Advantages

• The standard market incurs many expenses not related to individual clients, it is inefficient, and the buyers have to pay for that inefficiency. Captive companies have a lower fixed cost (“expense ratio”).



• The standard market automatically retains investment income on what is essentially their policyholder’s money. Captive owners hold their own loss funds and premiums on which they earn investment income.



• The standard market is subject to insurance cycles, alternating between artificially low and excessive premiums, when the basic purpose of the industry is to stabilize costs. Captive owners fund their own predictable losses while reinsuring catastrophic exposures. Premiums can be stabilized through loss control.



• The standard market selects only those classes of risk that conform to its “standards”. Captive owners decide which risks are acceptable and evaluate prospective members.



• The standard market avoids providing individual services on a fee basis. Captive owners decide which services will be purchased promoting cost effectiveness.



• The standard market will not provide a long-term deal to a corporation wherein the parties agree on the after-tax, after-investment cost to the insurer of providing its service plus a reasonable profit. Captive owners negotiate fees in advance with the fronting insurance company for selected services and guide their own tax and investment programs.