Captives Solutions at Work for You
There are a number of captive and alternative risk solutions Caitlin Morgan Captive Services offers that are aligned with your business strategies and goals. These solutions can provide you with greater control over your risk, improved profitability and the ability to better plan for the future. We create customized programs for clients to mitigate risk and maximize control over insurance expenses.
Deductible Reimbursement Policies (DRPs)
There are several risk-retention strategies that an owner can use to reduce the volatility of premiums year-to-year. Among the most popular is retaining a portion of the risk through a self-insured retention (SIR) or a large deductible.
Deductible Reimbursement Policies (DRPs) are designed to satisfy the traditional large deductible obligations that insureds carry, including collateral requirements, claims escrow and paid loss reimbursement. DRPs are increasingly popular for larger, financially secure insureds, especially in workers’ compensation and commercial general liability lines, but can be offered for any line, including commercial auto, professional liability, and property insurance. They are often used with solutions in which the captive insurer issues a policy directly to the insured. The policy terms typically mirror the large deductible policy terms, and the limits offered by a DRP can range from $100,000 to several millions depending on the size of the insured. Different limits can be issued for different coverages.
The benefits of a DRP captive program include reducing third-party insurance expenses; providing for smooth cyclical insurance premiums; accelerating premium expense deduction for losses within the deducible; exerting control over claims services and proactive risk management practices; realizing underwriting and investment income; and leveraging captive assets to insurers for other lines within the business.
Caitlin Morgan Captive Services can provide insureds with expert consultation regarding a Deductible Reimbursement Policy in addition to guidance as to whether financing the retention through a captive is both feasible and financially beneficial. Large deductible captives usually have a retention level of at least $100,000 and annual incurred losses over $200,000.
A captive is used to fund some or all of an entity’s deductible — the most common use is for a Single Parent Captive. In fact, Single Parent Captives are increasingly being used in conjunction with large deductible insurance programs, particularly for workers’ compensation. Here, a fronting company will also issue a policy, but it is subject to a deductible. The captive is established so it can issue a deductible Buy-Back policy to the pair. The captive reimburses the parent company for losses up to the amount of the deductible.
Single Parent Captives
A Single Parent Captive (also known as “Pure” captives) is set up to insure the risk of its owner(s), however, many Single Parent Captives underwrite unrelated (aka third-party) risk as well. The lines of business most often financed under this type of captive are workers’ compensation, general liability (including products), professional liability and automobile liability. Under a Pure Captive, the intention is not to necessarily make a profit (though many do), but to effectively manage the cost of insurance borne by the owner by assuming a layer of risk that is either frequent or severe, depending upon the risk-retention strategies of the owners. Depending upon the need to produce a certificate of insurance representing insurance coverage, a Pure Captive may be fronted by a carrier (issues the policy on behalf of the captive) or may issue the policy coverage directly from the captive. While used for over 60 years, Pure Captives remain the most popular captive structure in the world.
Similar to a Pure Captive, a Group Captive can be an attractive alternative to traditional insurance if owners of businesses cannot create a Pure Captive structure of their own, yet are sophisticated to assume a portion of risk. A Group Captive can be formed by both profit and non-profit organizations. It’s best suited for middle market firms and some large businesses looking to take advantage of all the benefits of a captive but are unable to meet certain guidelines needed to be considered an insurance company for tax reasons or don’t have the sufficient premium volume needed to assume a portion of their risk. Group Captives can be homogeneous or heterogeneous, with homogeneous captives formed by companies in the same industry (sometimes called a “industrial group captive”). Heterogeneous plans are for businesses from a wide variety of industries coming together to share the risk, cost and benefits of providing commercial insurance to their members.
An Association Captive is formed to insure the risks of member companies when they have a legal association for purposes other than insurance and the association has been in existence more than one year. It’s similar to a Group Captive except that it’s sponsored or owned by a group of entities within a particular organization with common insurance needs and similar exposures. (A Group Captive is established by a group of companies with similar businesses or exposures writing only the risks of its owners and/or affiliates.)
