# Captive Insurance Company Project captive insurer underwriting profit and capital adequacy with realistic claims timing, combined ratio improvements, and reinsurance program design. Model premium income across insurance lines and evaluate different retention levels to optimize capital efficiency. - Canonical: https://finamodel.com/templates/captive-insurance-model - Excel download: https://finamodel.com/templates/captive-insurance.xlsx - Category: Insurance - Model type: Portfolio - Difficulty: Advanced - Audiences: Credit & risk, Investors & analysts, Risk managers, Captive managers, Insurance investors, CFOs - Tags: insurance, underwriting, reinsurance, combined ratio, risk management ## Overview A captive insurance company model projects underwriting profit, investment income, claims reserves, and dividend capacity to show whether the parent company can save money by self-insuring its own risks through a captive subsidiary rather than buying commercial policies. The model answers how much capital is required at formation, how quickly the captive returns profit to the parent through dividends, and whether the target return on invested assets (float income) is achievable. Premium revenue flows in from the parent, calculated using actuarial transfer pricing to reflect the true cost of the parent's insurable risks. Net earned premium equals gross written premium less the reinsurance cession to a fronting carrier. Incurred losses and loss adjustment expenses (LAE) are modelled using a vintage-based payout pattern: 50% in the year of loss, 30% in year +1, 20% in year +2 (tail). Investment income is earned on the float (the lag between premium collection and claims payment), scaled by a bond portfolio yield (4.5% typical on short-duration investment-grade bonds). Operating expenses include captive management fees (10% of GWP), actuarial and audit (2.5% combined), legal and regulatory compliance, directors' fees, and Vermont insurance premium tax (0.214%). Dividend capacity is calculated from prior-year surplus and is constrained by Vermont's ordinary dividend rule (maximum 10% of surplus or prior-year net income, whichever is less). Parent companies, risk managers, and insurance brokers use captive models to quantify premium savings vs. commercial insurance, stress-test the captive under catastrophe scenarios (spike in incurred losses, extended reserves), and project the cumulative dividend stream back to the parent over a 10-year time horizon. ## What's included - Premium income by insurance line: property, casualty, workers compensation - Claims frequency and severity assumptions with loss triangle development - Combined ratio tracking: loss, LAE, and underwriting expense versus premium - Reinsurance program with retention limits, excess layer costs, and aggregate limits - Capital adequacy and loss reserve calculations - Premium income by insurance line: property, casualty, workers compensation, etc. - Combined ratio tracking (loss + LAE + underwriting expense) / premium - Reinsurance program: retention limits, excess layer costs, and aggregate limits - Underwriting profit and investment income - Capital adequacy and loss reserves ## Captive Insurance Model: How the Financial Template Works This captive insurance model projects whether forming a single-parent Vermont captive makes financial sense. It captures premium flows, multi-year claims runoff, investment float, regulatory capital tests, and dividend capacity. The template is aimed at CFOs, captive managers, and advisors evaluating capital adequacy, parent cash extraction, and return on equity over a six-year horizon. Rates and financial results described here reflect illustrative model settings, not industry benchmarks. ### Operating Drivers Behind the Captive The model focuses on a pure single-parent captive that underwrites the parent's own property and casualty risks. Gross written premium is set by actuarial pricing of those insurable risks and grows 5% annually, reflecting parent exposure and pricing adjustments. - A fronting carrier writes the business for regulatory compliance; the captive then assumes 100% of the risk through a quota-share reinsurance arrangement. Because the parent retains underwriting profit instead of paying a commercial carrier, the template evaluates premium savings, investment income on float, and risk-adjusted return on capital. - All operating costs are expressed as percentages of gross written premium, so expenses scale with premium volume, while loss costs are tied to net earned premium. ### Calculation Flow From Premium to Net Income Premiums cascade from gross written to net earned: gross written premium minus ceded premium gives net written premium, which is further reduced by the change in unearned premium reserve to arrive at net earned premium. Incurred losses equal net earned premium times an assumed loss ratio, with loss adjustment expenses shown separately. - Each accident year's incurred losses then pay out over a three-year pattern, with 50% in the year of incurrence, 30% in the following year, and 20% in the third year. A vintage triangle tracks paid and unpaid balances by accident year, so total paid claims in