Reinsuring The Agent-Owned Captive Insurance Company

Insurance agents have had very limited exposure to reinsurance and little education about it. Agents are only made aware of reinsurance by an underwriter from the insurance company. This tells them that we cannot write this type of business because of our insurance company’s treaty insurance agreements.

Over the years, reinsurers have been the traditional risk-taking organization. Their influence on primary insurers’ underwriting has increased significantly. Because they have a greater amount of exposure to a specific insurance company’s risk, many reinsurers now determine primary pricing, deductible, credit and debit amounts. The primary insurance business is now more important to reinsurers.

Agents should think about purchasing reinsurance programs for their captive insurance company. The buying of reinsurance is similar to traditional insurance companies. An agent should be familiar with all types of reinsurance.

1. Quota Share Reinsurance

2. Reinsurance for excess losses

3. Catastrophic Reinsurance

4. Reinsurance for Aggregate Loss Excess

5. Stop Loss Reinsurance

6. Finite Risk Reinsurance

While the capital requirements to start agent-owned captive insurance businesses, especially those located in offshore domiciles are relatively low, it is important that you carefully consider the structure of a comprehensive program. It is gone a time when it was easy to determine aggregate stop loss reinsurance to guarantee underwriting profits of the agent-owned captive.

This is why the net retention of an agent-owned captive must be considered in conjunction with its financial structure, and the risk taking philosophy of the agent owner. Today’s majority of captive insurance companies that are owned by agents have too high a retention rate, compared to traditional insurance companies and taking into account their financial structure.

The reinsurance program of an agent-owned captive must be continuously evaluated and monitored, regardless of whether it purchases quota shares reinsurance only or a combination of different types of treaty insurance agreements. When designing a reinsurance plan for a newly-formed agent-owned captive insurance firm, the difficulty level is high.

Reinsuring the Policy-Issuing Organization with Your Agent-Owned Capital

An agency’s policy-issuing arrangement is when a policy is issued to it by a licensed property/casualty insurer company. It is then reinsured by the traditional insurance market, which would also include the agent-owned captive. This arrangement is often referred to “fronting”, and it is usually used when an agent has created an agent-owned captive.

The policy-issuing firm is paid a “fronting” fee and reinsured 100%. Some property/casualty insurers have used as their franchise model the offer of their “A” rated carrier to be a “frontier,” thereby transferring financial risk and underwriting risk. Fronting companies need to consider state premium take, residual mods and assessments. This is why an agent must be trained in the negotiation of a fronting fees. The pure profit margin for a fronting fee can range from 3% to 7.5%, depending on the fronting insurer.

Example: A captive insurance company owned by an agent that operates in the Florida restaurant insurance market reinsures the first $75,000 underwriting loss. The policy-issuing company also owns a reinsurer that writes excess loss reinsurance up to $75,000 and up to $500,000 at 17.5% of GNWPI. As a percentage gross net written premium income, the excess of $500,000 to $1,000,000 limit for restaurant program has a different rate. Because they have separate treaty-reinsurance agreements, the reinsurer negotiates their excess of loss treaty agreement directly with the policy-issuing company.

Agents must be able to comprehend the buying process for reinsurance in either the intermediary or direct market. This will help them build a profitable captive insurance company. Agents will be better able to understand the underwriting cycles in the property/casualty industry and how they can take advantage of them. Agents will need to start negotiating with reinsurers when policy-issuing insurance firms take very little underwriting risks.

Quota Share Insurance Provided
Only by the Agent-Owned captive

Another example is: A captive insurance company that was Cayman Island’s agent and owned by an insurance bank capitalized the agency substantially using collateral. The substantial capitalization enabled the agent-owned captive to write 100% of the quota-share reinsurance for the policy-issuing insurer. The original policies were written by the agency. They were 100% reinsured by the agent-owned captive who purchased an outgoing going program consisting of excess of loss and quota share.

After several stock offerings, the profits from the Cayman Islands agent-owned captive insurance firm were used to buy a “shell” insurance company that was a property/casualty company. This company went on to become an “A” rated specialty program insurance company.