The $150 Billion Gap:
What Your Insurance Premium Really Funds

What $1 trillion in P&C premiums reveals about who owns the upside of your good risk

3F CAPTIVE SERVICES  |  BUSINESS RISK & INSURANCE

As business owners watch their commercial premiums climb regardless of claims history, more and more companies are discovering the benefits of captive insurance. But what is captive insurance? How does the model work? And how to understand whether it's worth exploring for your business? This article answers these questions. But before delving into what “forming a captive” means, it is worth understanding how traditional insurance works and exactly why those premiums keep climbing.

A peer-reviewed analysis out of the Vanderbilt Policy Accelerator, published in the Columbia Business Law Review, put a number on something most business owners have felt for years but never seen quantified: for every $1 U.S. property and casualty insurers collected in premiums in 2024, they paid out roughly 62 cents in claims. This is a 61.8% pure loss ratio, against a five-year average of 63.39%. In the 1980s and 1990s, that same ratio averaged above 80%. Applied across a P&C premium market that exceeded $1.03 trillion in 2024, the researchers’ own 10-year figure (72.7 cents paid per premium dollar, 2014–2024) works out to roughly $100 billion a year in excess premium versus the historical benchmark. Press coverage of the study, using a broader calculation, put the number at closer to $150 billion annually.^[1]   The Associated Press carried the finding nationally.^[2] Insurance industry groups dispute the methodology, arguing the capital insurers must hold to pay future claims.^[3] Whichever number you use, these numbers are worth your attention. That gap is a big part of why more businesses are exploring captive insurance as an alternative to the traditional model, and it’s where the answer to what captive insurance actually is begins.

Across industries, even when businesses boast a clean five-year loss run, premiums are frequently going up. This is simply the economics of a traditional insurance model working exactly as it was built to work. If your company is consistently a good risk, the real question isn’t why your premium keeps climbing: it’s who is capturing  the economic benefit of your good performance.

Every Business Already Self-Insures

Every business self-insures. The question is how efficiently a business self-insures.

Every deductible is self-insurance. So are excluded losses, uncovered exposures (known and unknown), claims above policy limits, risks you intentionally retain, and the smaller losses absorbed simply because filing a claim isn’t worth it economically.

Here’s what commercial insurance actually is: a pool. Your premium goes in alongside everyone else’s. The carrier pays claims out of that pool, and whatever’s left — after claims, administrative costs, commissions, reinsurance, and the insurer’s return on capital — flows to the carrier’s shareholders. You are not one of those shareholders. Roughly 27 to 38 cents of every premium dollar stays with the carrier, covering overhead, commissions, and shareholder returns. There’s nothing inherently wrong with that model. But economically, you are still the customer. The insurer owns any positive underwriting result.

Federal and industry data, analyzed by independent researchers, puts numbers on that spread:

• 62 cents in claims paid per $1 of P&C premium in 2024 (a 61.8% pure loss ratio), against a 63.39% five-year average and roughly 80% historically^[1]
• Roughly 50 cents in claims per $1 in workers’ compensation premiums specifically (a 49.72% five-year average) — the most profitable major commercial line for five consecutive years^[1]
• 50 percent of P&C claims denied in 2023; of more than 63,000 confirmed consumer complaints filed with state insurance departments in 2025, the carrier’s original position was upheld in only about 2,565 cases, or roughly 4 percent^[1]

These figures shouldn’t be read to mean every denial is improper. Some claims fall outside the policy, some are fraudulent, some disputes are legitimate. But they reinforce a basic business reality: the value of insurance isn’t just the price of the policy. It’s also the quality, clarity, and reliability of the coverage when a loss actually occurs.

What Is Captive Insurance?

A captive insurance company is a licensed insurer that a business forms and owns to cover selected risks that would otherwise be transferred to a commercial insurer or simply absorbed by the business itself.

Think about risk as types, or buckets. Most businesses effectively have two buckets of risk. One of these buckets of risks gets transferred to traditional insurance carriers, in exchange for premiums.  But what about everything else?  The exclusions, deductibles, uninsured losses, and risks the commercial market will not cover economically? This other bucket of risks gets retained by the business, and is paid directly from operating revenue when losses occur.

A captive creates a third bucket. The business can continue using traditional insurance where it makes sense, continue retaining certain risks directly, and selectively move other risks into its own captive insurance company (the captive). Those captive-covered risks are formally insured, with premiums paid into the captive and claims paid according to the policies it issues.

The distinction matters. Instead of simply absorbing those losses from operating cash flow, the business is deliberately funding the risk through an insurance structure it owns. If covered losses occur, the captive is there to pay them. If losses are lower than expected, the underwriting profit and accumulated reserves remain within the captive rather than becoming profit for a commercial insurance carrier.

