Captive Coalition Blog

How Does My Client Profit in a Captive?

Written by Jerrett Phinney | Aug 26, 2024 2:42:54 PM

As an independent insurance agent, it is important to know how captives can transform your clients' approaches to risk management and profitability. 

With Captive Coalition, we understand everything in captive insurance, from how much it takes to join a captive at the beginning to how clients can profit over time. We have seen many clients benefit from becoming captive owners.

This article will provide insights to help you confidently discuss the financial benefits of captive insurance programs with your clients.

What Are the Financial Benefits of Joining a Captive?

Captive owners can profit from three primary sources:

  1. Underwriting Profit/Surplus
  2. Investment Income
  3. Cost Stabilization

Underwriting Profit/Surplus

Underwriting profit is what's left after losses and expenses are deducted from premiums. In the traditional insurance model, this surplus is kept by the insurer. In a captive, however, this profit is either distributed back to members or used to build capital reserves.

For example, property claims with low liability may allow for 80% of the underwriting profit to be distributed within six months, with the remainder paid out after that period. Over time, effective risk management can significantly reduce insurance costs, directly benefiting captive members.

Investment Income

Captive owners can invest premiums and earn returns not available through traditional insurance. Funds reserved for future claims can generate interest, which in turn reduces the overall cost of those claims.

Investment income can be substantial, especially for captives managing large capital reserves, providing a steady revenue stream that offsets insurance costs.

Cost Stabilization

Traditional insurance premiums often fluctuate based on industry-wide losses, while captive premiums are based on individual loss experiences.

For example, businesses in a captive can see premium reductions of up to 28% over the first three years, assuming stable loss experience. Cost stabilization allows businesses to budget more accurately and avoid unexpected spikes in insurance costs.

If you're curious how your best clients could benefit from joining a captive, use our captive assessment tool for those results.

Payout Distribution Varies by Line of Business

Different lines of business handle payouts differently:

  • Property Claims: With minimal liability, property claims are often settled quickly. Underwriting profit can be paid out within six months to a year after the policy year ends.
  • Liability Claims: These typically have longer development periods, with underwriting profits distributed over several years. For instance, profits from the first year might not be paid out until year four, with subsequent profits following a similar delayed schedule.

What Are the Indirect Sources of Profit in a Captive Insurer?

Captives also provide indirect financial gains through:

  1. Loss Reduction
  2. Loss Prevention
  3. Ultimate Net Present Value of Losses

Loss Reduction

Captive members are incentivized to implement robust safety and risk management programs to reduce claims and overall costs, leading to higher shared profits by year-end. This fosters a culture of safety and risk awareness, resulting in long-term improvements in loss ratios and financial performance.

Loss Prevention

Enhancing risk control measures can prevent losses altogether, contributing to a larger shared profit margin for all members. This not only improves financial outcomes but also boosts employee morale and operational efficiency by creating a safer work environment.

Ultimate Net Present Value of Losses

By reserving funds for future claims, businesses can earn interest on these reserves, reducing the net cost of those claims over time. This strategy can offer significant financial benefits, especially over extended periods.

What Other Financial Impacts Would Clients See if They Joined a Captive?

Beyond direct and indirect profits, captives offer several other financial advantages:

  • Cost Control: Captive members have complete transparency over their insurance costs, unlike traditional insurance, where expenses are often opaque.

  • Tax Advantages: Captives may offer tax benefits, such as deferring taxes on underwriting profits. However, it's important to note that captives should be part of a long-term strategy, not just a tax play.

  • Estate Planning: Captive ownership can be integrated into long-term financial and estate planning strategies.

Will Your Clients Profit in a Captive?

Captive insurers offer financial benefits that your top clients can see, from underwriting profits to stabilizing and controlling insurance costs. Captives provide not only direct and indirect benefits but also greater transparency compared to the traditional market.

While the potential for profit exists, it's crucial for your clients to understand the financial implications fully. We recommend reading our article on the financial advantages and disadvantages of captive insurers.

If you have questions about how your clients can benefit from joining a captive, schedule a call with Captive Coalition to speak with one of our insurance advisors.