WELCOME TO THE WORLD OF ART ALTERNATIVE RISK TRANSFER

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WELCOME TO THE WORLD OF ART ALTERNATIVE RISK
TRANSFER

• Presented by
• The Taft Companies

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ART OBJECTIVESAVE AND/OR MAKE MONEY

• Control
• Program Design
• Risk Taking Partners
• Professional Team
• Ownership
• Responsibility
• Involvement
• Pre and Post Claim Risk Management
• Risk
• Investment
• Assumption
• Profit or Loss

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WHAT IS A RISK RETENTION GROUP (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 the LRRA is a
federal law, it preempts state regulation, making
it much easier for RRGs to operate nationally. As
insurance companies, RRGs retain risk.

• 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.
• May act as a direct writer negating the need and
  expense of working with insurance agents and
  brokers. (optional)
• No expense for fronting fees.
• Unbundling of services.

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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,
such as doctor groups and/or specialties and or
hospitals and its staff, docs and other medical
professionals. The captive's owner(s) dictate
its underwriting, risk management (pre and post
loss) and investment policies. Twenty-eight
states, the District of Columbia and the U.S.
Virgin Islands have enacted laws that regulate
these Special Purpose Insurance Companies
differently than traditional commercial insurers,
the state of Montana being one of these leading
domiciles.
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WHAT IS A PROTECTED CELL
The term "protected cell" applies to separate
insured risks (i.e. medical disciplines) 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 hospital, medical group or
medical disciplines, or by line of coverage.
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WHY FORM A RRG AND CAPTIVE

• 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.
• 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 WORK

• Medical Malpractice
• General Liability
• Workers Compensation
• Employer Group Medical Coverage
• Any Coverage(s) that Financially Qualify

These coverages, with the exception of workers
compensation, may be provided through a RRG on a
direct written basis, workers compensation
coverage required to be fronted by a traditional
insurance company. Coverage(s) may be reinsured
by a captive insurance company.
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RISK RETENTION GROUP
MODEL 1
Med Mal GL Coverages Funding Structure (Coverage
Limit 1,000,000 with optional higher limits to
5,000,000)

• A. 250,000 per occurrence risk assumption
• B. 500,000 per occurrence risk
  assumption
• C. 1,000,000 per occurrence risk
  assumption

Traditional Reinsurance A. 750 X 250 B. 500 X
500 C. None
Risk Retention Group
This page is for illustration purposes only.
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MODEL II
RRG WITH COMPANION CAPTIVE Med Mal GL Coverages
Funding Structure (Coverage Limit 1,000,000 with
optional higher limits to 5,000,000)

• RRG
• 20 quota-share risk assumption
• A. 50,000 per occurrence risk assumption
• B. 100,000 per occurrence risk assumption
• C. 200,000 per occurrence risk assumption

Traditional Reinsurance A. 750 X 250 B. 500 X
500 C. None

• 80 quota-share risk assumption
• A. 200,000 per occurrence risk assumption
• B. 400,000 per occurrence risk assumption
• C. 800,000 per occurrence risk assumption

Protected Cell Reinsurance Captive

• This page is for illustration purposes only.
• Percentage of risk shared between the RRG and
  captive is flexible.
• Higher limits offered x 1,000,000 will be
  provided by the reinsurer up to 5,000,000 in
  total.

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HOW A PROTECTED CELL CAPTIVE MAY BE STRUCTURED
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PROTECTED CELL STRUCTURE NOTES

• There are no restrictions to the number of cells
  a captive may have. Individuals, groups, lines of
  coverage and strategic partners have the
  opportunity to own protected cells.
• Each protected cell is responsible for claims up
  to its risk retention limit. Risk retention may
  vary by cell. All cells and the captive are
  protected by an agreed specific loss and optional
  aggregate stop loss limit.
• Each cell is protected from the others potential
  for adverse loss experience.

• Insureds may receive a program dividend for
  favorable loss experience from within their
  assigned protected cell. (Optional)
• RRG or cells may buy financial catastrophe
  reinsurance provided by the captives CAT Fund
  cell. (Optional)
• Insureds may participate as captive investors.
  (Optional)

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WHAT'S INVOLVED

• Step 1
• Orchestrate meeting(s) with selected domiciles
  regulators.
• Gather underwriting information.
• Incorporate received underwriting information
  into a financial model to determine proposed
  
  RRG's, captive's and cells' financial
  viability.
• Collectively agree whether proposed RRG, captive
  and cells are a "GO" or "NO GO" proposition.
• Step 2
• Taft and chosen actuarial firm will provide for
  the RRG, captive and each cell optional financial
  
• models that will include suggested RRG's,
  captive's and each cell's retention limits and
• capitalization requirements.
• Meet ART program's professional team.
• Identify and begin dialogue with qualified
  reinsurance partners.
• Taft, with the assistance of other team members,
  will develop RRG's, captive's and each cell's
• business plan, which will include marketing
  and financial sections.
• Orchestrate a meeting with the Department of
  Labor if appropriate (employee benefits only).
• Step 3
• Incorporate and capitalize RRG, captive and
  cells.
• Complete and file RRG's, captives and cells
  applications with the SAOs ART division for

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HOW MUCH

• Implementation Cost RRG Captive
• Step 1 - 20,000 20,000
• per cell
• Step 2 - 50,000 35,000
• " "
• Step 3 - 30,000 10,000
• " "
• Step 4 - Investment (capital and surplus)
• " "
• Plus reimbursement of travel related expenses
• (Minimum feasibility study and implementation fee
  - 100,000.)
• Footnotes
• Costs include consulting, actuarial and
  accounting professional fees (not legal).
• All costs are proportionally allocated to the
  RRG, captive and cells.
• Capital/Investment may be provided by
• i. Cash

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HOW MUCH CONT.

• Annual Expenses
• Management Services 5 of RRG's annual premium
  to agreed cap
• Actuarial Services (85,000 minimum annual fee
  RRG only)
• Accounting Services
• RRG and captive, 7.5 of premium to
• (Exclusive of Legal) agreed cap (125,000
  minimum annual fee)
• Footnotes
• Each required professional service provider firm
  will be independently engaged
• and contracted.
• RRG's, captives and cells' expense is
  proportionally allocated.
• Insureds may be charged a program access fee
  equal to 1/3 of their first year
• annual premium to be financed by the RRG and
  captive over twelve monthly
• equal installments. (optional)

IMPORTANT NOTICE This document is for conceptual
illustration purposes only. It is not to be
construed as a proposal to provide an insurance
program.
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