Executive Summary

In April 2026, the Vanderbilt Policy Accelerator published a 76-page peer-reviewed analysis of U.S. property and casualty insurance pricing titled "Regulating Insurance as a Public Utility." The author, Brian Shearer, is a former Assistant Director of Policy Planning at the Consumer Financial Protection Bureau. The paper is forthcoming in the Columbia Business Law Review. The author has no financial interest in the captive insurance industry.

The paper's central finding, supported by an original 50-state analysis of National Association of Insurance Commissioners data, is that U.S. Property and Casualty (P&C) carriers collect approximately $100 billion more in annual premiums than their actual loss costs require. The five-year average pure loss ratio across all P&C lines is 63.39 percent, compared to a historical norm of approximately 80 percent and a legally mandated floor of 80 to 85 percent for health insurance. [1]

This white paper summarizes those findings and applies them to the captive insurance decision. The argument for captive insurance does not require advocacy assumptions or industry projections. The NAIC data makes the case on its own: businesses are paying substantially more in commercial premiums than their actual risk costs require, the excess funds carrier overhead and profit rather than claims, and a captive insurance company is the structure that keeps that difference inside the business.

Five findings from the research define the decision framework:

• Loss ratios are at historic lows. The five-year P&C average of 63.39 percent compares to a norm of 80 percent and a health insurance legal floor of 80 to 85 percent. The gap is approximately $100 billion in excess annual premiums.
• Workers' compensation is the most overpriced major line. The five-year average loss ratio of 49.72 percent means carriers paid out less than 50 cents per premium dollar. For staffing companies, contractors, and transportation firms, this is their largest insurance expense.
• Non-claims expenses absorb a third of every premium. Selling expenses alone, including advertising and commissions, consumed 16.3 percent of net premiums in 2023. That is over $160 billion, more than the entire IRS budget.
• P&C insurers denied 50 percent of claims in 2023. Health insurers denied 20 percent. Of contested P&C denials, the carrier's position was upheld in only 4 percent of cases.
• The industry earned record profits while raising premiums. Return on assets and return on revenue exceeded 15 percent in 2024. The U.S. Treasury described 2024 as a year of sharp gain in underwriting profit.

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Every business self-insures. The question is not whether, but how efficiently. The NAIC data defines the cost of doing it inefficiently through the commercial market. A captive insurance company is what doing it efficiently looks like.

Part I: About the Research

Understanding why the Vanderbilt research carries weight requires understanding what it is and who produced it.

Brian Shearer served as Assistant Director of Policy Planning and Strategy at the Consumer Financial Protection Bureau. He is now Director of Competition and Regulatory Policy at Vanderbilt University's Policy Accelerator, an independent research institution. His paper is not funded by the insurance industry, the captive insurance industry, or any financial services company. It is an independent academic analysis of publicly available federal data.

The paper's data comes entirely from the National Association of Insurance Commissioners, the standard-setting and regulatory support organization for U.S. state insurance regulators. The NAIC publishes annual data on premiums collected and claims paid across every major line of P&C insurance, broken down by state and company. This data is public, audited, and used by the industry itself to track market performance. It is the same data insurance commissioners rely on when reviewing rate filings. [2]

The paper's conclusion that premiums are approximately $100 billion too high per year is not a projection or a model output. It is the arithmetic result of comparing the industry's actual reported loss ratios to the historical norm and to the legally mandated health insurance standard. The gap is documented, not estimated.

For business owners evaluating captive insurance, the significance of this sourcing is straightforward: the argument for a captive does not rest on captive industry advocacy or on projections that assume a business will have lower claims than average. It rests on what the insurance industry itself reports about how much of every premium dollar goes to claims versus everything else.

Part II: What the Loss Ratio Data Shows

Understanding the Loss Ratio

A loss ratio is the most direct measure of insurance efficiency: claims paid divided by premiums collected. A loss ratio of 80 percent means 80 cents of every premium dollar pays claims. A loss ratio of 60 percent means 40 cents of every premium dollar goes to overhead, commissions, advertising, executive compensation, investor returns, and profit.

Two benchmarks put the current P&C numbers in context. First, the historical norm: from 1980 to 2000, net P&C loss ratios averaged approximately 80 percent. Second, the regulatory standard: the Affordable Care Act requires health insurers to maintain loss ratios of 80 to 85 percent and rebate the difference to customers if they fall short. P&C insurance, which involves less administrative complexity than health insurance, has averaged 63.39 percent over the past five years.

