Captive Insurance Company Benchmarks: How to Know If Your Captive Is Underperforming

Measuring the performance of a captive insurer is a critical step once the captive has been formed, approved, and management is in place. Owners and boards often ask, "How do we know if our captive is succeeding or underperforming?"

While the "bottom line" provides an immediate snapshot, it is only a partial view. A more complete assessment requires examining the factors that drive that figure. Were expenses and reserves accounted for accurately? Do advisers disagree with the reported results, and if so, why?

No two captives are identical, but they share common benchmarks that help measure performance.

Financial Stability and Continuity

A core benchmark for any captive insurance company is its ability to remain financially stable over time. Failure of the captive would directly affect the parent company's balance sheet and its ability to manage risk effectively. Ensuring long-term continuity requires careful oversight of reserves, underwriting practices, and governance so the captive remains a reliable risk financing tool.

Reserve Adequacy

Adequacy of reserves to pay claims is one of the most important measures of performance. Reserve levels are typically reviewed at formation by accounting and actuarial partners and must be approved by regulators. Owners may sometimes disagree with these determinations, but regulators' approval is binding.

If reserves prove inadequate, the parent may have to contribute additional funds, potentially jeopardizing its broader financial health. Over-reserving is generally less problematic, since funds remain available and may earn interest or dividends. Under-reserving, by contrast, can create serious downstream challenges in meeting claims.

The composition of reserves also matters. How much should be held in cash? Should any reserves consist of parent company stock? How quickly can non-cash assets be liquidated to pay claims? Could withdrawals from the parent cause stress on its balance sheet? Each of these decisions must be disclosed to and approved by regulators.

Retention Rates and Underwriting Standards

Retention rate—the share of written business kept by the captive—is another key benchmark. Boards should regularly review retention strategies with managers and advisers, considering the parent's nature, business needs, and appetite for risk.

Selection of lines of coverage and policy limits is equally important. Not all risks should be retained, and regular analysis of claims helps identify which exposures fit best within the captive. Strong internal risk management, supported by directors, managers, accountants, and actuaries, strengthens these decisions.

Written underwriting standards provide clarity and consistency across all stakeholders. When a parent company operates multiple or diverse business lines, diversification can spread risk but also generate disputes. These complexities should be carefully evaluated at formation or when new businesses join the captive.

Governance and Decision-Making

Governance dynamics play a direct role in performance. Board composition may not always align with the owner's perspective, particularly as personnel changes over time. Differing views on reserves, retention, or strategic direction can slow decision-making and weaken the captive's position.

If disagreements arise, clear decision-making guidelines are essential. In most cases, the owner makes the final determination, but regulators may intervene. When multiple owners are involved, the process becomes even more complex and, at times, contentious. Establishing governance structures at the outset is critical.

Regulatory oversight itself is another variable. Changes in state law or the replacement of a favorable regulator with one less supportive can materially affect captive operations. Boards and owners must remain aware of the regulatory environment and adjust accordingly.

Dividends and Cash Benefits

Owners often expect their captive insurance company to provide financial return. Dividends are a common method, but they require regulatory approval and careful review by accountants and actuaries.

The timing, frequency, and form of dividends—whether cash or additional captive stock—must be evaluated with the captive's financial strength in mind. Owners' desire for liquidity cannot outweigh the priority of maintaining solvency and paying claims. Regulators and advisers are generally cautious in approving dividends unless the captive is in strong financial condition.

Measuring Success

Ultimately, the true benchmark for a captive insurer is whether it achieves its stated goals while maintaining long-term financial viability. By monitoring reserve adequacy, retention practices, governance, and dividend policies, owners and boards can better evaluate whether their captive is meeting expectations or underperforming.