Risk management
Alternative risk transfer is a fancy way of saying alternative insurance and risk management methods, of which there are many. From the most basic alternative of not having insurance (self-insurance) to the so-called “commercial captives of the program”, there is a wide variety of strategies to choose from.
To understand why ART strategies are so popular, it’s important to understand some facts about insurance prices.
►Insurance premiums are primarily related to business cycles NOT primarily to claims.
“Claims that recent increases in Connecticut medical malpractice liability insurance premiums are attributable to overly generous jury verdicts are unfounded. The most likely explanation for the sudden increase in rates is declining investment earnings. of medical malpractice insurers…” Professor Tom Baker, Director, Center for Insurance Law, University of Connecticut School of Law
Every time insurance industry profits decline sharply, the industry declares an “insurance crisis”: Rates rise sharply, deductibles rise, and underwriting guidelines tighten.
►Insurance premiums have increased much faster than claims.
Average medical malpractice payouts increased 35 percent from 1997 to 2001 (an average of 8.5% a year).
Average premiums for individual health insurance coverage increased 39 percent during that period (9.5 percent per year). (Source: National Physician Database)
►A small number of policyholders may be responsible for a large percentage of losses.
Database of national professionals:
For example, in Florida, 6% of physicians were found to be responsible for 51% of malpractice claims. 2,674 of 44,747 doctors have paid two or more malpractice payments. These doctors are responsible for 51% of the total malpractice payments.
24 Florida doctors have paid 10 or more malpractice settlements since 1990.
Needless to say, 94% pay for the 6% bad claims experience.
ART Strategies
Conventional insurance markets are one-year indemnity contracts designed to transfer risks of specific perils. Typical characteristics of an ART strategy are:
►Multi-annual and multi-line coverage
►Coverage adapted to the special needs of the insured
►Provides coverage not generally available in the market
►Risk retention by the insured
There is a multiple trade-off between risk retention, complexity, and cost among different ART strategies. Not surprisingly, plans with the least risk, complexity, and expense generally provide the least benefit. The more risk that is retained, the higher and higher profits can be made. Of course, the complexity and administrative costs also grow. Windward Harbor can help you find, execute and manage the strategy that’s right for you. We have listed the basic ART strategies below.
►Guaranteed Cost Insurance Plans
Traditional insurance coverage.
►Loss sensitive insurance plans
Insurance coverage for a specific insured where the final premium is based on the insured’s losses.
►Risk Purchase Groups (RP’s)
Risk Buying Groups were created by the Liability Risk Retention Act of 1986. The purpose of the law was to break the myriad of state insurance regulations in hopes of making it easier for groups to purchase liability insurance. . The law allows groups of people to bundle the purchase of liability insurance and prohibits states (regulators) or insurance companies from discriminating against them.
►Self-Insured Retention Plans (SIRS)
The main difference between a deductible and a self-insured retention is that the amount of the deductible counts against the total policy limits, which reduces the total coverage, while a self-insured retention plan provides coverage limits that exceed the self-insured retention, of so that the amount to be paid under the policy is not reduced by the amount of the withholding.
►Captives of Protected Cells (Segregated Portfolio Companies)
PCCs (SPCs at certain addresses) are essentially captive rental companies that ensure complete separation between program participants. In accordance with the laws of the specific domiciles, the PCCs or SPCs generally guarantee the complete separation of assets, capital and surpluses of each cell from each other. Because they can achieve economies of scale, rental captives make captive insurance affordable for businesses that might not otherwise be large enough to profitably own and operate their own captive.
Windward Harbor LLC owns a BVI licensed segregated holding company: Windward Harbor SPC Ltd, which provides captive rental services for selected clients on an annual fee basis. Each segregated portfolio has its own financial ownership, tax identification number and files a separate tax return.
►Self-Insured Groups and Pools (SIG’s)
While the concept differs slightly from state to state, GIS work similarly in the nearly 40 states where they are legal. A group of employers forms a nonprofit corporation or trust and hires a professional to manage it. This new entity then purchases the insurance, meaning SIG members essentially “own” their own workers’ compensation company.
The group pools the money it would otherwise pay to an insurer, earning investment income on the funds held in reserve. If a SIG program reduces workplace injuries and claims costs, the excess or “dividend” of premiums is returned to members.
Of course, if a company or the group as a whole has catastrophic losses, the members pay the difference, up to a limit. Above that point, the group buys excess insurance to offset a single large loss or a combination of losses.
►Captives (See Captive Services)
A captive insurance company is an insurance company that is owned and controlled by its policyholders. According to the Captive Insurance Companies Association (CICA), the first captive to be formed was in the late 19th century and was designed to write more profitable fire insurance policies for New England textile manufacturers that were hit hard by the rising market rates.
Captives gained popularity in the 1980s as a result of the US liability crisis, particularly in the medical arena.
As captives have continued to grow over time, employers are looking at employee benefits as new or expanded coverage. The latest tough market and changing economy is expected to spur further and faster industry growth this year.
Sole (pure) parent captive: A sole parent captive is owned and controlled by one owner, usually the parent organization, and is formed as a subsidiary company. The captive subsidiary writes policies for the parent and bears only the risks of the parent.
►Captive Group: A captive group is owned and controlled by multiple policyholders. They may or may not be related entities or form part of a homogeneous group, such as industrial or commercial groups. Typically, companies of similar size pool their risks in a captive industry with customized insurance plans. Similarly, companies of similar size in different industries can also form group captives to enjoy the benefits of a captive model. More recently, associations have been forming association captive insurance companies to offer captive services as part of their membership benefits.
► Agency Captive: Agency captives are companies that are often owned by groups of brokers or other insurance intermediaries and are often structured as rental captives.
►Risk Retention Groups
Risk Retention Groups were also created by the Liability Risk Retention Act of 1986, which provides for simplified regulation. An RRG is an insurance company in all respects, but it has a very important regulatory distinction. Each RRG chooses a single state in which to be domiciled and regulated. The law states that the RRG is then eligible to do business in all states.
►Captive Companies Program
Associations, regional producers and corporations that wish to take on some selected third party exposure.