The difference between 63.39 percent and 80 percent, applied to the $1.03 trillion in P&C premiums collected in 2024, is approximately $170 billion. Even using a more conservative plausible benchmark of 72 to 75 percent, the overcharge exceeds $100 billion annually.

Loss Ratios by Line

The overpricing is not uniform. The table below shows five-year average pure loss ratios for major commercial lines, sourced from NAIC 2024 Market Share Reports as analyzed in the Shearer paper. Pure loss ratio measures claims paid only, excluding all overhead.

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Source: NAIC 2024 Market Share Reports, as cited in Shearer (2026). Pure loss ratio = claims paid divided by premiums collected, excluding all non-claims expenses. Five-year averages cover 2020-2024.

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What These Numbers Mean in Business Dollars

The loss ratio data has a direct financial translation for any business owner. The table below applies the overall five-year P&C average loss ratio of 63.39 percent to show how much of each premium level represents expected claim cost versus the amount the commercial carrier retains for all other purposes.

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Based on the five-year average pure loss ratio of 63.39% across all P&C lines (NAIC 2024). Individual results vary by line of coverage, industry class, geography, and carrier. For lines with lower loss ratios, such as workers' compensation at 49.72%, the carrier's retained amount is substantially higher.

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A business spending $300,000 annually on total commercial insurance, at the five-year industry average, is funding approximately $110,000 per year in carrier overhead, commissions, advertising, profit, and executive compensation. Over five years, that is approximately $550,000 directed to something other than covering the business's own risk.

For lines with worse loss ratios, the figures are more significant. A business with a workers' compensation premium of $300,000 per year is funding approximately $151,000 annually beyond expected claim cost, at the 49.72 percent five-year average. Over five years, that is approximately $755,000 that has built the carrier's reserve rather than the business's own financial position.

The commercial market pools your loss experience with thousands of other businesses. A company with excellent loss history pays nearly the same rate as one with poor loss control. Your discipline generates profit for the carrier. In a captive, it generates reserve for you.

Part III: Where Your Premium Goes

The roughly 37 cents of every P&C premium dollar that does not go to claims is distributed across four categories, documented in the Shearer analysis using NAIC profitability data. [3]

Selling expenses: 16.3 percent of net premiums. This is the largest non-claims category. In 2023, the P&C industry spent over $160 billion on advertising and agent commissions. For comparison, the entire budget of the U.S. Internal Revenue Service is approximately $18 billion. Insurance is legally or practically mandatory for most businesses. The social value of spending $160 billion to acquire customers who have no practical alternative is minimal. And competition for agent referrals creates what economists call reverse competition: carriers compete by raising commissions, which raises prices for policyholders rather than lowering them.

Loss adjustment expenses: approximately 10 percent of net premiums. These are the costs of processing claims, including adjusters, investigators, and attorneys. A portion represents legitimate administrative cost. A portion, as the paper documents, represents the cost of minimizing claim payouts, which may contribute to the high denial rates discussed in Part IV.

Overhead and executive compensation: approximately 8 percent of net premiums. The paper notes that the CEOs of the top 10 auto and homeowners insurers were paid a combined $250 million in 2022 and 2023. State Farm, the largest private P&C insurer in the U.S., owns four private jets.

Profit and investor returns. In 2024, the P&C industry earned a return on assets and return on revenue exceeding 15 percent, up from 8 to 9 percent the prior year. The U.S. Treasury Federal Insurance Office described 2024 as a year of sharp gain in underwriting profit, despite higher estimated catastrophe losses.

The P&C industry collected $1.03 trillion in premiums in 2024. After paying all claims, $383 billion remained. The industry earned an additional $164 billion in investment income on the reserves it holds. This happened while premiums continued rising across every major commercial line.

Part IV: The Claim Denial Problem

The Shearer analysis documents a P&C insurance claim denial rate of approximately 50 percent in 2023. Health insurance, which is routinely cited as the leading example of wrongful claim denials and is subject to intense regulatory and public scrutiny on this issue, denied approximately 20 percent of claims in the same year. [4]

Of the P&C claims formally contested with state insurance departments in 2025, the carrier's original denial position was upheld in only 4 percent of cases. For the remaining 96 percent, the carrier's position was either overturned or settled in the claimant's favor. This suggests that a meaningful share of initial denials are abandoned when challenged, rather than reflecting a genuine coverage determination.

