How Do Group Captives Work?

Captive premiums are made up of a loss fund and fixed expenses. The loss fund is derived by an independent actuary from a company's loss history (5 years), industry, lines of coverage, etc. The fixed expenses are comprised of fronting and reinsurance costs, taxes, claims and loss control, operating expenses, brokerage fees, and captive management fees.

The flow of money in the captive process is explained in the Captive Flow Diagram. Essentially, the companies that make up the group captives pay their premiums much like they have in the past. That money is used to pay for any losses that your company has for claims that occur during that year. Occasionally, you will have to share large losses with other members of your group. The money left over is put into an account that the group can use to pay "dividends" to its members beginning 4 years after the inception of the group. Given a good loss ratio, you will potentially have a return on your premium investment instead of not being rewarded for controlling your losses in the "sunk cost" approach of the traditional insurance market.

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