Traditional Insurance vs. Captive Insurance

The following example clearly illustrates the differences between captive insurance and traditional insurance:

Traditional Insurance:

1. Acme, Inc. is a manufacturer that pays $500,000 in workers’ compensation, liability, and automobile insurance premiums.
2. Over the past three years, Acme’s insurance company paid $125,000 a year on average claims.
3. Acme paid $4 to the company for every $1 that was paid in claims. That is a cost of over 400% on Acme’s dollar.
4. Profits go to the insurance company

Captive Insurance:

1. Acme becomes an owner/member of a group captive insurance company and pays a small initial investment. (This one-time capitalization fee is not subject to loss, earns investment income, and is returned to the corporation if it ever decides to exit the captive.)
2. Based on Acme’s $125,000 per year claim history, their annual premium as an owner/member in the captive program is $275,000.
3. Acme is now paying $2.20 per $1 of claims paid, lowering the cost of insurance from 400% to 200% on Acme’s dollar.
4. Profits and investment income from Acme's premiums are returned to Acme, after operating expenses are paid.