☰Mechanically, a captive works like any insurer, with one difference: the policyholder and the owner are the same business. Your captive issues policies to your company, collects premium priced by an actuary from your own loss history, pays claims as they arise, and holds reserves for claims still developing. What premium doesn't pay out in claims and expenses becomes underwriting profit, which stays in the captive as surplus and earns investment income while it stands behind your risk.
Around that core runs an annual rhythm. Policies renew, the actuary re-prices from fresh loss data, an independent audit confirms the financials, and the domicile's regulator reviews solvency. Where a single bad year could exceed what the captive should absorb, reinsurance caps the exposure. Run well, the value compounds: better loss control produces stronger results, stronger results build surplus, and surplus supports retaining more risk on your own terms.