Most people think insurance is a
necessary expense, something you pay for
hoping you never need to use it. But the
wealthy figured out something most
people never notice. Insurance companies
are some of the most profitable
businesses on Earth. So eventually, rich
people asked a dangerous question. Why
keep paying the insurance company when
you could become the insurance company
yourself? And that simple realization
quietly created one of the most powerful
wealth structures in modern finance.
It's called captive insurance. And
that's what we're talking about here
today. Welcome to Alux.
All right, let's start this discussion
today with how insurance became one of
the biggest businesses on Earth.
Insurance started as a very simple idea.
Hundreds of years ago, merchants used to
move valuable cargo across oceans filled
with storms, pirates, and shipwrecks.
One bad trip could destroy an entire
fortune. If a single ship sank, the
merchant could lose everything. So,
people came up with a system. Instead of
one person carrying all the risk alone,
a group of people would share the risk
together. Everyone would put money into
a common pool, and if disaster happened,
the losses would be covered from that
pool. That was the beginning of
insurance. At first, it was mostly used
for shipping and trade. But over time,
the idea spread into almost every part
of life. Homes, businesses, cars,
health, life. Eventually, modern
economies became completely dependent on
insurance because almost every large
financial activity involves some kind of
risk. Banks want insurance. Businesses
want insurance. Governments want
insurance. Investors want insurance. The
bigger the company became, the bigger
the insurance industry became with it.
And slowly something very important
started to happen. Insurance companies
realized they weren't just protecting
people from disasters. No, they were
collecting enormous amounts of cash long
before they ever needed to pay claims.
Every single month, millions of people
and businesses continuously send money
into the system through premiums. But
the claims happen later, sometimes much
later. A lawsuit might take years before
the insurance company pays anything. A
business could pay insurance premiums
for decades without filing a major
claim. Some policies expire without ever
paying out at all. Which means insurance
companies end up holding gigantic
amounts of cash for very long periods of
time. And they don't just leave that
money sitting there. No. As long as they
keep enough reserves to safely cover
future claims and comply with
regulations, insurance companies are
allowed to invest large portions of the
money while they wait. Just like banks
invest your deposits while your money
sits in your account. And this is where
the business starts looking completely
different from what most people imagine
because insurance companies are not just
making money from premiums anymore.
They're making money from investing the
float created by those premiums. And
once wealthy companies realized how much
money insurance companies were making
from that float, well, they started
asking themselves a very simple
question. Why are we paying other people
to do this? The rich realized they could
insure themselves. Just think about how
much insurance a massive corporation
needs. A hotel chain needs insurance for
thousands of rooms and properties.
Airlines insure planes worth hundreds of
millions of dollars. Shipping companies
ensure cargo moving across the planet.
Real estate companies ensure office
buildings, malls, and apartment
complexes. Large retailers ensure
warehouses, trucks, inventory, and
lawsuits. And the bigger the company
gets, the bigger the premiums become.
Some corporations spend tens of millions
of dollars every year just on insurance.
At first, this seems normal. Big
company, big risks, big insurance bill.
But eventually some of those companies
started noticing something important.
Insurance companies were becoming
incredibly wealthy by investing the
float created from those premiums which
meant corporations were constantly
sending huge amounts of money into a
financial machine they didn't control.
And over time a very simple idea started
spreading through the corporate world.
If insurance companies are getting rich
from our premiums why don't we create
our own insurance company instead? And
that's exactly what many large
businesses did. They created something
called a captive insurance company. A
captive insurance company is basically a
real insurance company owned by the
business itself. Instead of paying all
of the premiums to one outside insurer,
the company creates its own licensed
insurance entity and pays part of the
premiums into that company instead. The
risks are still real here. The company
still needs reserves, compliance,
audits, and regulators. If something
goes wrong, the captive still has to pay
legitimate claims just like any other
insurance company would. But now
something very important changes. The
money no longer leaves the system
completely. Instead of sending millions
of dollars every year into somebody
else's insurance company, part of that
money now moves into an insurance
company the business itself owns. And
just like traditional insurers, the
captive can hold reserves and
potentially invest part of the float
while waiting for claims. Now, this
becomes especially attractive for very
large companies because large
organizations already understand their
own risks extremely well. A hotel chain
already knows roughly how many accidents
happen every year across thousands of
locations. A shipping company already
understands average cargo loss rates.
Retailers already know how much theft
happens inside their stores. At a
certain size, risk becomes surprisingly
predictable. And once a company
understands its own risks well enough,
it starts realizing something else.
Insurance is not just protection. It's
also cash flow. And that's why captive
insurance became extremely popular with
large corporations, family offices, real
estate groups, and wealthy business
owners. because instead of constantly
sending money outward into somebody
else's financial machine, they started
to build their own. And once that
happened, another advantage started
appearing. Taxes. There's less taxes and
more profit. Once large companies
started creating their own insurance
companies, they realized something else.
The structure didn't just help them keep
more money inside their own ecosystem.
No, it also changed how their taxes
worked. And this is where captive
insurance started becoming extremely
attractive to wealthy businesses, which
is why we go deeper into this within the
Alux app, especially in our collection,
Money301, for high- netw worth
individuals. Download for free at
alux.com/app and take it for a free
7-day test drive. But if you're ready to
commit, you can scan that QR code on
screen for 25% off your membership. Now,
normally when a company makes profit,
that money is taxed. So, let's say a
company earns an extra $20 million this
year. If that money is simply sitting
inside of the business as profit, a
large portion of it may eventually be
taxed. But insurance works differently.
