The alternative risk universe is rapidly expanding. That which was considered alternative just a few years ago is now de rigueur for any well-managed, progressive company.
We divide ART consulting services into three categories:
1. Standard Loss Exposures (Workers Compensation, Public Liability, and Property)
There is no “best” time to investigate alternative risk transfer options for the standard loss exposures. While hard insurance markets certainly increase ART activity, risk capital devoted to alternative markets increases each year. Smart companies form or join alternative risk facilities when insurance markets are soft. There are 4 reasons for this:
- Excess insurance and reinsurance pricing is reasonable and capacity is usually abundant
- Fronting insurers tend to be plentiful and pricing is competitive
- Being prepared in advance of a hard market is good business
- Negotiating with insurers, reinsurers, and other service providers is always more productive and less contentious in a buyer’s market.
2. Non-standard Loss Exposures
The alternative markets are growing most impressively for loss exposures that conventional insurers either avoid entirely or insure sporadically at opportunistic prices. These loss exposures are manifold within every company yet many remain unrecognized. They include the various forms of professional liability such as that represented by corporate directors and officers, and virtually any difficult products-related loss exposures. Intellectual property and patent infringement are also good examples of non-standard loss exposures for which an alternative funding option may be appropriate.
Conventional insurance and alternative financing options provide coverage and funding for event risk. Coverage is usually dependent on a set of defined perils (or the lack thereof). There are many risks, however, that defy the conventional definition of what is typically insurable. The insurance mechanism operates on the principal that the premiums of the many pay the losses of the few. This assumes large numbers of relatively homogeneous risks. This is fine as far as it goes, but the majority of an organization’s risks are not homogeneous.
3. For-profit ART Applications
Many companies recognize the value of being able to address insurance issues relative to their customers, suppliers, vendors, or any other third party with which they do business. For example, a general contractor might establish a captive insurer expressly to serve the insurance needs of its core subcontractors. These options are limited only by a company’s imagination and willingness to form a subsidiary designed to take insurance risk.
Our captive practice comprises two separate areas:
1. Prospective Captives
For clients contemplating the establishment of a new captive or joining a group captive, our advisory and analytical services include the following:
Pre-feasibility. We will offer a no-cost opinion of a feasibility study’s potential value and an estimate of time and expenses if the candidate decides to commission a study. We are in business to sell our ART expertise; however, our interests are not served by recommending a study when the facts indicate otherwise. We would rather tell the truth at the onset, thus preserving our nascent relationship with the candidate and the possibility for future business.
Feasibility. We answer these two most important questions: (i) “Do we need a captive, and if not, what do we need?” (ii) “If we don’t need a captive, are there other compelling reasons for forming (or joining) one?”
To do this we:
- Conduct In-depth research into each client’s business drivers, organization, capital structure, and cost of risk, dcounted, after-tax cost comparisons to existing program(s), (if applicable)
- Exposition on potential captive uses (insurance coverages), benefits, frictional costs, and potential for failure (risk factors) customized to each client’s individual circumstances.
- Projected captive financial statements
- Capital & surplus requirements
- Expected loss modeling (pre-actuarial analysis)
- Captive governance
- Domicile review
- Limits retention analysis
- Excess insurance market intelligence
- SEC implications (if any)
- Loss prevention and claims management imperatives
- Overview of taxation issues
When clients decide to form a captive we provide full post-feasibility (implementation) services. These include:
- Review and oversight of broker-related excess insurance placement and fronting insurer activities
- Assistance with administration
- Identifying and hiring domicile service providers
- Guidance through the domicile application process, including business plan development and domicile meetings, introductions to the domicile’s captive regulatory officials
- Consultation on board, committee, and policy decisions – e.g., underwriting protocols, and premium and equity allocations
2. Existing Captives
We answer the following questions: (i) “Do we still need (or want) this captive?” (iI)“What is the economic benefit of this captive?” and (iii) “If it isn’t performing to our satisfaction, should we fix it or get rid of it?”
For clients that own single-parent captives or own a fractional interest in a group captive, we provide the following services:
Performance Measurements:
- Functional utilization review (How effectively are you using your captive?)
- Financial standards benchmarking (Competitive expenses? Solvency ratios within acceptable ranges?)
- Review of service providers
- Capital & surplus utilization review (Under-employed capital? What are the opportunity costs?)
Logistics:
- Relocation (offshore captive domestication and vice versa)
- Run-off, wind up, closing a captive
These reviews are critical exercises designed to reveal the captive’s true value (or lack thereof) and its economic impact on the parent company(s).
3. Other ARS Applications
In addition to equity and rental captives, we provide expert consultation on a wide range of ART options:
- Self-Insured Retention (SIR) Modeling
- Group Purchasing or Association Program Feasibility & Implementation
- Self-Insurance feasibility (Group and Individual)
- Risk Retention Group (RRG) Feasibility & Implementation
- Finite and Structured Insurance Arrangements (including retroactive programs such as loss portfolio transfers)
- Public Entity Pools
Tools and Proprietary Models:
- Captive and RRG pro forma financial statements
- Present value cash flows
- Loss trending and development
- Finite reinsurance and structured insurance modeling at various loss levels
- Pre-tax and after-tax cost analysis
All alternative risk financing options have opportunity costs and none are considered panaceas. But the fact remains that risk must be managed. If off-the-shelf insurance is the answer, we’ll tell you. However, if you could possibly benefit from an alternative funding approach, we’ll tell you that too.
For more information please call 781-449-2866 and ask for Don Riggin or click here to send an email.