Every way of insuring a business answers the same question differently: when losses come in above or below expectations, who pays the difference? Here are the four structures the captive design tool compares, and how each one moves with your losses.
The difference between them is not the expected cost alone. It is who carries the variation around it.
A fixed premium. The insurer keeps the profit in a good year and absorbs the loss in a bad one. Your record still matters, but only through experience rating at renewal.
Simplest, and the benchmark the others are measured against.
The premium is recalculated after the year from your actual losses, within a minimum and a maximum agreed in advance12. A good year costs less; a bad year costs more, up to the cap.
You share the swing with the insurer, inside a corridor.
You pay each claim up to the deductible yourself and the insurer pays above it, for a lower premium. Insurers commonly hold collateral against the deductibles you owe, and states regulate it; Illinois is one example3.
In Illinois, workers’ compensation deductibles from insurers rated below A- with under $200 million of surplus are capped at 20% of the policyholder’s audited net worth4.
Your own insurance company keeps the losses up to its retention, buys reinsurance above, and holds capital for the bad years. It keeps the underwriting result, good or bad.
More control and more of your own data; also more capital, running cost and governance.
Illustration: standard premium $1,000,000 and expected losses $650,000 are round, illustrative figures; the basic premium factor (0.145), loss conversion factor, tax multiplier, minimum and maximum are the worked-example values in New York’s published retro manual2. Real plans are negotiated case by case.
A retrospective plan or large deductible already shares your losses with you, without forming a company. A captive goes further: it keeps the underwriting result, earns investment income on reserves, and can fund your own loss-control programmes. In return it needs capital, a licence, a fronting arrangement for some lines5, and annual governance. The right answer depends on your premium, your loss record and your appetite for variation.
Realtech’s captive design tool prices guaranteed cost, a retrospective plan, a large deductible and a captive on the same basis for your stores, and shows which one is cheapest and how much each would swing in a bad year.
Figures are published rules, estimates and benchmarks, not quotes. They vary by state, domicile, line of cover and year.
This guide is general information about captive insurance. It is not insurance, legal or tax advice. Realtech is an independent consultancy and does not sell insurance.