Where does a dollar of insurance premium actually go?
Acquisition cost, expenses and claims, in that order
Queen answers from inside the economics rather than from the buyer's side. A carrier spends a large share of every premium dollar simply acquiring the customer, then carries its own expenses, and only then pays claims. He is careful that this varies widely between personal and commercial lines and between admitted and surplus lines markets, but his summary is blunt: insurance is expensive, and carriers make their money on volume.
The first cost in the chain is not a claim. Queen puts customer acquisition first, and describes it as a real share of every premium dollar a carrier takes in. Expenses sit on top of that, and claims on top of those. The combined ratio he quotes for admitted lines is the sum of all of it.
He immediately qualifies the number. There is a great degree of variability, he says, and a large difference between personal and commercial lines and between the admitted and surplus lines markets.
Key takeaways
Queen orders a carrier's costs as customer acquisition first, then expenses, then claims, with the combined ratio as the total.
He hedges the figures deliberately, noting wide variation between personal and commercial lines and between admitted and surplus lines markets.
His case for a captive is narrowness rather than cheapness: a business with few claims stops being averaged against everybody else's losses.
The contrast he draws is not that captives are cheaper but that they are narrow. Captive insurance, in his phrase, is a specialty and a sniper. A single business with genuinely good loss experience is not being averaged against a book, and the money that would have been a carrier's profit stays inside the company that generated it.
He works it through with a hospital system holding a large single parent captive: with few claims, funds accumulate until the actuaries release them. In property, he says, that release comes at the end of almost every year, which is why the effect shows up quickly for real estate owners rather than over a decade.
From the conversation
Matt Queen
Captive Insurance Attorney and MGA Executive, Author of Modern Captive Insurance
“With that being said, captive insurance is like a specialty and it's a sniper.”
Transcript
Read the full transcript 6 turns
HostSo the
Matt Queencustomer acquisition cost and insurance carrier is really odd. That can be 25 to 30 cents on the dollar to get one dollar premium in the door for a carrier. And above and beyond that, you have expenses and above and beyond that, you have claims. Consequently, the combined ratio for most of your admitted lines will be in the 90 some odd percent range. Now, that has a great degree of variability and there's a huge difference between personal lines and commercial
Matt Queenlines, admitted markets and ENS markets, but insurance is expensive. And they make the money on volume for the most part. With that being said, captive insurance is like a specialty and it's a sniper. And if you have someone who's really good at what they do and they don't post a lot of losses, you can very well have a combined ratio of like 11%, which means that they're going to be making 89 cents on the dollar per dollar premium, which
Matt Queenmeans they otherwise would have been a huge profit source to a traditional carrier, but now they've decided to in house that. And that's a reasonable number, by the way. If you have a large single parent captive for a healthy, let's just say, hospital system with eight, nine, ten million dollars worth of gross written premium. And let's just say they don't have any claims or they have very, few claims. They very well might only be paying your capital manager a capped, you know, quarter million dollars or maybe in half a million dollars a year. And as a
Matt Queenconsequence, if they don't have any claims, that's a whole lot of capital gains just sitting around that are going to be available once the actuaries release that funding. Now, healthcare and medical malpractice would be a long tail situation and the property insurance environment, the actuaries are going to release all that money pretty much at the end of the year, almost every year. And what that means is you all of a sudden have a phenomenal amount of capital gains you can distribute instantaneously. And
Matt Queenthat's been the source of a lot of liquidity and bonuses and wealth for REITs and other real estate conglomerates in the
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