FAQ – Business Insurance Programs, Business Insurance Company, Business Financial Consultant

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What is an actuary?
What is a Captive Insurance Company?
What is a Risk Retention Group (RRG)?
What is a Self-Insurance Program?
How do I know if a Captive/RRG is right for my company?
What are the Advantages and Benefits of creating a Captive Insurance Company/RRG?
- Affordability
- Availability
- Stability
- Coverage
- Reinsurance
- Claims Handling
- Underwriting Control
- Underwriting Results
- Improved Cash Flow Benefits
How easy is it to create a Captive?
What is an "on-shore" Captive?
What is an "off-shore" Captive?
Where can Captive Insurance Companies be domiciled?
What are the different types of Captives?
- Single Parent or "Pure" Captive
- Association Captives
- Industrial Insured Captives
- Agency Captives
- Rent-a-Captives
- Sponsored Captives or Protected Cells
- Risk Retention Groups
How is a Captive Insurance Program Structured?
What will my minimum capitalization requirement be?
What is a risk retention analysis?

What is an actuary?
The actuary's role is to protect an insurer's financial solvency, design and price products and establish appropriate reserve and capital levels.

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What is a Captive Insurance Company?
A captive is a closely held insurance company whose insurance business is primarily supplied by and controlled by its owners and in which the original insureds are the principal beneficiaries. Most importantly, the captive, by regulation and statutes, can not market or sell insurance products to the general populace. It is a closed system, an Alternative Risk Transfer vehicle providing financial protection against insurable risk to those affiliated with the program.

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What is a Risk Retention Group (RRG)?
A Risk Retention group is an alternative risk transfer mechanism. It is a corporation or limited liability association that is owned by its members and spreads risk and results among members. The federal government passed the Liability Risk Retention Act in 1986 which allowed Risk Retention groups to be licensed in one state but to operate in every state. RRGs only insure third party liability coverages.

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What is a Self-Insurance Program?
Self insurance is an alternative risk management method whereby an eligible risk is retained by a company, but a calculated amount of money is set aside to compensate for a potential future loss. The amount retained is calculated using actuarial and insurance information so that the amount set aside (similar to an insurance premium) is enough to cover the future uncertain loss. Self insurance is similar to insurance in concept, but it does not involve paying a premium to a traditional insurance company. By self-insuring some part of their risk, organizations can gain more control over their cost of risk while potentially improving coverages and limits, enhancing claims management and loss control, and gaining cash flow advantages. All states regulate workers compensation self insurance programs.

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How do I know if a Captive/RRG is right for my company?
If you are finding it is difficult to obtain insurance, or you are finding insurance unaffordable, then it is worth exploring captives and other alternative risk vehicles for handling your insurance needs. In general terms, if you are paying about $1 million dollars in premiums or more today, then a captive should be cost effective for you. The Captive Feasibility study performed by the actuary will define the costs associated with the program.

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What are the Advantages and Benefits of creating a Captive Insurance Company/RRG?
There are many advantages and benefits of creating a captive including affordability, availability, stability, coverage, reinsurance, claims handling, underwriting control, underwriting results, wealth transfer vehicle and improved cash flow benefits. More information on each of these items is below.

Affordability: Physicians and surgeons professional liability insurance is a prime example of the massive problem presently facing purchasers of commercial insurance. By forming their own insurance company and setting rates based upon their own relatively favorable experience, doctors within a medical group or association can reap the benefits of lower premiums. Also, there are generally expense savings associated with captives that will be reflected in the lower premiums charged.

Availability: The last two years have witnessed a crisis developing in the ability of insureds to find much needed protection against financial loss from previously insurable risks in commercial insurance market. By establishing a captive insurance company a group can take a pro-active approach to eliminating unavailability of coverage as a recurring problem. Control over coverage would pass from the hands of commercial insurance underwriters to participants in the captive program.

Stability: The employment of a captive insurance company will insulate participants from excessive premium swings and availability issues caused by vagaries in financial markets and factors exogenous to their profession. The captive vehicle will facilitate tighter control over premiums charged, which will be based upon actual underwriting experience of insureds, and, in this fashion, will shield participants from violent price swings evident in the commercial insurance market.

Coverage: Captives can tailor insurance contracts to specifically provide the protection needed by the participants. For example, at inception "nose" coverage for unfunded tails under previous commercial contracts can be provided. Gaps in coverage for prior primary and excess insurance contracts can be covered in the captive with proper adjustments in premiums.

Reinsurance: Captive insurance companies typically have better access to the reinsurance marketplace than traditional self-insurance programs. Reinsurance carriers prefer to do business with other insurance carriers. Captives can be employed to cushion the impact of underwriting cycles in the reinsurance market. As the reinsurance market hardens, retentions by the captive could increase.

Claims Handling: Captive programs allow significant control over the claims settlement process by participants. A captive can establish policies and procedures that will provide guidelines for claims administrators to follow. Further, since claims experience will be directly reflected in underwriting results and consequently premiums, there is increased incentive for participants to focus upon loss prevention and claim control procedures.

