Your renewal came in high. You may not have to live with it for a year.

The loss funds are two funds, stacked in layers, and every claim climbs those layers from the bottom. About 60% of premium is typical; in some groups it runs a little over 70%.

The A fund is the bottom layer. It pays the first part of every claim, from $1 to $150,000. It is called the frequency fund because it handles the small, frequent claims, and it holds most of the premium.

The B fund, also called the severity fund, pays the part of a claim from $150,001 up to the retention, and it also pays once the A fund is used up. The retention is how much of each claim the captive pays itself before reinsurance takes over: $400,000 in this example.

Anything above the retention is paid by the reinsurance carrier, up to where the umbrella policy starts.

A claim is paid from the bottom up, and the company's own money always goes first: its A fund, then its B fund, then risk sharing with the group up to the retention, then reinsurance.

Take an example company with an A fund of $200,000 and a B fund of $32,000. A $75,000 claim has already come in, so $125,000 is left in its A fund. Now a much bigger claim arrives: $500,000.

1. Everything left in its A fund: $125,000
2. Then the whole B fund: $32,000
3. Risk sharing covers the rest, up to the $400,000 retention: $243,000
4. Reinsurance pays the part above the retention: $100,000

Operating costs are what it takes to run the captive: reinsurance, claims handling, management, accounting and regulatory fees.

A captive quote shows the exact amount for each one, so every dollar of the price is shown to you.

Operating costs are spent either way, whether the year has claims or not, which is why they are called below-the-line costs. They are not the money that comes back. The loss funds are.

Every insurer runs the same simple equation: premium comes in, operating costs and claims go out, and whatever is left over is the insurance company's profit. In a group captive the members own that company, so they share in what is left.

If a company's A fund and B fund are both empty and another claim comes in, the captive fronts the money. This is called an assessment: an extra amount the company owes the captive and repays over time.

It is capped. The most a company can be assessed is one times its A fund: $200,000 for the example company with a $200,000 A fund.

It is repaid over three years, quarterly: typically 50% in the first year, then 25% and 25%. Some groups use a 50 / 30 / 20 split. Either way, the amount and the schedule are known in advance, so the company can budget for them.

In traditional insurance, a bad year shows up at renewal instead: the insurer may send a large increase about 30 days before renewal, or decline to renew at all.

Risk sharing means members chip in on each other's larger claims. It sits in the B fund: typically 6 to 15% of the B fund goes to it.

When a large claim uses up a member's own A fund and B fund, risk sharing covers the rest, up to the retention. Above the retention, reinsurance pays.

It is based on size. A smaller member contributes much less to the group's large claims than a much larger member does.

That is why a captive only accepts well-run companies with strong safety programs. Members are very rarely removed, and only with years of notice.

Pricing starts by sorting claims by size. An actuary, the specialist who prices insurance, separates small, frequent claims from large ones. Small claims are predictable, like free throws in basketball; large ones are like half-court shots, so they are priced apart.

Claims also keep growing after the day they happen. An injury claim first estimated at $20,000 can close at $60,000 a couple of years later: treatment runs longer, lawyers get involved, and the final bill is bigger than the first estimate. So young years are grown to their likely final cost.

One shock loss is capped at $150,000 in the loss pick, so a single bad claim does not set your price.

Large members are priced mostly on their own record; smaller ones lean on the group until they build one.

Each of your last five years becomes a cost per unit, in today's dollars. Recent years count the most; older years count less. The weighted average is the loss pick.

The loss pick times the units you have today is the A fund. In this example:

$5,093 per unit × 28 units = $142,604 the loss pick × units today = the A fund

The B fund and the operating costs are then figured as percentages of it. In a captive, most amounts are figured as a percentage of the A fund, so it is the number to watch. For the example company with a $200,000 A fund, the B fund is 16% of the A fund: $32,000.

You become an owner. Joining means buying one share of stock in the captive. A share typically costs $15,000 to $40,000, depending on the group. It is your ownership stake, not a fee, and you get it back if you ever leave.

Collateral: a security deposit. Like the deposit on a lease, it is not a payment and is not spent. You can post it as cash or as a letter of credit. Cash collateral is invested alongside the premium and grows, and it is only touched if a member fails to pay what it owes.

Collateral equals two thirds of the A fund, and you post it in three equal parts: the same third in each of your first three years. On a $200,000 A fund that is about $44,000 a year, about $133,000 in all. It does not go up each year. After year 3 it is only adjusted if your A fund grows or shrinks.

Unused loss-fund money comes back as distributions. The first one typically comes at the end of year three, because a year needs about three years for its claims to close.

So year 1's money comes back at the end of year 3, as year 4 begins. Year 2's comes back at the end of year 4, as year 5 begins, and so on: after the first, about one distribution every year.

An open claim holds back only its reserve. Take a year with $250,000 in its funds and one lawsuit reserved at $180,000: the clean portion is released, and only the reserve waits.