Maximizing ART (Alternative Risk Transfer)

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Maximizing ART(Alternative Risk Transfer)

• SCCIA Road Show
• Richard (Dick) C. Goff

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What is a Captive?

• Captives are truly Special Purpose Insurance
  Companies.
• They are created primarily to serve a single
  corporation (or corporate family), members of an
  association, homogenous groups, an insurance
  agents/brokers, TPAs or MGUs controlled book
  of business.
• The captives owner(s) dictate its underwriting
  and investment policies.

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What is a Sponsored Captive?

• Sponsored captives may be owned by insurance
  companies, associations or a captive.
• Sponsored captives have protected cells.
• The term protected cell applies to separate
  insured risks or lines of coverage that are
  segregated (protected) from other insured risk
  exposures and liabilities.
• Protected cell design structures are flexible in
  make-up. As examples, they may be made up of
  single insureds, controlled books of business,
  homogenous groups or by line of coverage.

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What is an RRG?

• A risk retention group (RRG) is a liability
  insurance company that is owned by its members.
• Under the Liability Risk Retention Act (LRRA),
  RRGs must be domiciled in a state.
• Once licensed by its state of domicile, an RRG
  can insure members in all states.
• Because LRRA is a federal law, it pre-empts state
  regulation, making it much easier for RRGs to
  operate nationally.
• As insurance companies, RRGs retain risk.

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What is an RRG?

• Avoidance of multiple state filings and licensing
  requirements.
• Member control over risk and litigation
  management issues.
• Establishment of stable market for coverage and
  rates.
• Elimination of market residuals.
• Exemption from countersignature laws for
  agents/brokers.
• No expense for fronting fees.
• Unbundling of services.

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Why Form a Captive/RRG?

• Provide alternative risk transfer/funding
  mechanism.
• Smooth out insurance cost volatility.
• Control coverage design, cost and administration.
• Benefit from proactive risk management program.
• Provide coverages not otherwise available.

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Why Form a Captive/RRG?

• Gain access to reinsurance market.
• May enhance strategic relationships and
  opportunities.
• Capture underwriting profit and investment
  income.
• Creative financial tool.
• Long-term fluid investment.

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What Coverages?

• Medical Malpractice
• General Liability
• Auto Liability Physical Damage
• Workers Compensation
• Environmental Liability
• Professional Liability
• Property
• Medical Stop Loss
• Short Long Term Disability
• Employee Benefits
• Coverages not otherwise available

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What Coverages?

• These coverages in most cases may be reinsured
  to a captive whether the front is a traditional
  insurance company or an RRG.

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What is a Fronting Company?

• A fronting company retains responsibility for the
  captives regulatory and statutory compliance,
  which includes the ultimate financial
  responsibility for all coverages reinsured within
  the captive.

  Reinsurance
Captive Insurance Company
Fronting Insurance Company  
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What is Involved?

• Step 1
• Gather underwriting information.
• Incorporate received underwriting information
  into a financial model to determine proposed
  captives financial viability.
• Agree whether proposed captive is a go or no
  go proposition.

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What is Involved?

• Step 2
• An actuarial firm will provide financial models
  that will include suggested retention limits and
  capitalization requirements.
• Identify and begin dialogue with qualified
  underwriting partners.
• Team members will develop captives business
  plan, which will include marketing and financial
  sections.
• Orchestrate a meeting with selected domiciles
  regulators and Department of Labor if appropriate
  (employee benefits only).

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What is Involved?

• Step 3
• Incorporate and capitalize captive and/or RRG.
• Complete and file captives and/or RRGs
  applications with the insurance department for
  approval.
• Contract with a captive management company for
  ongoing mind and management services.

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What is Involved?

• Step 4
• Roll out program.

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Small Captive Insurance Co.?

• Internal Revenue Code 831 (b) provides a very
  powerful tax advantage through small insurance
  companies (captives) to provide them additional
  financial resources to pay claims.
• This advantage assumes insurance tax treatment
  (as opposed to deposit accounting tax treatment)
  for the premiums paid to the company.
• Legitimate risk is being transferred.
• Available to onshore and offshore captives that
  choose to be taxed as a U.S. company through a
  953(c) election.

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Small Captive Insurance Co.?

• IRC Section 831(b) allows for a property and
  casualty insurance company to elect to be taxed
  only on its investment income.
• The company is able to accumulate surplus from
  underwriting profits free from tax.
• Owners are taxed on dividends and other
  compensation received from the 831(b) and
  long-term capital gains rates on any gains from
  sale or liquidation of their stock.

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Small Captive Insurance Co.?

• Any properly structured and operated insurance
  captive writing less than 1.2 million of annual
  premium may elect to be taxed as an 831(b).
• Other applications of these codes
• A captive that is in runoff with little or no
  premium.
• A start-up captive in its year of inception,
  though higher premium levels may be anticipated
  in subsequent years.
• This overview should not be considered tax advice.

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Benefits of Forming?

• Allows a corporate family to cover business risk
  on a tax-deductible basis with coverage that is
  not normally available within the traditional
  insurance marketplace (as examples, contingent
  sales tax liability and construction rework
  exposures).
• Earned premium accumulates on a tax-free basis
  (only investment income is taxable as ordinary
  income).
• Annual premium range allowed under Section
  831(b) Minimum-0 Maximum 1.2 million. (this
  flexibility allows the captive insured(s) the
  ability to allocate premium levels to be paid in,
  or not, annually).

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Benefits of Forming?

• Coverages may be modified, rewritten, or
  non-renewed on an annual basis at the insureds
  discretion.
• Small captive insurance company structures may be
  used for estate planning, company perpetuation,
  key employee benefit/compensation package
  purposes, and to begin to pre-fund the necessary
  capital and surplus required for a traditional
  captive structure insuring traditional lines of
  coverage.
• Dividends may be declared to owner(s) on an
  annual basis, which are taxed at the new capital
  gains rate of 15.

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Small Captive Insurance Co.?
Small Captive Insurance Company
Premium
Premium
Insured(s)
Owner(s)
Claim Pay
Claim Pay
Dividends
Dividends
Reinsurance (Optional)
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Small Captive Insurance Co.?

• Premium(s) deductible.
• Premium income accumulated tax free.
• Investment income taxed as ordinary income.
• Dividends taxed at new capital gains rate (15).
• Claim payments are tax neutral.

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Maximizing ART(Alternative Risk Transfer)
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Med Mal RRG 10 of Risk
Hospital Owned Captive 15 of Risk
Sponsored Captive
25 of Risk Clinic
10 of Risk Doctors Practice I
25 of Risk Doctors Practice II
5 of Risk Doctors Practice III
35 of Risk Hospital
1 million per claim 3 million aggregate
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• Richard (Dick) C. Goff
• The Taft Companies
• Phone [phone]
• E-mail Dick_at_taftcos.com