Know The Types of Alternative Markets

 

A pure captive insurance company has a single parent company and insures only the risk of the parent company. The pure captive insurance company will have an insurance charter to operate as an insurance company. The parent company will invest the money to set up and start the captive insurance company. The parent company controls the decisions in regards to underwriting, investments and claim operations. The pure captive insurance company will normally have an excess insurance carrier or a re-insurer to cover the cost of claims if they exceed a predetermined limit.

 

A group captive insurance company is jointly owned by a group of companies having a homogeneous interest and similar exposures to loss. It is a closely held insurance company with the insurance business being supplied and controlled by its owners. A group captive will operate the same as the pure captive and differs only in having multiple owners as opposed to a single owner.

 

A rent-a-captive (also known as a sponsored captive) is a company providing captive insurance company services and facilities to others for a fee. The rent-a-captive is normally run by a fronting insurance carrier, but can be operated by a broker or a re-insurer.   The fees to obtain membership in the rent-a-captive are much lower than what would be necessary monetarily to start a pure captive. The rent-a-captive usually provides services to mid-size companies without the resources to start their own captive. The rent-a-captive differs from the pure captive or group captive in that the member is not an owner and does not have voting control of the captive. The rent-a-captive is normally divided into “cells” in which each member is legally separated from the rest of the members and separated from the liabilities of the other members and the rent-a-captive itself.

 

Public entity pools or government pools are a form of risk management where small or mid-size local governments within a single state—towns, small cities, counties, water districts, parks & recreation, public bus lines, etc.,—join together to form a non-profit association to share the risk of loss. The members of the pool collectively self-insure their insurance exposures through a participation agreement. The pool will have a joint underwriting operation in which the participants in the pool assume a predetermined and fixed exposure in all business written.

 

A self-insurance plan describes a company setting aside a pre-determined amount of money to pay for future claims. Using available underwriting information and the laws of large numbers, the amount of money needed to pay future claims is actuarially calculated. This amount of money is placed in reserve to pay the losses as they occur. Like a captive insurance company, the self-insurance plan will normally have an excess insurance carrier or a re-insurer to cover the cost of claims if they exceed a predetermined limit.

Workers’ compensation coverage has relatively predictable amounts of risk and is measurable enough to make it appropriate for self-insurance. Most of the jurisdictions allow companies to self-insure for work comp. Self-insurance plans are the alternative market approach most used in the work comp field.

In a large deductible program the insured purchases a policy of insurance from an insurance company. The insured is responsible for reimbursing the insurance company for each claim in the policy period up to a dollar limit. The insured will also have a maximum amount of exposure. To illustrate, the insured would reimburse the insurance company the total amount paid on each claim under $250,000 (the large deductible amount), but when the insured has paid a total of $1,000,000 (a stop loss limit) on all claims, the insurance company will take over and pay all further claim cost during the policy period. The allocated loss adjustment expense (the cost of handling the claim) is often included in the claim cost in the large deductible program.

 

A risk retention group is an insurance company owned by the policyholders. Membership in the group is limited to companies in the same type of business. The risk of loss is spread across the group members. Risk retention groups are normally used for medical malpractice, professional liability and products liability. Risk retention groups are normally not used for workers’ compensation. (workersxzcompxzkit)

 

In Texas, the state statutes allow companies in similar industries to join together in a purchasing group to buy their workers compensation coverage. The companies in the group receive a discount from the workers' compensation carrier. If the insurance company is set up as a mutual company, the members may also receive a group dividend if the insurance company has a profitable year. The purchasing group may also join together to purchase health insurance to receive a group discount.