Heterogeneous Group Captive

April 15, 2015
From John Salisbury, Coeditor
Captive.com and Captive Wire

From my perspective as a retired founding CEO of several group captives, the optimum size is one where there is at least a 3:1 net written premium-to-surplus/capital ratio and a combined ratio of less than 100 percent.

My personal experience would suggest there is a minimum size for a captive that depends in part on line of coverage, spread of risk, availability of reinsurance, and a realistic appraisal of the minimum cost of administering and servicing the member or members of the captive.

Let me provide an example with respect to starting a group captive or risk retention group today. I think the minimum capital/surplus level should be at least $1 million, net written premium $2 million (2:1 net written premium to capital/surplus ratio), up to a maximum level of risk retained $100,000 (10 percent of capital/surplus). With a 25 percent to 30 percent expense ratio and a 65 percent loss ratio, this would enable the captive to sustain $1.3 million in losses, $500,000 to $600,000 in expenses, and net income of $100,000 to $200,000.