The practical implication for business owners is significant. A commercial policy that denies half of all claims, and reverses the majority of those denials when challenged, is not performing as most policyholders assume when they renew each year. The coverage that appears comprehensive on the declarations page may contain exclusions and sublimits that only become visible when a claim is filed.

A captive insurance company addresses the denial problem at the structural level. The captive's coverage form is written for the specific risks of the specific business, not for an industry average. The exclusions that allow commercial carriers to deny claims for regulatory actions, cyber business interruption, contractual indemnification, and specialized professional liability exposures do not need to exist in a captive policy. The business writes the terms because the business owns the insurer.

The gap between what a business owner believes their policy covers and what it actually covers is the single most expensive misunderstanding in commercial insurance. A captive closes that gap by design.

Part V: What a Captive Insurance Company Does Differently

The Structure

A captive insurance company is a licensed insurer formed and owned by the business or businesses it insures. The captive is a real insurance company, subject to insurance regulation in its domicile jurisdiction, with actuarially determined premiums, a board of directors, annual audits, and professional management. It is not an offshore account, a tax shelter, or an unregulated arrangement.

Instead of paying premiums to a commercial carrier, the business pays premiums to its own captive. The captive insures real business risks at actuarially supportable rates. Claims are paid from captive reserves. If loss experience is favorable, the reserves accumulate as financial assets that belong to the business. If loss experience is unfavorable, the captive pays the claims, just as a commercial carrier would.

A captive does not replace commercial insurance. Most businesses maintain their commercial program alongside the captive. The commercial policy covers the large, pooled risks it was designed to cover. The captive covers the retained layer, coverage gaps, specialty exposures the commercial market prices poorly, and risks the commercial policy excludes entirely.

What a Captive Covers That a Commercial Policy Often Does Not

For many businesses, the most significant captive benefit is not the loss ratio economics but the coverage quality. Commercial policies contain standard exclusions that leave real business exposures uninsured. The most common gaps, documented in the claims denial and coverage analysis literature, include:

• Regulatory investigation and defense costs. Commercial general liability policies cover bodily injury and property damage, not the cost of responding to a government investigation. A captive can write regulatory defense coverage at meaningful limits.
• Business interruption from non-physical causes. Standard business interruption coverage requires a covered physical loss. A cyber attack, a regulatory order, or a supply chain disruption that causes real revenue loss may not trigger it. A captive can write business interruption without the physical damage requirement.
• Contractual indemnification liability. Commercial GL policies typically exclude coverage for liability assumed in a contract, including the broad indemnification clauses standard in construction and service agreements. A captive can cover this exposure.
• Specialty professional liability. Practices and businesses that offer services outside the standard professional liability class codes often find commercial markets inadequate or unavailable. A captive can write coverage for the specific services the business actually provides.
• Equipment breakdown at replacement value. Commercial policies frequently carry sublimits on equipment breakdown that do not reflect actual replacement costs for sophisticated diagnostic, manufacturing, or agricultural equipment. A captive can insure at full value.

Part VI: Industry-by-Industry Analysis

The loss ratio data from the Shearer analysis has specific implications for the industries 3F Captive Services serves. The following analysis applies the NAIC findings to each vertical's primary insurance lines.

Construction

Construction companies carry two of the three most overpriced lines in the commercial market. Workers' compensation, typically the largest line for contractors, had a five-year average loss ratio of 49.72 percent. Inland marine and equipment coverage, which protects contractor equipment on job sites and in transit, averaged 49.50 percent. Together, these two lines represent a substantial portion of most contractors' total insurance spend, and both are paying out less than 50 cents per premium dollar in claims.

Commercial property and general liability coverage, at 59.21 percent and approximately 63 percent respectively, add to the picture. A mid-size general contractor spending $600,000 annually across these lines is funding approximately $220,000 per year beyond expected claim cost. Over five years, that is $1.1 million, not including investment income, directed to carrier overhead, commissions, advertising, and profit rather than to the contractor's own financial position.

Contractors with strong safety programs, documented subcontractor qualification processes, and active claims management consistently generate better-than-average loss outcomes. In the commercial pool, that discipline is invisible to pricing. In a captive, it builds the contractor's own reserve.

