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The Basic Calculus of Captive Insurance

By January 24, 2020No Comments

Many business owners and CFOs never seriously consider joining a group captive simply because they feel it is too complicated and they are not sure if they are viable fit.

A group captive can be described simply as a private insurance company of quality companies, protected by reinsurance, who band together for the purpose of securing better rates, better coverage, and being the beneficiary of underwriting profit generated from their premium.

With that description in mind, here are a few simple variables you can calculate and use to figure out if a group captive may be a fit for your workers comp, general liability, and commercial auto coverage.

  1. Average Annual Premium  ((5-year total premium) / 5)
  2. Operating Costs of the Captive ((Average Annual Premium) x .35)
  3. Average Annual Claims ((5-year total claims) / 5)
    Note: Cap all large claims at $100,000


Simply subtract the typical Operating Costs of the Captive from your Average Annual Premium and compare this number to your Average Annual Claims.

If,   Premium – OC  >  Claims = Possible Fit

If,   Premium – OC  <  Claims = Unlikely Fit

Ex., $600,000 – 210,000 = $390,000  >  $310,000    (Possible Fit)

The math is a little more complex in the actual application and underwriting process, but you can leave that heavily lifting to the professionals! Contact us to learn more.

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