Insurance premiums are usually treated
as business expenses. And business
expenses reduce taxable income. So that
means if a company pays millions of
dollars in insurance premiums, those
payments can often lower the amount of
profit the company gets taxed on. Now,
under a normal insurance agreement, the
money leaves the business completely and
goes to some outside insurance company.
But with a captive structure, part of
that money may move into an insurance
company the business owns itself. So,
from the outside, it still looks like
the company is paying for insurance.
Technically, it is. But underneath the
surface, the money may still remain
inside the broader structure. And while
that money sits there waiting for future
claims, it can potentially continue
generating investment income. Just like
traditional insurance floats. So that's
why wealthy companies became so
interested in captive insurance. The
structure allowed them to manage their
own risks, retain more capital
internally, potentially lower taxes, and
continue investing large pools of money
at the same time. And once businesses
realized how valuable these structures
could become, an entire industry started
forming around them. Certain places
became famous for captive insurance
companies because they created laws and
regulations specifically designed to
support the industry. Bermuda became one
of the largest captive insurance centers
in the world. The Cayman Islands became
another major hub. Even places inside
the United States like Vermont built
entire legal and financial systems
around captive insurers. Over time,
lawyers, accountants, actuaries,
regulators, and investment firms all
started specializing in this world
because once enough money gets involved,
entire industries begin forming around
helping wealthy people to manage it more
efficiently. And the numbers became
enormous. Today, thousands of captive
insurance companies exist around the
world, managing hundreds of billions of
dollars in assets and reserves. Some
belong to big corporations. Some belong
to real estate empires. Some are
connected to family offices managing
generational wealth. And at this point,
insurance starts looking very different
from how most people think about it. For
the average person, insurance is just
another monthly bill. But for wealthy
businesses, insurance slowly became
something else entirely. A way to
control capital. A way to keep money
moving inside the system for longer. A
way to build financial structures around
risk instead of simply paying somebody
else to take it away. And once people
started understanding that, someone like
Warren Buffett suddenly made a lot more
sense.
The real game here is access to capital.
Poor people dream about turning $1,000
into $1 million. The rich think
differently, though, because once you
already control enormous amounts of
capital, you don't need insane returns
anymore. A 10% return on $1,000 is nice.
A 10% return on a billion is $100
million. That's the real difference
here. At the highest levels of wealth,
the game stops being about finding
magical investments and starts becoming
about getting access to as much capital
as possible for as long as possible.
That's why leverage became one of the
most important tools in modern finance.
And there are few businesses creating
more leverage than insurance. Because
insurance companies, well, they're
constantly sitting on gigantic piles of
cash waiting for future claims. Every
month, premiums flow in from millions of
people in businesses. Meanwhile, many
claims won't happen for years. That
creates the float. And whoever controls
the float controls the money while it
waits. This is one of the reasons Warren
Buffett became obsessed with insurance
companies early in his career. Most
people spend years trying to understand
how Buffett picked winning stocks. Very
few people stop and ask a much simpler
question. How did he get access to so
much money to invest in the first place?
The answer is insurance. Buffett began
acquiring insurance companies decades
ago, including National Indemnity and
later on Geico. Those businesses
continuously generated enormous amounts
of float that Bergkshire Hathaway could
invest. And over time, the numbers
became staggering. In the 1970s,
Berkshire's insurance float was under 50
million. Today, Bergkshire Hathaway
controls well over $150 billion in
insurance float. That means Buffett
effectively gained access to one of the
largest pools of investable capital in
the world through insurance businesses
alone. And here's the important part.
That money didn't belong to Berkshire in
the traditional sense. It was money
sitting inside of insurance companies
waiting for future claims. But while it
waited, Buffett invested it into stocks,
businesses, infrastructure, railroads,
and some of the largest companies in
America. That's why insurance became so
attractive to wealthy corporations and
family offices. Because the rich don't
obsess about money, they obsess about
leverage. And it's because of one very
simple thing. Wealth scales through
leverage. Most people try to build
wealth using only their own money. They
save a part of their paycheck, maybe
invest a little bit, maybe buy a house,
maybe start a business. Everything
depends on their own labor and their own
capital. But once companies become large
enough, they stop growing only through
their own money. They start growing
through leverage. Banks use deposit to
create loans. Private equity firms use
borrowed money to buy companies. And
insurance companies use float to build
enormous investment portfolios. That's
why insurance became so powerful,
because float gives you access to
capital at a scale most people will
never experience. And once you have
access to billions of dollars, the
entire investing game changes. You no
longer need impossible returns. You
don't need to gamble on meme stocks or
find the next Bitcoin. A steady 8%
return on a billion dollars is 80
million a year. Insurance float gave
Bergkshire Hathaway access to massive
amounts of investable capital year after
year. And over time, that advantage
compounds into something almost
impossible to compete against. This is
also why large corporations started
creating captive insurance companies in
the first place. At some point they
realized they were constantly feeding
enormous amounts of money into outside
insurance companies that were using the
float to grow even larger. So they
started keeping more of that money
inside their own ecosystem instead. And
once you see that pattern, you notice it
everywhere. The biggest companies
control distribution, they control
financing. They control infrastructure
because the real money is often not in
the product itself. It's in controlling
the flow of capital around the product.
That's what insurance companies figured
out a long time ago. And eventually
wealthy businesses figured it out, too.
All right, Luxer, that's a wrap for
today. We'll see you back here next
time.