Captive Insurance Metrics Must Evolve with Program Goals

Captive insurance companies should evaluate financial performance in the context of their objectives, risk profiles, and lines of coverage rather than relying solely on standardized benchmarks, speakers said during the 2026 Vermont Captive Insurance Association Annual Conference.

The session, "What the Numbers Are Really Saying: Interpreting Captive Financial Metrics," featured Prabal Lakhanpal, senior vice president at Spring; Elise Kappelmann, senior risk and insurance adviser at Phillips 66; and Dave Guerino, executive vice president of captive solutions at KeyState. The panel discussed how captive owners can develop, analyze, and update financial metrics as their programs change.

Mr. Lakhanpal said organizations establish and operate captives for a variety of reasons, such as generating profit or accessing reinsurance solutions, and those objectives should shape how performance is measured. Metrics can help an organization compare its captive with broader industry results while also tracking the program's performance from year to year.

The presentation identified changes in premiums and surplus, premium-to-surplus ratios, and liabilities-to-surplus ratios as common metrics used in Vermont. Captives may also monitor loss ratios, profit margins, administrative costs, and investment returns. However, whether a particular result is favorable depends on the captive insurance company's strategy and circumstances.

Captive owners should consider whether to compare results with industry benchmarks or internal targets, as well as whether the program is expected to break even or generate a profit. Performance expectations may also vary by industry, coverage, corporate structure, and the parties insured. The panel also discussed whether results should be evaluated against commercial market conditions or the organization's total cost of risk.

Ratios Require Context

Mr. Guerino said reserve-to-surplus and premium-to-surplus ratios are among the core measures used to evaluate captives. Comparing the amount of risk a captive retains with its surplus is also important because the captive must have sufficient financial resources to meet its obligations following a significant loss.

According to the presentation, Vermont generally uses a reserve-to-surplus ratio of 4-to-1 or lower when monitoring captive insurers. This ratio measures reserves relative to the captive's capital and surplus and indicates the potential effect if those reserves prove inadequate. Vermont also suggests a premium-to-surplus ratio of 4-to-1 or lower to assess whether the captive has sufficient surplus relative to the amount of business it writes.

Mr. Guerino explained that exceeding a suggested ratio does not mean regulators will automatically take action. If the variance is material, however, the captive may need to explain the result and outline how it plans to address it.

Loss ratios must also be viewed in context. Although a loss ratio compares incurred losses with earned premium, interpreting the result becomes more complicated when a captive writes multiple coverages with different risks and claim-development patterns. A target that is appropriate for a captive seeking to generate profit may not be suitable for one focused on reducing the organization's total cost of risk.

Rated captives may also use Best's Capital Adequacy Ratio (BCAR). The presentation described BCAR as a benchmark management can use to monitor solvency and assess how financial decisions could affect the captive's rating. Mr. Guerino said proposed dividends and investments may be evaluated for their potential effect on both regulatory ratios and BCAR.

The panel also reviewed liquidity, debt-to-equity, and investment-yield measures. The liquidity ratio assesses a captive's ability to meet current obligations, while the debt-to-equity ratio compares its liabilities with its equity. Mr. Lakhanpal said investment yield should be evaluated alongside the captive's asset-liability management strategy and anticipated obligations.

New Coverages Can Change the Analysis

The speakers said captives should reassess their metrics when adding lines of coverage. A captive that begins with casualty risks and later adds employee benefits or property may experience significant changes in premiums, reserves, and the timing of claim payments.

Mr. Lakhanpal used medical stop-loss as an example of a short-tail coverage that may be added to a captive traditionally focused on casualty risks. Its shorter claim-development period changes the captive's reserving profile and may affect the metrics used to evaluate the program.

He recommended establishing acceptable ranges rather than relying on a single target. This approach allows a captive to account for variability in insurance results while operating within parameters established by the organization.

Ms. Kappelmann described how Phillips 66 changed its analysis after adding employee medical coverage to its domestic captives. The employee medical premium was approximately three times the combined premium from the other coverages, and its claims activity differed significantly from the other lines. Reviewing all the coverages together therefore made it difficult to identify meaningful trends.

Phillips 66 began evaluating employee medical separately, allowing the company to assess that coverage without obscuring results from its property and casualty lines. The company also compares financial results from year to year, reviewing premiums, losses, reserves, and net income, as well as assets, equity, and liabilities. Ms. Kappelmann said reviewing overall results and individual lines of business can help identify trends and explain unusual results.

More broadly, Ms. Kappelmann said a captive's structure, rating objectives, and management approach can influence its capital requirements and performance measures. She also emphasized coordinating with captive managers, regulators, auditors, and internal stakeholders when changing how a captive is managed.

Explaining Results to Stakeholders

As captives become more significant parts of an organization's risk-financing strategy, responsibility for evaluating them may extend beyond risk management to the chief financial officer, treasury, legal, human resources, and business-unit leaders. The panel said these stakeholders may view the captive's value differently, making it important to present results in a way that addresses each group's priorities.

One example in the presentation compared current results and a 5-year trend with established minimum and maximum thresholds. Each measure was then classified as pass, review, or fail. The speakers said this format could give executives a concise overview of the captive's performance and show whether individual results fall within established parameters.

Captive owners should continue to review their metrics as market conditions, business operations, policies, and insured risks change. Some measures may need to be revised, added, or discontinued. Rather than prescribing a standard set of measures for every captive, the panel emphasized developing metrics that reflect the organization's goals and updating them throughout the life of the program.