Transportation and Logistics

Transportation is the sector where commercial auto pricing pressure is most acute, and the NAIC data provides useful context. Commercial auto had a five-year average loss ratio of 69.04 percent, the highest of any major commercial line. It is the line closest to the 80 percent benchmark, driven by nuclear verdict exposure, rising repair costs, and litigation funding. However, it is still below the benchmark, and the other lines transportation companies carry are significantly worse.

Workers' compensation for drivers and warehouse workers returns a 49.72 percent five-year average. Inland marine and cargo coverage averages 49.50 percent. For a third-party logistics company or fleet operator carrying all three lines, the combined economics are substantially below the 80 percent standard.

Transportation companies with strong driver qualification programs, telematics adoption, and proactive claims management have measurably lower loss outcomes than the commercial pool average. The challenge is that commercial pricing, even with experience rating, lags several years behind actual performance. A captive prices to the business's actual risk profile in real time.

Staffing

Staffing companies present the most concentrated captive opportunity of any major industry, precisely because their largest insurance line is the most overpriced in the market. Workers' compensation is the primary insurance expense for most staffing firms, as they carry comp exposure for every worker placed at every client site, across every job classification. The five-year average loss ratio for workers' comp is 49.72 percent.

A staffing firm placing 500 temporary workers per year and spending $500,000 annually on workers' comp is paying approximately $251,000 more than expected claim cost each year, at the industry average. Over five years, that is $1.25 million that has built the carrier's reserve rather than the firm's own financial position.

Staffing companies with rigorous candidate screening, pre-placement safety training, strong client site vetting, and active return-to-work programs generate substantially better-than-average workers' comp outcomes. In the commercial pool, those companies subsidize the firms that do none of those things. In a captive, the discipline generates direct financial return.

Healthcare and Medical Practices

Medical professional liability had a five-year average loss ratio of 55.29 percent, meaning carriers retained approximately 45 cents of every malpractice premium dollar beyond expected claim cost. This finding is notable in the context of the ongoing policy debate about medical malpractice litigation. The NAIC data suggests that malpractice premiums have not been driven primarily by claims costs, but rather by carrier overhead, commissions, and profit margin expansion.

Workers' compensation for clinical and administrative staff adds a second heavily overpriced line at 49.72 percent. Healthcare practices with large clinical workforces carry this exposure across every employee. Employment practices liability, specialty professional liability for emerging treatment modalities, and cyber coverage for patient data round out the typical healthcare practice insurance program, all of which are handled imprecisely by standard commercial markets.

Cash-pay medical practices, including med spas, cosmetic surgery centers, and concierge medicine practices, have a risk profile that commercial underwriters struggle to price accurately because the class codes were not developed for these business models. A captive can write coverage specifically for the services the practice actually provides, at limits that reflect actual exposure.

Agriculture

Agricultural operations carry a distinctive combination of insurance lines, and the NAIC data shows overpricing across most of them. Inland marine and farm equipment coverage averages a 49.50 percent five-year loss ratio. Workers' compensation for farm labor averages 49.72 percent. These are the two lines where most agricultural operations carry their largest premium exposure.

Farmowners multiple peril, at a 70.50 percent five-year average, is the closest agricultural line to the 80 percent historical benchmark. Rising equipment replacement values are pushing premiums higher without proportionate claims increases, beginning to widen the gap even on this line.

Agricultural operations with strong equipment maintenance programs, documented safety protocols for farm labor, and consistent claims management have loss profiles that differ from the commercial pool average. A captive captures the financial return of that discipline rather than passing it to a carrier.

Part VII: Who Qualifies for a Captive

Not every business is a captive candidate. The structure requires sufficient premium volume to fund meaningful reserves, organizational capacity to participate in captive governance, and a genuine interest in active risk management. The following profile identifies the businesses that consistently make strong captive candidates.

• Total insurance spend of $300,000 or more annually. This is the threshold at which a captive feasibility analysis generally demonstrates real economic value to the parent company. The $300,000 can be across multiple lines combined. It also is not a hard and fast rule. With businesses that have significant risks not well covered by the traditional market, a captive may make economic sense at a much lower premium number.
• Stable, profitable operations. A captive works best for businesses with predictable revenue and the financial stability to fund reserves over time. Businesses in financial distress are generally not good captive candidates.
• Favorable or manageable loss history. The captive rewards businesses that have controlled their risk better than the market average. Clean loss history is also the strongest negotiating tool with commercial carriers, and it is the foundation of the captive economic case.
• Real, insurable business risks. The captive must insure genuine business exposures at actuarially supportable premium levels. This is both a regulatory requirement and a tax requirement under the 831(b) election.
• Management engagement in governance. The captive requires an annual board meeting, actuarial review, audit, and basic insurance company administration. Professional captive managers handle most of this, but the business owner and their advisors need to be active participants.

