How Does a Captive Insurance Company Generate Profit?

Take a moment to think about the enormous expenses a conventional insurance company faces as part of its daily operations: payroll, employee health insurance, pension and retirement plan obligations, rent, staffing for the legal, actuarial and claims departments, sales team expenses and commissions, advertising and profit margin, just to name a few.  A huge percentage of the premiums you pay for a property and casualty insurance policy is eaten up by these expenses and let’s not forget TV, magazine and radio advertisements, corporate spokespeople and mascots.

When you purchase your coverage from a captive insurance company, your premiums aren’t paying for a conventional insurance company’s overhead mentioned earlier.  In fact, you will be motivated to control operational costs, introduce loss control measures and you may gain significant savings in the form of underwriting profits.  Your captive insurance company will probably not advertise during the Super Bowl, and is unlikely to enlist a corporate mascot or cartoon character to represent it.  The owner of the captive will retain the profits generated.  Over the years, profits and surplus may accumulate to sizable amounts and may be distributed to the owner(s) of the captive insurance company under favorable income tax rates as either dividends or long-term capital gains.