What It Really Costs to Join a Group Captive in the First Two Years

You've walked a business owner through how a group captive works. They're following along and nodding. Then they ask: "Is that 25% on top of the premium?"

You answer yes. Then comes the follow-up: "And when do I get it back?"

Those two questions can determine whether the conversation moves forward. Answer them clearly, and you help the owner understand what they're committing to and why. So let's break down every dollar that goes into a group captive during the first two years, what type of money it represents, and how it may come back.

How Much Does Joining a Group Captive Cost?

We'll use one example throughout the article. These are illustrative figures created for this discussion, not an actual account or quote. Your client's numbers will depend on their loss runs, the underwriting review, and the actuary's analysis.

The example business: $500,000 in annual captive premium, approximately what the business pays at renewal today.

What Does Your Client Pay in the First Year?

There are four initial financial commitments, and each represents a different kind of money:

• Premium (insurance expense). This is the same type of insurance premium your client is accustomed to paying, typically through quarterly or monthly payments rather than one lump sum. In this example, the annual premium is $500,000.
• Capital share (ownership). When your client joins, they purchase a share in the captive. This represents an ownership stake in the program. The one-time purchase is $40,000 and is redeemed when a member leaves, subject to the program's redemption requirements.
• Collateral, first contribution (your client's money, held). In this program, total collateral is approximately 38% of annualized premium, contributed over two years: 25% in year one and 13% in year two. For this example, that means $125,000 in the first year. You can provide collateral as cash or through a letter of credit. It serves as security against your client's claims, much like a security deposit. When collateral is provided in cash, it earns investment income that is paid out annually. If your client leaves the captive, their collateral is released as the associated policy years close.
• Underwriting review (one-time fee). Before your client joins, the account goes through an underwriting review to determine whether the business is a good fit for the program. The fee is $2,995 anywhere in the US.

So, to answer the owner's first question: yes, the 25% collateral contribution is in addition to the premium in year one. But it's not another insurance fee. It's your client's money, held as security.

How Much More Collateral Is Due in Year Two?

In year two, your client pays the annual premium again, along with the final portion of the initial collateral requirement: 13%, or $65,000 in this example.

That completes the initial collateral schedule. After that, collateral requirements may be adjusted if the business experiences a significant increase or decrease in exposures. Collateral is also reviewed annually.

Group Captive Costs: Years 1, 2, and 3 Compared

Example only. Premium is shown at a consistent amount to keep the comparison simple. Actual renewals will vary with exposures and losses. With a letter of credit, collateral may not require cash to leave the business, but the amount is still committed.

Compared with a $500,000 traditional renewal, the business commits an additional $190,000 in collateral over the first two years, plus the one-time capital share and underwriting review fee.

The important distinction is that the premium and the underwriting review fee are expenses. Collateral is held as security, while the capital share represents an ownership interest. These are different financial commitments and should not be treated as the same type of cost.

When Does Your Client Get the Money Back?

There are three different types of money that may come back to your client, but each follows a different process:

• Collateral: If your client leaves the captive, the collateral is released as each policy year closes, subject to outstanding claims and the captive's release requirements. When collateral is provided in cash, it earns investment income, which is paid out annually. (When Does Collateral Come Back to the Client?)
• Underwriting profit: When your client's claims come in below the amount allocated to their loss fund, the remaining balance may be distributed back to them over time along with investment income. Most captive programs begin distributions 36 months after the policy period ends. For example, distributions from a first-year policy period would typically begin in year four. Timing and amounts vary by captive program and are subject to regulatory approval.
• The capital share represents your client's ownership interest in the captive. It is redeemed when they leave the program and is subject to the captive's redemption requirements.

Understanding these differences is important. Collateral, underwriting profit, and the capital share are not interchangeable, and each has its own timeline and conditions.

How Should You Explain Startup Costs to an Owner?

Year one requires more money up front than a traditional renewal. It won't necessarily save your client money in that first year, and suggesting otherwise could undermine the trust you've worked to build.

A better conversation focuses on the long-term opportunity. Can the business manage its losses year after year? If it can, the owner has an opportunity to participate in the results of its own loss experience rather than simply transferring the benefit of good years to a traditional insurance carrier. (How Do I Explain Higher Costs in Year One?)

Of course, a group captive isn't the right fit for every business. Here are three situations worth considering:

• A business that can't manage the initial financial commitment without putting pressure on cash flow.
• A business with a loss history that fluctuates significantly from year to year.
• An owner who expects the same fixed insurance cost every year, with little interest in participating in the results.

For these clients, the better approach may be to strengthen their safety and loss-control programs now and revisit a captive strategy later. Your role is to help them make the right decision, even when that means waiting. And if cash flow is the main concern, there may be alternatives worth exploring. (Do Clients Have to Tie Up Cash for Collateral?)

How Do You Work Out Your Client's Actual Numbers?

It comes down to two questions: Can the business manage the financial commitment in years one and two, and does its loss history support a long-term captive strategy?

If you have a client in mind, send Captive Coalition five years of their loss runs. We'll work through the numbers and build a table like the one in this article using their actual account information. You'll then have something concrete to bring to the conversation.

If you're still getting comfortable explaining captive costs, start with Why Does a Captive Require Collateral?. It explains why the money is held and provides useful background for this discussion.

Related Resources

• When Does Collateral Come Back to the Client? Read this next if your client's biggest worry is how long their money is tied up.
• How Do I Explain Higher Costs in Year One? Talking points for the meeting itself.
• Do Clients Have to Tie Up Cash for Collateral?

It's always your client. Never ours.