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Alternative Risk Transfer and Financing Mechanisms

Alternative Risk Transfer and Financing Mechanisms. Financial Risk Management CAS Special Interest Seminar April 12-13, Denver, Colorado. Presented by: Christy Simon, FCAS Vice President and Profit Center Executive Diversified Risk, Fireman’s Fund Insurance Company. “Alternative Market?”.

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Alternative Risk Transfer and Financing Mechanisms

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  1. Alternative Risk Transfer and Financing Mechanisms Financial Risk Management CAS Special Interest Seminar April 12-13, Denver, Colorado Presented by: Christy Simon, FCAS Vice President and Profit Center Executive Diversified Risk, Fireman’s Fund Insurance Company

  2. “Alternative Market?” Source: Sedgwick Strategic Planning Unit of Sedgwick James, Inc.

  3. Growth in the Alternative Market1994 vs. 1997 • Commercial Ins. Mkt. 21% • Risk Retention Grps. 70 • Qualified Self Ins. 25 • Captives 80 • Pools & Trusts -5 • Private Retentions 32 Source: Sedgwick Strategic Planning Unit of Sedgwick James, Inc.

  4. “Why Create A Captive or other Alternative Risk Program?” • Greater control over service costs and quality • Access to reinsurance markets • Greater stability of total insurance costs • Cash flow benefits • Tailored coverages • Realize underwriting profit and investment income

  5. “Just what is a Captive?” • A Captive Is The Insurance Subsidiary Of A Corporation, Group Or Association Whose Primary Function Is To Provide For Its Parent’s Or Sponsor’s Exposure To Loss. • And it often requires the services of a “Fronting” carrier….

  6. A Definition of “Fronting” • A legitimate reinsurance transaction whereby a licensed insurer issues a policy or policies to provide coverage to risks of an insured which are then reinsured with the same insured’s own captive or reinsurance company.

  7. Types of Captives • Pure • Single Parent • Association • Group • Agency • Rent-A-Captive • Profit Center. . .

  8. Number of CaptivesListed in the Captive Insurance Company Directory Source: Tillinghast - Towers Perrin

  9. Captives By Domicile Source: Tillinghast-Towers Perrin

  10. A number of important factors will be evaluated in the domicile selection process: Regulatory and legal environment Political & economic stability Business and economic aspects Tax considerations Other considerations include…. Professional services availability Adequate infrastructure Personal Preferences Selecting A Domicile

  11. Costing Services v. Traditional Pricing: Policy Issuance - specialized or standard forms Underwriting Services Accounting Services Actuarial Services Risk Management Support and Information Investment Services Other Important Considerations.. Credit Risk Profit Load Unbundled Services Pricing the Program

  12. Specific Excess….. Attachment Point Line(s) of Business State Focus Program Results Industry Results Anticipated Rate Changes ALE Treatment Aggregate Excess….. Attachment Point Line(s) of Business Expected Captive Loss Ratio Historical Experience Anticipated Rate Changes Financial Strength of Captive/Parent Determining Excess Reinsurance Costs

  13. Risk Management Services • Factors That Influence Costs • Line(s) of Business • Complexity of Claims • Frequency/Severity Trends • State(s) Litigious Environment • Cost Basis (percent of loss, percent of premium, claim count) • Management Information Services (Specialized loss detail, on-line access) • Loss Control Program - Customized, Off the Shelf, Vendor Supplied

  14. Captive Roles & Relationships Step 3: Fronting Carrier Pays Agent’s Commission Step 6: Captive Reimburses Fronting Carrier for Claims Paid Fireman’s Fund Fronting Carrier Agency ABC Captive Grand Cayman Step 5: Front Issues Policy to Insured and Pays All Claims Step 4: Front Cedes Net Premium to Captive Step 1: Agent Sells Coverage and Provides Normal Services Insured Step 2: Insured Pays Premium to Fronting Carrier

  15. Rent-A-Captives • In some situations a captive program may not make sense. Whether it is an issue of capital, limited start-up premium, or the reluctance of members to form and run a captive company, a rent-a-captive may be a more practical solution.

  16. Rent-A-Captive Programs Can Offer Many Benefits Traditionally Associated With Equity Captives Including: Increased Control Over Service Costs Realization of Underwriting Profit & Investment Return Tailoring of Coverage Tax Benefits When Compared With An Equity Captive, A Rent-A-Captive Offers The Following Advantages: No Capitalization Lower General & Administrative Costs No Board Meetings Rent-A-Captive Advantages

  17. ABC Rent-A-Captive Program

  18. Questions?

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