Different Types of Captives

Structure

Multiple unrelated employers participate in a shared captive.

Typical layers:

• Employer retains claims to its specific deductible (e.g., $100,000)
• Captive assumes a shared layer (e.g., $100,000–$500,000 
• Reinsurer covers catastrophic excess

All participating employers share risk in the captive layer.

How Earnings are Distributed

After the policy year:

1. Captive premiums are collected from all members.
2. Claims in the captive layer are paid.
3. Expenses and reinsurance costs are deducted.
4. Remaining surplus becomes underwriting profit.

Distribution methods:

• Pro rata based on premium contribution
• Loss ratio-adjusted allocation (better performers receive more)
• Dividends declared by captive board

In some models:

• Surplus is returned after a multi-year development period (e.g., 24–36 months)
• Funds may be retained as surplus to stabilize future years

Key Facts

• Risk and reward are pooled.
• Strong performers benefit from overall group performance, not just their own results.

Structure

Each employer participates in its own legally segregated “cell” within a larger captive.

Risk layers:

• Employer retention
• Individual employer cell layer
• Reinsurance layer

Each employer’s results are financially separated.

How Earnings are Distributed

Because risk is isolated:

• Surplus in a cell belongs to that specific employer.
• Losses in one cell do not affect others.

Distribution methods:

• Dividends credited directly to that employer
• Premium credits for renewal
• Retained surplus inside the cell for future risk funding

Key Facts

Risk and reward are individualized, not pooled.

This model is attractive to employers who want:

• No cross-subsidization
• Direct performance ownership

Structure

A large employer forms its own captive insurance company.

The captive:

• Retains a defined stop loss layer
• Purchases reinsurance above it

There are no unrelated participants.

How Earnings are Distributed

Because the employer owns the captive:

• All underwriting profits remain inside the captive.
• Surplus increases captive capital.
• Funds may be:
  • Retained for future claim volatility
  • Used to offset future premium
  • Distributed as dividends (subject to regulation)

There is no shared distribution formula.

Key Facts

Complete control and complete ownership of results.

Structure

A consultant, broker, or trade association sponsors the captive.

Employers join under common underwriting guidelines.

Risk may be:

• Fully pooled
• Partially pooled
• Blended with performance adjustments

How Earnings are Distributed

Common approaches include:

1. Tiered Distribution

• Employers with lower loss ratios receive higher dividend percentages.
• Poor performers may receive little or no return.

2. Corridor-Adjusted Allocation

• Captive retains a shared layer.
• Losses within corridor affect individual allocation.
• Catastrophic results shared broadly.

3. Experience-Based Weighting

• Profit allocation formula adjusts based on individual claims performance.

Often:

• Surplus is returned after 2–3 years.
• Some retained for stability reserve.

Structure

The captive takes a fixed percentage of the stop loss layer.

Example:

• Captive assumes 50% of $100,000–$500,000 layer.
• Reinsurer assumes remaining 50%.

Risk is partially shared between captive and reinsurer.

How Earnings are Distributed

Because the captive holds proportional risk:

• Earnings are directly tied to that percentage share.
• Surplus allocated based on premium contribution.
• Often simpler dividend formulas.

This model can smooth volatility because the captive does not hold 100% of the working layer.

Structure

Employers share a defined risk corridor collectively.

Example:

• Captive covers $100,000–$250,000.
• Losses above $250,000 fully reinsured.

How Earnings are Distributed

Distribution depends on corridor performance:

• If corridor claims are low → shared surplus returned.
• If corridor claims are high → surplus reduced.
• May include performance adjustment by employer.

This structure emphasizes shared mid-layer performance.