Risk Management
Alternate risk transfer is another way to say alternative methods of insurance or risk management. There are many. There are many options available, from self-insuring to the more basic option of not having insurance at all to “program business captives”, and there are many other strategies.
It is important to know a few facts about insurance pricing in order to understand the popularity of ART strategies.
>Insurance premiums are primarily related to economic cycles and not primarily to claims.
“The claim that the recent rise in Connecticut’s medical malpractice liability insurance premiums is due to excessively generous jury verdicts is unfounded.” The most likely explanation for the sudden increase in rates is the decline in investment earnings of the insurance companies …” Professor Tom Baker Director, Insurance Law Center University of Connecticut School of Law
When the profits of the insurance industry fall sharply, it declares an “insurance crises”: rates rise sharply, deductibles increase, and underwriting guidelines are tightened.
>Insurance premiums have risen faster than claims.
Median medical malpractice payments increased 35 percent between 1997 and 2001 (an average 8.5% per year). Average premiums for single-health insurance coverage rose 39 percent during that period (9.5% annually). (Source: National Practitioner Database)
>A small percentage of insured could be responsible for large losses.
National Practitioners Database:
Florida’s malpractice claim statistics show that 51% of the malpractice cases were caused by 6% of doctors. 2,674 of the 44,747 doctors paid more than one malpractice payment. They are responsible for 51% total malpractice payments.
Since 1990, 24 Florida doctors have received 10 or more malpractice settlements.
It is obvious that the 94% cover the poor claims experience of 6%.
Strategies for ART
Conventional insurance markets offer one-year indemnity agreements that transfer specific hazard risk. An ART strategy typically has the following features:
>Multi-year, multi-line coverage
>Coverage that is tailored to the specific needs of the insured
>Provides coverage that is not usually available on the market
>Risk retention by the insured
The various ART strategies offer a variety of tradeoffs between cost, complexity, and risk. It is not surprising that the most cost-effective plans have the lowest risk, complexity, and expense. The greater the risk, the more benefits can be achieved. Complexity and administrative costs also increase. Windward Harbor can help find, implement and manage the best strategy for you. Below are the most important ART strategies.
>Guaranteed-Cost Insurance Plans
Traditional insurance coverage
>Loss Sensitive insurance plans
A specific insured can be covered by insurance if the final premium is determined by the insured’s losses.
>Risk Purchasing Groups (RP’s)
The 1986 Liability Risk Retention Act created Risk Purchasing Groups. This act was created to remove the many state insurance regulations that make it difficult for individuals to purchase liability insurance. The act allows individuals to buy liability insurance together, while preventing states (regulators or insurance companies) from discriminating against them.
>Self-Insured Retention Programs (SIRS).
A deductible is a reduction in coverage. However, a self insured retention plan offers coverage beyond the self-insured retention.
>Protected cell captives (Segregated portfolio companies)
PCCs (or SPC’s in some domiciles) are basically rent-a-captive businesses that guarantee complete seperation among program participants. Each domicile’s laws may require that PCCs and SPCs guarantee the complete seperation of each cell’s capital, assets, and surplus. Rent-a-captives allow companies to rent insurance that is affordable because they are able to achieve economies of scale.
Windward Harbor LLC is the owner of a BVI licensed Segregated portfolio company – Windward Harbor SPC Ltd. This company provides rent-a captive services to selected clients for an annual fee. Each segregated portfolio is unique in its economic ownership, tax ID number, and file a separate tax return.
>Self-Insured Pools & Groups (SIG)
Although the idea of a SIG is different from one state to the next, they work in nearly all 40 states where they are legal. A group of employers creates a trust or nonprofit corporation and hires a professional to manage it. The new entity purchases insurance. This means that the SIG members “own” their workers’ compensation company.
The group pooled the money it would otherwise pay an insurer to earn investment income from funds kept in reserve. The surplus from premiums, also known as the “dividend,” is returned to members if a SIG program reduces workplace injuries or claims costs.
If a company or group suffers catastrophic losses, the members will pay the difference up to a certain limit. The group can buy excess insurance to cover a single loss or a combination.
>Captives (See Captive Services).
A captive insurance company is one that is controlled and owned by its insureds. The Captive Insurance Companies Association (CICA) states that the first captive was formed in late 1800s. It was created to provide fire insurance policies to New England textile producers who were hard hit by rising market rates.
Due to the US liability crisis in the 1980s, captives became very popular in the medical field.
Employers are increasingly considering employee benefits to expand or replace their captive coverage, as they have seen their business grow. Industry growth is expected to be even faster due to the changing economy and recent hard market.
Single Parent (Pure Captive): A single parent captive is controlled and owned by one owner, usually the parent organization. It is created as a subsidiary business. The parent’s policy is underwritten by the captive subsidiary, which bears all the risk.
>Group Captive: Multiple insureds own and control a group captive. They could be related entities, or part of an homogeneous group such as trade or industry groups. Companies of similar size often pool their risks with an industry captive to receive customized insurance plans. To enjoy the benefits offered by a captive model, similar-sized companies in different industries can form group captives. In recent years, associations have started to form captive insurance companies as part of their benefits.
>Agency Captive. Agency captives are usually owned by groups or brokers of insurance intermediaries. They are structured in a rent-a-captive fashion.
>Risk Retention Groups
The 1986 Liability Risk Retention Act created Risk Retention Groups. This allows for simplified regulation. RRGs are insurance companies that can be regulated in all aspects. However, there is one important distinction. Each RRG selects one state to be domiciled in and regulated. The act states that an RRG can then do business in all other states.
>Program Business Captives
Organizations, regional producers, and corporations that wish to be exposed to a selected third party.