Where does a dollar of insurance premium actually go?
Acquisition cost, expenses and claims, in that order
Queen answers from inside the economics rather than from the buyer's side. A carrier spends a large share of every premium dollar simply acquiring the customer, then carries its own expenses, and only then pays claims. He is careful that this varies widely between personal and commercial lines and between admitted and surplus lines markets, but his summary is blunt: insurance is expensive, and carriers make their money on volume.
The first cost in the chain is not a claim. Queen puts customer acquisition first, and describes it as a real share of every premium dollar a carrier takes in. Expenses sit on top of that, and claims on top of those. The combined ratio he quotes for admitted lines is the sum of all of it.
He immediately qualifies the number. There is a great degree of variability, he says, and a large difference between personal and commercial lines and between the admitted and surplus lines markets.
Key takeaways
Queen orders a carrier's costs as customer acquisition first, then expenses, then claims, with the combined ratio as the total.
He hedges the figures deliberately, noting wide variation between personal and commercial lines and between admitted and surplus lines markets.
His case for a captive is narrowness rather than cheapness: a business with few claims stops being averaged against everybody else's losses.
The contrast he draws is not that captives are cheaper but that they are narrow. Captive insurance, in his phrase, is a specialty and a sniper. A single business with genuinely good loss experience is not being averaged against a book, and the money that would have been a carrier's profit stays inside the company that generated it.
He works it through with a hospital system holding a large single parent captive: with few claims, funds accumulate until the actuaries release them. In property, he says, that release comes at the end of almost every year, which is why the effect shows up quickly for real estate owners rather than over a decade.
From the conversation
Matt Queen
Captive Insurance Attorney, author of Modern Captive Insurance
“With that being said, captive insurance is like a specialty and it's a sniper.”
This answer begins at 5:03 of the full conversation. Watch or listen to the whole thing.
The views expressed are those of the featured guest, drawn from a recorded conversation, and reflect their own professional experience. Nothing on this page is insurance, tax, legal, or investment advice. Consult your own advisors about your specific situation.
Corrections or removal requests: contact@captiveip.com