Underwriting Control: A major advantage of ownership of a captive is its ability to generate management information useful for underwriting control. Monitoring results can be a key to maximizing the captive's value to the parent and assessing future premium requirements.

Underwriting Results: Under traditional insurance, in years with exceptional loss experience, underwriting profits would adhere to the benefit of the commercial carrier and would not be available to the insureds involved. Under a captive program, underwriting profits and investment earnings generated would remain with the captive and would provide additional financial assets for funding future claims.

Improved Cash Flow Benefits: The ability to generate investment income from unearned premiums received is a critical advantage in forming a captive. In the event that premiums are paid in advance and losses are paid out over an extended period, significant cash flow benefits will be accrued. Further, if investment income accumulates in a tax-free domicile, there will be additional funds available to pay losses and support capital requirements.

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How easy is it to create a Captive?
The key to the ease and facility with which a captive can be created is the level of regulatory oversight and the availability of qualified service providers. The captive can be domiciled "on-shore" in a U.S. jurisdiction or "off-shore" in locales such as Bermuda, the Caymans, or the Isle of Guernsey, to name a few. In the case of U.S. jurisdictions, the regulatory body within the state of domicile takes the lead in approving new programs and monitoring on-going operations. Regulatory oversight by other states is minimal.

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What is an "on-shore" Captive?
A captive would be domiciled "on-shore" in a U.S. jurisdiction. Major players in the U.S. at present are South Carolina and Vermont, but recent initiatives have been launched in Arizona, Montana, and the District of Columbia.

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What is an "off-shore" Captive?
A captive would be domiciled "off-shore" in locales such as Bermuda, the Caymans, or the Isle of Guernsey, to name a few.

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Where can Captive Insurance Companies be domiciled?
Major players in the U.S. at present are South Carolina and Vermont, but recent initiatives have been launched in Arizona, Montana, and the District of Columbia. Non-U.S. domiciles include locales such as Bermuda, the Caymans, or the Isle of Guernsey, to name a few.

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What are the different types of Captives?
The following represents a brief survey of the more common forms of captive insurance programs. References to minimum capitalization requirements are extracted from South Carolina Statutes and are presented as benchmarks only.

Single Parent or "Pure" Captive: These are companies with a single owner to whom they provide insurance coverage. They are usually monitored by a risk manager or financial officer at the parent company. Most are managed by a captive insurance management company, located within the jurisdiction of domicile. Minimum capitalization in South Carolina would be $250,000.

Association Captives: This type of captive is formed by an established association to provide insurance coverage for members. Ownership rests with the association or individual members. The captive may only insure members of the association. Finally, the association must have been in existence for at least one year prior to the formation of the captive. Organizations usually have financial expert at the association level with prime management responsibility, or outsource this function to a management company, broker or consultant. Minimum capitalization in South Carolina would be $750,000.

Industrial Insured Captives: Industrial insured captives are owned by companies within the same industry that have come together to solve a specific insurance problem. The captive may insure only insureds that comprise the industry group and their affiliated companies. The stockholders generally appoint a board of directors to whom the management company reports. Minimum capitalization in South Carolina would be $500,000.

Agency Captives: An agency-owned captive is a reinsurance company owned by an agent or group of agents. These are formed by brokers or intermediaries for their clients. Agency captives are not explicitly mentioned in South Carolina statutes.

Rent-a-Captives: A 'rent-a-captive' insures the risks of its members and returns underwriting profit and investment income participation to the insureds. Certain companies 'rent' their surplus to entities wishing to establish a self-insurance program but not their own captive. Not applicable to South Carolina.

Sponsored Captives or Protected Cells: Protected cell companies (PCCs) are essentially rent-a-captives with a special difference. PCCs allow participants to shield their capital and surplus from other participants in separate protected cells as long as the sponsored captive remains solvent. Requirements for the establishment of sponsored captives are stringent in the state of South Carolina. Minimum capitalization in South Carolina would be $1,000,000.

Risk Retention Groups: A risk retention group is a group captive formed under the requirements of the Liability Risk Retention Act of 1986. The risk retention group need only be licensed in one state in order to write liability coverages except employers' liability and workers compensation in all fifty states. In South Carolina risk retention groups are considered a type of industrial insured captive.

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How is a Captive Insurance Program Structured?
There are many different ways of structuring a Captive Insurance program but the most common would be as follows: The captive uses a "fronting carrier" that is highly rated to issue an insurance contract to the insured. In this fashion, the insured will be able to satisfy any regulatory requirements that it has a "rated" insurance company providing protection against financial loss. The captive, in turn, reinsures the fronting carrier. A captive with a fronting carrier is a form of alternative risk transfer that would satisfy, for example, the needs of a group of medical professionals.

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What will my minimum capitalization requirement be?
Actual capitalization requirements will be contingent upon such criteria as the volume of business contemplated, individual policy limits and the coverages to be written. Letters of Credit can be used to help participants meet the minimum capitalization requirements.

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What is a risk retention analysis?
It is a study which will help you determine what level of risk is right for you.

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