval from the Department of Labor, a process that can be time- and resource-intensive. Some employers manage this by starting outside the captive on traditional stop-loss while other welfare benefits (life, disability, dental) go in first, then folding medical in once the program and the relationship with regulators have matured.

What This Means for Your Next Renewal Conversation

A captive isn't the right next step for every group, and it isn't a substitute for the basic plan-performance work - claims review, stop-loss positioning, vendor evaluation - that should happen every renewal cycle regardless of funding structure. But for employers who are already self-funded, already carrying meaningful claims volatility, or facing a renewal that feels disconnected from their actual claims experience, it's worth a structured look rather than a passing mention.

A few questions worth raising before your next renewal:

• How has our claims volatility trended over the past three to five years, and would a shared risk layer have meaningfully changed our last renewal?
• What captive options exist for our size, industry, and risk profile - and what's the minimum commitment period?
• What would the collateral and capital requirement look like in year one, and how does that compare to the premium swings we're trying to avoid?
• If we wanted to start with non-medical benefits and add medical later, what would that phased timeline realistically look like?

These are exactly the kind of questions OVD is built to work through with you. The right funding strategy isn't a product we're selling - it's a conclusion we reach together, after looking honestly at your claims history, your risk tolerance, and where you want your benefits dollars working hardest. Whether a captive turns out to be the answer or not, that structured, no-pressure evaluation is the work we do every renewal. If your last renewal felt more like a number handed down than a strategy you helped shape, let's make this renewal different.

This article is intended for general informational purposes and does not constitute financial, legal, or actuarial advice. Employers considering a captive arrangement should consult with their broker, legal counsel, and actuarial advisors to evaluate suitability for their specific risk profile and goals.

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