any calendar year sum across all open vintages. - Revenue includes net earned premium, investment income on the float, and ceding commission income; after operating expenses and tax, the result is net income. ### Outputs and Regulatory Metrics The income statement reports revenue, costs, and net income, with separate lines for incurred losses and loss adjustment expenses, plus distinct loss and combined ratios. The balance sheet shows investments as the core asset, loss reserves, unearned premium reserve, and equity comprising initial capital plus retained earnings. - A cash flow statement reconciles operating, investing, and financing activities, treating portfolio growth as a use of cash and dividends as a financing outflow. Key metrics include premium-to-surplus ratio, checked against a regulatory limit; return on equity; payback period based on cumulative net income versus initial capital; and cumulative dividends returned to the parent. - Dividend capacity is computed from prior-period equity to avoid circularity and to reflect the regulatory test using prior year-end surplus. ### Practical Use in Evaluating a Captive This template is built for decision-makers weighing whether to form a captive, how much capital to inject, and how much cash can be extracted over time. It lets users adjust assumptions such as gross written premium, cession rate, loss ratio, payout pattern, portfolio yield, and dividend payout to see effects on capital adequacy and payback. - The dividend policy models ordinary dividends limited by prior-period surplus and net income, reflecting the Vermont regulatory framework. The model includes validation checks for balance sheet integrity, premium leverage, non-negative reserves, and payout pattern sums. - Practical use is to compare base and stress scenarios, assess capital buffers, and understand the timing of returns to the parent. It supports a first-pass feasibility analysis, not detailed actuarial pricing. ## Built for captive underwriting economics Model each insurance line separately with line-specific loss frequency, severity, and expense ratios rather than forcing a generic insurance template. ## Reinsurance program design and optimization Evaluate different retention levels and excess layer costs to find the structure that optimizes capital efficiency and tax treatment. ## Claims development and reserve adequacy Build a loss triangle to forecast ultimate claims costs and test whether loss reserves are sufficient over time. ## Built for captive underwriting economics Model each insurance line separately with line-specific loss frequency, severity, and expense ratios rather than forcing a generic insurance template. ## Reinsurance program design and optimization Evaluate different retention levels and excess layer costs to find the structure that optimizes capital efficiency and tax treatment. ## Claims development and reserve adequacy Build a loss triangle to forecast ultimate claims costs and test whether loss reserves are sufficient over time. ## Features - **Multiple line underwriting:** Model different insurance lines separately with line-specific loss frequency, severity, and expense ratios. - **Reinsurance program design:** Evaluate different retention levels and excess layer costs to optimize capital efficiency and tax treatment. - **Claims development tracking:** Build a loss triangle to forecast ultimate claims costs and reserve adequacy over time. ## Use cases - **Captive establishment business plan:** Project underwriting profit, capital needs, and ROI to justify captive creation to the parent company. - **Annual actuarial review:** Test reserve adequacy and update premium rates based on actual claims development. - **Reinsurance procurement:** Model different program alternatives and their impact on combined ratio and capital efficiency. ## Frequently asked questions ### What is a captive insurance company? A captive is an insurance entity formed by a parent company to underwrite its own risks, capturing underwriting profit and improving risk management control. ### What is combined ratio and what is profitable? Combined ratio equals losses plus loss adjustment expense plus underwriting expense, divided by premium. A ratio below 100% means underwriting profit; above 100% means a loss. ### How do I estimate loss frequency and severity? Use historical actuals from the parent company where available. Otherwise apply industry benchmarks; severity often follows a lognormal distribution. ### What is a reasonable retention limit? Retentions typically range from 10 to 50 percent of expected losses, depending on parent company risk tolerance and capital position. ### Who uses captive insurance models? Risk managers, captive managers, insurance investors, and CFOs use them for captive establishment business plans, annual actuarial reviews, and reinsurance procurement decisions. ## Related templates - [Insurance Portfolio Risk and Return Model](https://finamodel.com/templates/insurance-portfolio-model) - [Life Insurance Valuation Model](https://finamodel.com/templates/life-insurance-model) - [Reinsurance Company Underwriting Model](https://finamodel.com/templates/reinsurance-model)