The result is not necessarily less traditional insurance. It is a more intentional approach to risk: deciding which risks should be transferred to the commercial market, which should be insured through the captive, and which the business is comfortable retaining directly.

It’s worth returning to the Vanderbilt research referenced above, because it points to part of why this gap exists in the first place: traditional insurance policies are priced and structured for broad buckets of similar customers. They are built to work reasonably well across thousands of similar policyholders, which means they often do not address the specific risks a particular company actually faces.  And, good operators with relatively low losses are in the same pool of those insured, meaning these relatively low loss businesses subsidize the high-loss operators.

A captive can create coverage built around the business itself, shaped by its actual risk profile rather than a standardized policy form. That can be particularly valuable as businesses encounter new or evolving exposures that commercial insurance products have been slow to address.

How a Captive Works

The basic model is straightforward:

1. Identify the risks. The business determines which risks make sense to insure through the captive, including risks that may be excluded, expensive, or poorly addressed by traditional coverage.
2. Form the captive. The business establishes its own insurance company with the appropriate legal, actuarial, regulatory, and administrative structure.
3. Pay premiums. The operating business pays premiums to the captive, which it owns, for those policies, just as it would pay a commercial insurer.
4. Pay covered claims. When a covered loss occurs, claims are paid from the captive according to the terms of its policies.  For most captives, there will be risk-sharing so that for every dollar of loss for the parent company, the captive will cover a portion of the loss (e.g. for every $1.00 of loss, the captive pays the parent company $.50 and the pool of other captives with which the captive is grouped, will pay the parent company $.50.  So, the parent company receives $1.00 in coverage while the captive only pays $.50 of that loss).
5. Build reserves. Premiums not needed for claims and operating expenses remain in the captive as reserves.  Those reserves are invested, in the same way that traditional insurance companies invest premiums.  Those premiums compound year after year.
6. Manage larger exposures. When appropriate, reinsurance can be used to help protect the captive against unusually large losses.

The important difference is ownership. With traditional insurance, underwriting profit ultimately belongs to the insurance carrier. With a captive, favorable underwriting results can remain with the business’s own captive.

In a captive, favorable claims years build your reserve instead of someone else’s margin.

That doesn’t mean every premium dollar becomes profit. Captives carry real claims, expenses, reserves, reinsurance costs, and regulatory requirements of their own. Some years run better than others. But when underwriting results are favorable, the economic benefit stays with the captive’s owners, not a carrier whose financial relationship with you resets at every renewal.

Businesses are catching on. AM Best-rated captives grew net premium 7% in 2025, capping five straight years of growth that added up to 65.5% cumulatively.^[4] Formation activity backs that up: Vermont, the largest U.S. captive domicile, licensed 51 new captives in 2025, up from 41 the year before. Representing one of the three strongest formation years in the state’s history.^[5] That growth is happening even as commercial insurance pricing broadly continues to soften. Fortune 500 companies have long-relied on the benefits of forming a captive. That same economic reasoning used in the C-Suite of the Fortune 500 is accelerating captive formation in mid-sized businesses.

Captives are a structural risk-financing decision, not simply a hard-market escape hatch.

What Most Business Owners Assume is Wrong

There are a variety of objections and assumptions around captive insurance.

“I’d have to drop my commercial coverage.”

No. A captive sits alongside your existing commercial program, not in place of it. In most structures, the commercial layer stays exactly where it is while the captive assumes a defined portion of predictable risk, fills coverage gaps, or covers exposures the traditional market handles poorly or not at all. You’re not trading coverage. You’re adding it and thereby creating a business that is less exposed to total risk.

“This will complicate my broker relationship.”

It won’t. Your broker keeps the commercial book. Nothing about that changes. A captive adds another risk-financing layer rather than removing the broker from the relationship, and it gives you both more options around deductibles, retentions, limits, and coverage design. If anything, you become a more sophisticated client to work with.

“I don’t want to run an insurance company.”

You won’t. Captive owners are insurance company owners, not insurance company operators. Formation, licensing, regulatory compliance, reporting, accounting, and claims administration are handled end-to-end. The captive runs in the background. You run your business.

Is It Worth a Closer Look?

Four questions. Use them as screening questions, not hard eligibility rules:

• Is your total insurance spend $250,000 or more annually, across all lines?
• Has your claims history been favorable over the last five years?
• Have you ever had a claim denied, or discovered a coverage gap after the fact?
• Are your premiums rising while your claims trend is improving?

