ABCs of Captives

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ABCs of Captives ART
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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,
  risk management and investment policies.

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What is a Segregated Cell Captive

• Segregated cell captives may be owned by
  insurance companies, associations, insurance
  agents/brokers, holding companies, etc., etc.,
  etc.
• Segregated cell captives are protected.
• 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 insureds.
• Under the Liability Risk Retention Act (LRRA),
  RRGs must be domiciled in a single state. (may
  NOT be domiciled offshore)
• Once licensed by its state of domicile, an RRG
  can insure qualified risk(s) 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.
• Insured controlled pre and post loss management
  program.
• 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, and risk retention.
• 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 partnership 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 Group Medical 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 to the
  captive.

  Reinsurance
Captive Insurance Company
Fronting Insurance Company  
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ARTs Versatility

• For example, two models
• Single Parent Captive
• State Medical Community

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Single Parent Captive
Fronting Insurance Company  
Single Parent Captive
1,000,000 risk assumption
500,000 risk assumption
250,000 risk assumption
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Single Parent Captive

• Deductible buy back program for casualty lines
• General Liability
• Auto Liability
• Workers Compensation
• Front underwrites and issues coverages policies
  on a fully insured basis
• Front enters into a reinsurance agreement wherein
  the captive guarantees to reimburse the front for
  the programs negotiated deductible.

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State Medical CommunityART Funding Model
(1,000,000/3,000,000 Coverage Limit)
State Funded Risk Retention Group
Traditional Reinsurance A. 750 X 250 B. 500 X
500 C. None
20 quota-share risk assumption 50,000 per
occurrence risk assumption 100,000 per
occurrence risk assumption 200,000 per
occurrence risk assumption
80 quota-share risk assumption 200,000
per occurrence risk assumption 400,000 per
occurrence risk assumption 800,000 per
occurrence risk assumption
Medical Society Hospital Association Segregated
Cell Owned Captive Insurance Company
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Medical Society Hospital
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Programs Coverages

• Medical Malpractice Tail Liability coverage
• 1 million / 1 million
• Medical Malpractice Liability coverage 1
  million / 3 million
• Miscellaneous Professional Liability coverage 1
  million / 3 million
• General Liability coverage (optional)
• 1 million / 3 million

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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 engaged to 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 license
  application with chosen domiciles 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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ART

• The World of Imagination
• Creativity
• Long-Term Partnerships
• Control

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• Richard (Dick) C. Goff
• The Taft Companies
• 901 Dulaney Valley Rd, Suite 610
• Towson, MD 21204
• Phone [phone]
• E-mail Dick_at_Taftcos.com
• Web www. Taftcos.com

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