Insurance Math Uncovered: Losses, Expenses, Profit

Every year, employers write hefty checks to their workers’ comp insurance carriers. But do you know where that money actually goes? Most companies don’t. They see “premium” as one big, unavoidable number. In reality, each dollar you send to the carrier gets divided into three simple categories: losses, expenses, and profit.

Understanding this breakdown—and how much of it you could keep—is the key to deciding whether you should keep transferring risk or start playing a more active role in the business of insurance.

The $100,000 Example: How Premiums Are Spent

Let’s take a round number: $100,000 in guaranteed cost premium. What happens to that money?

• • Profit (≈10%) → About $10,000 goes straight to the insurance company’s bottom line. That’s their vacation fund, shareholder dividend, or shiny new office furniture.

  • Expenses (≈35%) → Roughly $35,000 covers adjuster salaries, rent, systems, compliance, and administration.

  • Losses (≈55%) → About $55,000 is set aside for your claims—medical bills, indemnity payments, legal fees, nurse case management.

These ratios are approximate, but the concept holds across the industry. Guaranteed cost means you’ve essentially pre-paid for all three slices. Whether you have zero claims or fifty, the carrier keeps its profit and expenses intact. If your actual losses are only $10,000, congratulations—you just funded a very profitable year…for them.

The Core Question: Do You Want to Participate in the Business of Insurance?

Every insurance structure beyond guaranteed cost (retros, captives, large deductibles, self-insurance) is really asking one question:

Do you want to participate in the business of insurance—or keep paying someone else to?

When you retain more risk, you expose yourself to volatility. But you also open the door to capturing the profit and expense margin that carriers otherwise pocket. If you manage claims effectively, prevent injuries, and control severity, those dollars stay with you.

Retain vs. Transfer: Two Sides of the Equation

Transfer-heavy (Guaranteed Cost):

• Stability and predictability—budget certainty.

• Limited control over claims partners and handling.

• You subsidize carrier profit and overhead regardless of performance.

Retention-heavy (Deductibles, Captives, Self-Insurance):

• More control over vendors, RTW enforcement, and litigation strategy.

• Upside: Keep carrier “profit/expense” margin by outperforming on losses.

• Downside: Real risk of loss volatility if prevention and claim management aren’t strong.

The economics aren’t complicated. Every time you move the line between “you pay” and “they pay,” you’re making a decision about how much of that 45%–plus pool of profit and expenses you’d like to reclaim.

When Retention Makes Sense

Shifting from “donor” to “participant” doesn’t happen overnight. It’s best suited for organizations that can answer yes to three questions:

1. Do we have credible, predictable losses?
   If claims data is stable, you can budget retained risk without gambling.

2. Do we execute workers’ comp best practices well?
   Immediate injury response, physician partnerships, return to work, and claim oversight are the gears that turn savings into profit.

3. Do we have financial capacity and governance?
   Retention means collateral requirements, cash flow timing, and tax nuances. If your balance sheet and leadership can handle it, participation becomes viable.

Why Some Employers Stay “Donors” Too Long

Many organizations remain in guaranteed cost even after they’ve built predictable claims and strong management. Why?

• Fear of volatility—Leadership wants certainty, even if it’s overpriced.

• Lack of visibility—They don’t realize how much of their premium is leaving as carrier profit and expense.

• One-trick advice—Brokers or carriers push favored programs, not necessarily best-fit ones.

• Collateral drag—Companies underestimate the impact of letters of credit or cash reserves, even when ROI from retention could outweigh it.

The result: they keep funding insurance company profits instead of capturing them.

A Practical Illustration

Imagine your company pays $2,000,000 in guaranteed cost premium.

• Profit (10%): $200,000

• Expenses (35%): $700,000

• Losses (55%): $1,100,000

Now imagine your actual claims came in at $500,000. Under guaranteed cost, you’ve essentially gifted the carrier $600,000+ in margin. Under a well-run deductible or captive, that margin could flow back to your bottom line.

Multiply that year over year, and you see why larger employers eventually move up the retention ladder.

The Bottom Line

Premiums aren’t just a bill; they’re an equation. Losses + expenses + profit. When you outsource everything to a carrier, you pay all three—no matter your performance. When you retain risk thoughtfully, you start participating in the business of insurance.

The decision isn’t about bravado or cutting corners. It’s about matching your risk tolerance, loss predictability, program strength, and financial posture to the right point on the spectrum.

Otherwise, you’ll keep leaving profit on the table—and your insurance company will keep thanking you for it.

Michael Stack, CEO of Amaxx LLC, is an expert in workers’ compensation cost containment systems and provides education, training, and consulting to help employers reduce their workers’ compensation costs by 20% to 50%. He is co-author of the #1 selling comprehensive training guide “Your Ultimate Guide to Mastering Workers’ Comp Costs: Reduce Costs 20% to 50%.” Stack is the creator of Injury Management Results (IMR) software and founder of Amaxx Workers’ Comp Training Center. WC Mastery Training teaching injury management best practices such as return to work, communication, claims best practices, medical management, and working with vendors. IMR software simplifies the implementation of these best practices for employers and ties results to a Critical Metrics Dashboard.

Contact: mstack@reduceyourworkerscomp.com.

Workers’ Comp Roundup Blog: http://blog.reduceyourworkerscomp.com/

Injury Management Results (IMR) Software: https://imrsoftware.com/

©2025 Amaxx LLC. All rights reserved under International Copyright Law.

Do not use this information without independent verification. All state laws vary. You should consult with your insurance broker, attorney, or qualified professional.