Getting Captive Insurance Pricing Right

Milliman actuary Mike Meehan authored the article "Pricing for Captives: Communication Is Key to Getting It Right," which covers best practices for captive insurance pricing.

When done "right," setting premium rates for a captive, particularly a captive start-up, involves a number of considerations, including the following.

• Risks being insured
• Perils, both covered and excluded
• Credibility of past loss experience
• Communication between the risk manager, underwriter, claims manager, and actuary
• State location of where the risks being covered are located, which, depending on the type of coverage, can include the following
  • Workers compensation statutes and benefit levels
  • Liability court decisions
  • Liability statutory limits
• Scope and effectiveness of the loss control program

Mr. Meehan’s article stresses the importance of communications between the several parties. He points out that "actuaries use historical data to extrapolate future projections" with the underlying assumption "that the past is representative of the future." However, that underlying assumption may not be valid. Communications by the risk manager, underwriter, claims manager, and actuary are critical to establishing captive insurance pricing that is appropriate—not excessive or inadequate.