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A Brief Primer of Alternative Market Terms
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Deductibles—Deductibles shift the responsibility for frequency losses from the carrier,
which can result in savings for insureds that impact that frequency. Placement of an aggregate
on the total of deductible losses is advisable. Deductible limits are determined based on your
actual loss experience as well as the carrier’s experience in writing the specific line of
business for your industry.
Rent-A-Captive Arrangements—Rent-A-Captive arrangements are structured so the Rent-A-Captive
contractually assumes a portion of the insurance risk under your policy on your behalf. The
Rent-A-Captive is authorized to write reinsurance and may be able to write insurance directly.
We suggest that you consider a “segregated cell” type Rent-A-Captive that separates liabilities
assumed by others from your obligations. Rent-A-Captives assume liabilities up to specific
limits, and aggregates should be considered. You may be requested to support the Rent-A-Captive
through initial capitalization and collateral, such as cash or letters of credit. The
Rent-A-Captive will invest proceeds from premiums and will reimburse the carrier within its
retention as claims are paid. The impact on your income tax needs to be reviewed with your
accountant.
Association Captives—An Association Captive assumes risk on policies issued for its members up
to specific retention levels (which should also be capped by an aggregate). The experience of
the association is combined and dividends may be considered for participants based on the
underwriting and investment results. The Association Captive is authorized to write reinsurance
and may be able to write insurance directly. (Where the captive is domiciled will impact these
capabilities). The captive will invest proceeds from premiums and will reimburse the carrier
within its retention as claims are paid.
Owned Captives—Individual companies often form their own captive to reinsure hard to place or
expensive insurance exposures. Hospitals and fast food chains have joined ladder manufacturers
and oil companies in considering captives as risk management tools in recent years. These
captives are subsidiaries of the parent company. Captives are licensed to write reinsurance
and or insurance (depending on domicile issues). Captives assume liabilities up to specific
limits, and aggregates should be considered. The owner will need to provide initial
capitalization and collateral, such as cash or letters of credit. The captive will invest
proceeds from premiums and will reimburse the carrier within its retention as claims are paid.
The impact on your income tax needs to be reviewed with your accountant, and a feasibility study
is suggested.
Risk Retention Groups—Authorized by the federal Risk Retention Act in 1986, these groups
qualify as property/casualty insurance companies under the laws of a state, referred to as
the domiciliary or chartering state. As companies, RRGs are capitalized by their members who
are also the insureds. While regulatory issues and complications exists, the RRG may be an
appropriate mechanism for an industry-wide insurance problem.
Risk Purchasing Groups—These groups are authorized to approach the insurance market for
placement as one risk rather than individual risks. This approach allows greater credibility
in evaluating the risks insured, greater leverage in securing coverage, and more efficiency in
the spread of costs across large total premiums. All members of the group need to have similar
limits and exposures to benefit from this approach.
Fully Funded Arrangements—This can be a solution for risks that are required to provide evidence
insurance to a third party, but are willing to assume the result of any losses. Carriers may
use Rent-A-Captives to support this type of structure. You would be required to provide letters
of credit or cash in support of these arrangements.
Self-Insured Retentions—Similar to deductibles, the insured may wish to consider not purchasing
insurance until losses exceed a specific dollar amount. This structure may be used where there
is no regulatory requirement for insurance (example, products liability) and where no third
party (customer, supplier, etc.) requires insurance placement. Aggregates on amounts in the
Self-Insured Retention should be considered.
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