Part VIII: Making the Decision

The captive decision rests on four questions. Answering them honestly determines whether the structure makes sense for a specific business.

What is your actual total cost of risk? Most businesses track premium spend but not total cost of risk, which includes deductibles paid, uninsured losses, internal claims management time, and the cost of risk mitigation investments. Total cost of risk is the right number to compare against the captive alternative.

What does your loss history say? Five years of loss runs, showing frequency and severity by line, is the foundational document for any captive analysis. A business that does not have this information cannot have a meaningful captive conversation. Pulling it from the current carrier is straightforward, and it is also the single most important negotiating tool at renewal.

What are you not covered for? The coverage gaps analysis is where the captive case often becomes most compelling. Most businesses that conduct a thorough review of their current policy language against their actual operations discover that coverage they believed they had does not exist in the form they assumed.

What does a captive feasibility study show? The feasibility study is a forward-looking analysis prepared by an actuary. It uses the business's historical loss experience as a calibration input, then projects the economic outcome of operating a captive versus remaining in the commercial market over a multi-year horizon, based on actuarially estimated future losses. The study shows the projected financial benefit of the captive structure going forward.  This is the first paid step in the formal captive evaluation process and the foundation for the formation decision.

The Vanderbilt research defines the problem at the market level. The captive feasibility analysis defines it at the business level. The decision lives in the intersection of those two pictures.

Part IX: How 3F Captive Services Can Help

3F Captive Services works with mid-market businesses across construction, transportation, staffing, healthcare, and agriculture to evaluate whether a captive insurance structure makes sense and to implement it when it does.

The process begins with a no-cost analysis of your existing commercial policies. We identify coverage gaps, sublimits, exclusions, and areas where your current program does not reflect your actual risk profile. That analysis is valuable whether or not a captive is the right next step.

If the policy analysis identifies meaningful coverage gaps or if your total insurance spend approaches $300,000, we move to a captive feasibility study. That is a paid engagement conducted with an actuary. It projects the forward-looking economic benefit of a captive structure versus remaining in the commercial market, using actuarially estimated future losses calibrated to the business's experience. The study identifies the coverage structure a captive would use and produces the financial model that supports the formation decision.

For businesses that proceed, 3F manages the full captive formation process: domicile selection, regulatory filing, actuarial work, coverage design, and ongoing management. We coordinate with the client's existing legal and tax advisors throughout, as captive structures involve complex tax and legal considerations that require qualified independent counsel.

Contact 3F Captive Services to schedule a no-cost policy analysis. The Vanderbilt research tells you what the commercial market costs the average business. The policy analysis tells you what it costs yours.

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⚠  This white paper is for informational purposes only. It does not constitute insurance, legal, or tax advice. Captive insurance structures involve complex regulatory, actuarial, and tax considerations that require qualified professional guidance. Loss ratio data is sourced from the Shearer (2026) analysis of NAIC data. Individual business results will vary based on line of coverage, industry class, geography, carrier, and loss history. Nothing in this paper should be construed as a guarantee of specific financial outcomes from a captive insurance structure.

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Sources

  [1]  Shearer, Brian. "Regulating Insurance as a Public Utility." Forthcoming, Columbia Business Law Review (April 2026). Vanderbilt Policy Accelerator. https://cdn.vanderbilt.edu/vu-URL/wp-content/uploads/sites/412/2026/04/28170109/Regulating-Insurance-as-a-Public-Utility.pdf

  [2]  National Association of Insurance Commissioners (NAIC). 2024 Full Year Results, Property and Casualty Insurance Industries. 2025.

  [3]  NAIC. Report on Profitability by Line by State in 2023. April 2025.

  [4]  Weiss, Martin. "Homeowners Beware! Big Insurers Deny HALF of Damage Claims." Weiss Ratings, September 26, 2024. Cited in Shearer (2026).

  [5]  Internal Revenue Code § 831(b); IRS Rev. Proc. 2002-75. Annual premium limit indexed for inflation.

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