Captives allow associations to tailor insurance protection where members need it most, provide access to increased coverage and capacity, and allow for greater underwriting flexibility. Members of the Association Captive also gain direct access to wholesale reinsurance markets. In addition, with a captive, associations have increased risk control and better cost-effective administration to help lower premium costs. They can earn underwriting income as well as investment income on the reserves held to pay for future losses. And, they can gain favorable tax benefits. Also, in offering captive services, associations can attract new members and boost their non-dues income.
Risk Retention Groups (RRGs)
Since their creation by an Act of Congress (Product Liability Risk Retention Act of 1981), Risk Retention Groups now represent over $3 billion in premium annually. Unique to the United States, a Risk Retention Group is capable of writing liability coverages, such as general and automobile, as well as professional liability. It cannot, however, serve to underwrite workers’ compensation, property or personal lines. Members of a Risk Retention Group must be engaged in similar businesses and have similar or related liability exposures among each other.
As the insurance company is owned by its policyholders, some of the key advantages offered by RRGs relate to the control members obtain over their liability programs. This can mean lower rates, broader coverage, effective loss control/risk management programs, participation by Risk Retention Group members in favorable loss experience, access to reinsurance markets, and stability of coverage.
Protected Cell Companies (PCCs)
Commonly referred to as a “rent-a-captive”, Protected Cell Companies were originally the domain of offshore domiciles. PCCs offer a variety of benefits including comparably lower capital, cost and resources required versus starting a captive from the “ground up”. While organized as a single entity, a PCC is compromised of a core and one or more cells where the assets and liabilities are statutorily segregated from the assets of the PCC itself and from the assets and liabilities of the other cells. Under some domiciles, certain cells have a choice to be “incorporated” and possess the ability to enter agreements and under their own EIN. Cells can be owned by parent, association, group, agency insurer, or others and be “rented” to third parties. They are very popular with private businesses and middle market companies. A PCC is formed by a sponsoring entity, such as Constitution Insurance, which manages the captive and provides regulatory oversight regulatory and operating capital.
A cell shareholder has general control over his or her cell and the insurance business written through the cell as specified in an agreement. Each cell stands alone so you’re protected from the activities of the other cells. That means that creditors of a cell don’t have recourse against the assets attributable to other cells or to the core assets. The insolvency of one cell cannot impact another cell. In addition, the nature of the risks and the risk management controls of other cells are not of concern to individual cell shareholders.
A PCC also doesn’t require much of your company’s management time. PCCs are less expensive to administer than would be the case in a company with multiple subsidiaries, and they can be formed quickly by a board resolution. This can be very attractive to cost-conscious mid-market executives.
Agency Captives are created to leverage the expertise that an agency (or program administrator, wholesaler, MGA, etc.) possesses to enhance the firm’s revenue. While the Agency Captive can be a more important tool to generate revenue than a contingency agreement or swing rated commission plan, it is also very useful as an incentive to retain top producers, owners and staff. An Agency Captive will usually require a policy issuing carrier (“front”) and perhaps a reinsurer (if the front will not take risk), which will share in the risk with the Agency Captive owners. In some cases, the captive will include policyholders as owners, too. An Agency Captive can also be an ideal platform from which owners can provide additional capacity and coverage to their clients, which can lead to higher retention ratios and increased client loyalty. Determining whether an Agency Captive is a good fit for your firm can start with an analysis of the profit margins generated on the selected book of business and the revenue the agency receives for placing the coverage.
What Does it Take to Consider an Agency Captive?
Usually, a premium commitment of at least $3 million to $5 million in the first few years, though in this prolonged soft market, some agency captives are starting with less than $1 million to $2 million. A good business plan is a must. As for losses, an ultimate loss ratio of less than 50% is often desired by the front. Ideally, the loss history will show frequency but not severity.
An Agency-Owned Captive insurance company can also facilitate an increase in valuation of the agency and revenue, particularly in light of record-breaking M&As in the retail insurance distribution space. Depending upon market timing, the benefit can be an increase in the multiplier used in the purchase price of the insurance agency, enhanced profit-sharing opportunities, or solidifying an important relationship between the agency and insurance company – or all three.