Are Group Captives More Profitable than Other Forms of Insurance?

John Lightfoot | Aug 17, 2022 | minute read

Are Group Captives More Profitable than Other Forms of Insurance?Traditional forms of insurance have been a staple of the marketplace, but there has been a sharp increase in group captives over the last 20 years. Group captives are a good alternative for financing risks under certain circumstances.

Businesses have been establishing group captives to gain access to insurance coverages they cannot get in other places. They have also found how forming group captives give them greater control over insuring for risks, which also helps control their overall costs.

Is traditional commercial insurance better than group captive insurance? Is it more profitable?

To answer these questions, we must look at the nature of risk and what makes insurance more profitable. 

What Makes Commercial Insurance Premiums Profitable?

We will need to get back to the basics of insurance to understand what makes insurance premiums profitable. All companies bear risks. When a company purchases an insurance policy, it protects against unexpected financial losses.

There are lots of ways to manage risks, and purchasing insurance is one of them. Other ways of managing losses are to place a high focus on safety, train workers, implement a quality assurance program, control growth, appoint a risk management team, and much more.

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How do insurance companies make their money? Insurance companies sell policies to customers and collect premiums to generate revenue. If the claims made against a policy are greater than the amount of premiums an insurance company receives, the insurance company takes a loss.

The goal is to ensure the insurance company has enough money to pay for claims, including catastrophic claims. When a company has paid all its claims for the year and there is money left over, this is known as an underwriting profit.

To make even more money, insurance companies invest their income to generate additional income. This is known as investment income.

Underwriting is an important part of all forms of commercial insurance because it helps make insurance companies profitable. Some of the things underwriters look at are the number and dollar amount of claims, correctly classifying workers, and other underwriting standards that impact their loss ratios.

Are Group Captives More Profitable than Other Forms of Insurance?

There is a very simple formula for figuring profits:

Insurance premium – losses – expenses = revenue (underwriting profit)

At the end of the year, insurance companies figure out their expenses and the amount they have paid out in claims, and whatever is left is deemed as their underwriting profit.

Single captive and group captive insurance companies are considered risk retention groups. In a single captive insurance company, there is a parent company that insures one company.

By contrast, a group captive insurance company shares risks among parties that are unrelated to each other. Because of the varied risk factors involved in insuring multiple different companies, group captives have more rules than single captive insurance companies. This is part of the design of a group captive insurance company.

Are Group Captives More Profitable than Other Forms of Insurance?

The rules help protect all companies within the group. When a captive insurance company considers accepting a new business into its group, it is essential to pay attention to the new company’s loss experience and the group captive’s comfort level in taking on more risks.

Where do the profits come in? A group captive insurance company can operate either as a cost center or a profit center. In a study by the Captive Insurance Companies Association, one of the top five operational and strategic goals is to use the group captive insurance company as a profit center. Any profits a group captive realizes get either returned to companies in the group by way of a dividend or are held in reserves for future losses.

Due to stricter underwriting guidelines and careful control by the group captive insurance company, group captives tend to be profitable. Overall, group captives are popular because they help reduce costs for businesses.

Why Set up a Group Captive?

Nearly all large corporations have some type of captive insurance plan, and many midsized companies do as well. This is a testimony of the profitability of a group captive insurance company in itself.

There are many benefits to setting up a group captive insurance company, including:

  • Increased control over risks
  • Access to insurance coverage not available in traditional markets
  • Access to the reinsurance market
  • Ability to insure specialty risks
  • Lower total overall risks over the long term

While a group captive does not cover all the insurance needs of a company, it is typically profitable for certain types of insurance coverages. 

Final Thoughts

Group captive insurance companies can be profitable or fail, just as any traditional insurance company could. The amount of control a group captive insurance company has over which companies they choose to include in the group and the underwriting guidelines are key factors in ensuring a group captive is profitable. The companies that are part of a group captive insurance company have a vested interest in making that happen.

Free eBook: The Definitive Guide to Group Captive Insurance

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About The Author

My insurance career spans more than two decades and includes extensive work in group captives and construction, working with general contractors and subcontractors all over the State.

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