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”
Transcript
Read the full transcript 17 turns
kind of brings us to our next question, which is
the day premium lands in the captive and collateral, what happens to it? Where does it go? Who decides
where it's invested? Well, the captive manager makes the first decision. So, you know, the they do
underwriting, they do actuarial analysis and they come up, the captive comes up with, okay, this is
what your premium is going to be. Okay, now the premium is get put into the captive. What happens
first is, the various service providers, you know, they get paid and reinsurance is purchased,
so there's a payment for that. Obviously, if there's any other things that need to get paid,
but then what's left, that money that's left, there's statutory capital that's required
capital. Now, since this is an ongoing captive, that's already been met, the statutory
capital. And then, and then you have surplus capital, and both the statutory capital and the
surplus capital get invested. And that's where I come in. That's what I do. I manage money
for captives. And so, you, invest that with a, with an eye and an understanding to what risks
are being insured. And the nature of that risk, in other words, is it, is it high frequency, low
severity? In other words, you have a lot of little claims, or is it more like catastrophe
insurance or, you know, where you may never, you may not get a claim for 10 years, but then you
might get a claim for $5 million. Of course. And so, those are two, so the way you would invest
for those different kinds of risks determines a lot on what type of thing you invest in
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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