Alternative Risk/Captives

Alternative Risk

Today, there may be times when a company needs to mitigate a substantial risk that is not addressed effectively in the traditional insurance or financial markets. The risk may be too complex or multifaceted or just very unusual. It may be new to the market and/or have no available loss data associated with it. Some of these program structures include:

  1. Blended Structures. A single policy combines client funding of expected losses and the utilization of risk transfer above the funded layer.
  2. Customized Risk Transfer. Primary or excess risk transfer insurance policies are tailored to provide solutions for complex, unusual, or difficult to insure risks not currently addressed in the traditional insurance or financial markets.
  3. Buyout. Customized programs are designed to offset liabilities resulting from traditional insurance risks or unusual exposures.
  • Facing a specific problem for which there is no clear or viable risk transfer solution
  • Encountering a situation where current market conditions or shifting underwriting capacity are limiting availability of risk transfer
  • Planning a merger, acquisition, or divestiture in which difficult risks are impeding the transaction
  • Confronting significantly increased retentions or premiums
  • Experiencing restricted coverage due to adverse industry claim trends
  • Challenged with high attachment points due to poor loss experience or market conditions
  • Exploring the possibility of retaining risk as part of a comprehensive risk management strategy
  • Pursuing more efficient access to the excess markets
  • Seeking to offset significant retained or self-insured legacy liabilities
  • Managing short term volatility that could be better controlled or financed over a multi-year time horizon
  • Considering alternatives to protect against the accumulation of retained losses and/or to free up capital
  • Seeking to satisfy a primary lead layer to support an excess tower for a difficult to insure risk
  • Requiring broad flexibility regarding the type of exposure, class of risk, and/or contract issued
  • Looking to realize potential tax efficiencies
  • Seeking to insure risks that cannot otherwise be financed due to corporate structure (e.g., because a partnership must distribute all earnings, it cannot effectively fund for known risks)
  • Interested in offsetting liabilities (e.g., litigation or pollution remediation reserves)

Captives

A captive insurance company can be the primary risk management and planning tool for many businesses that the traditional marketplace may not provide any viable options. A captive typically refers to an insurance company that provides insurance to, and is controlled by its owners. Its purpose is to provide insurance coverage for some or all of the captive owners’ risk. Some of the advantages of forming a captive include, reduced costs, greater access to insurance and reinsurance, more control over managing risks and efficient use of financial resources for the enterprise. Most companies that entertain captive structures, have very good cost containment measures in place, a great safety culture,and a great broker that helps with these compliance techniques.

These alternative risk transfer mechanisms can be domiciled onshore or offshore. To provide for the contractual insurance requirements, captives need the assistance of a fronting company to provide proper licensing, and assist with contract or lending requirements. The strength of our bank partnership lends itself to more. We can provide the insurance expertise and formation, the management of funds,and the banking or lending needs the captive may have.

With decades of experience, First Foundation Insurance Services has the ability to develop innovative products that are outside the mainstream of insurance for clients with non-traditional needs. We can develop custom insurance programs from the ground up by bringing together strategically contracted providers, including; insurance carriers, reinsurance and intermediaries, independent claims adjustors, specialized loss control including nurse case management, actuarial services, captive managers and coverage counsel. There are four main insurance functions that a manager helps the captive with :

  • Performing underwriting
  • Performing claims handling
  • Assisting with financial record keeping and financial management
  • Captive regulatory compliance.

We work with our clients to determine if a captive is the right solution for them. This process includes pre-feasibility analysis, feasibility studies, actuarial study, pro forma, domicile selection, incorporation, and the capitalization. When the captive solution is the right choice, the captive then purchases specific and aggregate reinsurance and after deducting expenses, premium is ceded to the captive and a loss fund is established to pay claims should they occur.

First Foundation Insurance Services can take your captive from concept design to implementation.

6 Reasons to Form (or Join) a Captive Insurance Company

It is no accident that alternative risk transfer vehicles, including captives, now represent over 50% of the U.S. insurance market.

A captive is a wholly-owned subsidiary created to provide insurance to its parent company (or companies). Their rapid growth over the past decade is because of the potential savings and value they can provide, such as:

  1. Cost Control – Without a captive, a company may experience rising insurance premiums from the commercial market because of losses by other firms in its category. With it, a company can charge itself a premium based solely on its own historic loss experience.
  2. Assured Coverage – Medical malpractice and other industry crises have caused many commercial insurers to drop whole states or lines of coverage (such as Workers Compensation or EPLI with Wage and Hour). Many entities, such as physicians groups, can band together to form a group captive to effectively replace/complement the commercial market for example.
  3. Access to the Reinsurance Market – A captive has direct access to the wholesale insurance market. Because reinsurers have lower operating costs and regulatory barriers, they can often provide coverage at lower rates.
  4. Improved Claim Processing – With a captive, an entity can outsource claims administration to an experienced Third Party Administrator (TPA’s). It can then build it’s own historic claims database,for better record keeping and future loss estimates.
  5. Potential Tax Savings – Forming or joining a captive may open the door to tax advantages only insurance companies can access.
  6. New Profit Center – A captive can also be used to insure the third party risks of a firm’s customers, vendors, or franchisees. If managed properly, insuring unrelated risks could become a significant new profit center.

Owning or joining a captive does not preclude selectively using insurance providers. But if a firm with a captive feels that it is being overcharged for a particular risk, it can easily self-insure. Often, the threat of doing so is enough to have an outside insurer reduce its rates.