Answering “yes” to at least two of these questions suggests a conversation about forming a captive would be time well spent. Not because a captive is automatically the answer, but because there may be enough premium, enough retained risk, and enough favorable loss experience in your existing program to justify examining whether there’s a better risk management structure available for your business.

A Note on Legitimacy

Captives are licensed, regulated insurance entities. Internal Revenue Code Section 831(b) has been on the books for decades, and captive insurance has been used by large corporations for more than 40 years. Accessibility is changing. Today, structures that historically made sense only for very large organizations are now economically viable for qualifying middle-market businesses.

There were 3,466 U.S. domestic captives in 2024, up from 3,365 the year before.^[6] AM Best estimates that the captives it rates generated roughly $8.2 billion in savings for their owners over the past five years. This is capital that would otherwise have flowed into the commercial insurance market.^[4]

There’s also real regulatory scrutiny, as there should be. In January 2025, Treasury and the IRS finalized regulations identifying certain micro-captive transactions as listed transactions and others as transactions of interest, with disclosure obligations and penalties for noncompliance.^[7] A legitimate captive has to be built first and foremost as a real insurance company, which means genuine risk transfer, sound underwriting, appropriate pricing, claims administration, reserves, and regulatory compliance. The structures that attracted enforcement attention were not built that way.

Before You Decide Anything, Find Out What You Already Own

Many businesses frequently spend hundreds of thousands (sometimes millions!) of dollars on insurance governed by hundreds or thousands of pages of policies, endorsements, exclusions, limits, sublimits, and definitions. Very few have ever had someone explain those documents back to them in plain English. This itself is of enormous benefits, and that’s where we begin.

The promise is simple: keep the protection you need, while gaining greater control over how you insure and manage risk and where your insurance dollars go.

Our no-cost analysis examines your existing policies, premium spend, loss history, and risk profile. We look for coverage gaps, inefficiently insured lines, and exposures you may be retaining without realizing it. We identify the specific policy language most likely to produce a denial when a claim is filed, and we tell you where your existing coverage is already doing exactly what it should.

Sometimes that analysis leads to a captive. Sometimes it doesn’t. Either way, you’ll know what you actually bought. Knowledge is power. Uncertainty is weakness.

If formation does make sense, the process typically runs three to six months, fully managed, depending on structure, domicile, underwriting, and the regulatory process. The reserve begins building in year one and compounds from year two forward. Every year a qualified operation waits is a year of compounding the business doesn’t get back.

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⚠  This article is for informational purposes only and does not constitute insurance, legal, or tax advice. Captive insurance structures involve complex regulatory and tax considerations that vary by jurisdiction, entity type, and specific facts. Consult qualified insurance, legal, and tax advisors regarding your specific situation.

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Sources

^[1]  Brian Shearer, “Regulating Insurance as a Public Utility” (forthcoming, Columbia Business Law Review, April 2026) and “How to Lower the Insurance ‘Tax’ By $150 Billion,” Vanderbilt Policy Accelerator (April 2026). Primary source for loss ratio data (72.7% ten-year net average, 2014–2024; 61.8% 2024 pure loss ratio; 63.39% five-year average; 49.72% five-year workers’ compensation average), claim denial rates (50% in 2023), NAIC complaint-disposition data (63,000+ confirmed complaints in 2025, 2,565 upheld), and the $100–150 billion excess-premium estimates.

^[2]  Josh Boak, Associated Press, “You’re probably paying more for insurance lately. A new study suggests federal action to cut costs,” via Fast Company (May 2026).

^[3]  Insurance Journal, coverage of the Vanderbilt analysis and industry rebuttal (May 4, 2026).

^[4]  A.M. Best, “Rated Captives Continue to Demonstrate Financial Stability in an Evolving Risk Landscape,” Best’s Market Segment Report (2026, covering year-end 2025). Reports 7% net premium growth for AM Best–rated captives in 2025, 65.5% cumulative premium growth over the trailing five years, and an estimated $8.2 billion in savings generated for captive owners over that span.

^[5]  Vermont Department of Financial Regulation, reported via Captive Review, “Vermont Licenses 51 New Captives in 2025” (Jan. 21, 2026). Vermont, the largest U.S. captive domicile, licensed 51 new captives in 2025, up from 41 in 2024 — among the three strongest formation years in state history.

^[6]  Risk & Insurance, “Captive Insurers Save Owners Billions Even as Hard Market Abates” (Aug. 5, 2025), summarizing AM Best’s captive review: 3,466 U.S. domestic captives in 2024, up from 3,365 the year before.

^[7]  Internal Revenue Service, T.D. 10029, “Micro-captive Listed Transactions and Micro-captive Transactions of Interest,” effective Jan. 14, 2025.

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