What happens to premium after it enters a captive?
Providers and reinsurance are paid first. What is left gets invested.
According to Jack Meskunas, Managing Director at Oppenheimer, the captive manager sets premium through underwriting and actuarial analysis. Once premium arrives, service providers are paid and reinsurance is purchased. What is left covers required statutory capital and surplus, and both are typically invested around the risks the captive actually insures.
The first decision is not an investment decision. Meskunas says the captive manager does the underwriting and actuarial work that sets the premium in the first place.
After the money lands, the order is fairly mundane. Service providers are paid, reinsurance is purchased, and anything else owed is settled. Only then does the question of investing arise.
Key takeaways
The captive manager sets premium through underwriting and actuarial analysis before any investing happens.
Service providers and reinsurance are paid before capital is allocated.
Statutory and surplus capital are typically invested around the claim pattern being insured.
What remains splits into statutory capital, which is required, and surplus capital. Meskunas notes that for an ongoing captive the statutory requirement has generally already been met. Both pools are invested, and that is the point at which he describes his own role beginning.
How they are invested depends on the shape of the risk. He draws the contrast between high frequency and low severity, meaning many small claims, and something closer to catastrophe cover where a claim may not arrive for ten years and then arrives large. Those two patterns call for different portfolios.
Where the premium goes
A premium dollar moves through the captive in a set order.
- 01Premium is set by underwriting and actuarial analysis.
- 02Service providers are paid and reinsurance is purchased.
- 03Statutory capital requirements are covered.
- 04Remaining statutory and surplus capital is invested around the insured risk.
From the conversation
Jack Meskunas
Managing Director, Oppenheimer
“both the statutory capital and the surplus capital get invested”
This answer begins at 10:06 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.
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