1 / 18

Alternative Risk Transfer/ (fronting)

Alternative Risk Transfer/ (fronting). Process by which a primary insurer cedes a portion of the risk it has underwritten to a reinsurer, such as a captive insurance company.

snow
Download Presentation

Alternative Risk Transfer/ (fronting)

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Alternative Risk Transfer/ (fronting) Process by which a primary insurer cedes a portion of the risk it has underwritten to a reinsurer, such as a captive insurance company • Ceding company (front) securitizes for projected losses less paid losses while working with the captive to obtain maximum risk finance leverage • Front retains primary responsibility for regulatory and statutory compliance • Front usually retains some amount of underwriting risk

  2. What is Alternative Risk? Alternative risk in an insurance-based product where a substantial portion of the insurance risk is assumed by an entity other than a traditional insurance company.

  3. Definition of a Captive A closely held insurance company whose insurance business is primarily supplied by and controlled by its owners and in which the original insureds are the principal beneficiaries. A captive insurance company’s insureds have direct involvement and influence over the company’s major operations, including underwriting, claims and management policy and investments.

  4. Types of Captives • Pure captive • Single-parent captive writing only the risks of its owners and/or affiliates. • Captive writing connected business • Type 1 insurer writing the risks related to or arising out of the business or operations of its owners and/or affiliates. • Captive writing third-party business • Captive writing a portion of its net premiums for risks which are unrelated to the business of its owners and/or affiliates. • Captive of insurer • Single-parent captive owned by a professional insurer and/or reinsurer.

  5. Types of Captives • Association captive • Owned by members of a common industry or trade association in order to share the risks of that industry among its members. • Health care captive • Owned by a hospital or health maintenance organization and writing the risks of its owners and/or affiliates. • Multi-owner captive • Owned by two or more unrelated persons and writing the risks of its owners and/or affiliates. • Long-term (or life) insurer and/or reinsurer • Insurance company writing mainly life insurance as a direct writer and/or reinsurer.

  6. Types of Captives • Composite • Insurance company writing a combination of long-term (or life) business and general business. • Rent-a-captive • Owned by unrelated persons and providing captive facilities to others for a fee. • Agency captive • Owned by one or more independent insurance agents to write business that they control.

  7. Types of Captives • Finite insurer and/or reinsurer • Insurance company writing unrelated risks reflecting (i) clearly defined aggregate limits and (ii) anticipated investment income. • Professional insurer and/or reinsurer • Insurance company writing unrelated risks as a direct writer and/or reinsurer.

  8. 2000 Captives by Domicile RANK DOMICILE 2000 TOTAL CAPTIVES 1 Bermuda 1,564 2 Cayman 517 3 Vermont 361 4 Guernsey 375 5 Luxembourg 264 6 Barbados 119 7 Isle of Man 168 8 Ireland 163 9 British Virgin Islands 181 10 All Other 492 WORLDWIDE TOTALS 4,204 *Totals increase when take into consideration the numerous segregated cells within various captive companies.

  9. Is The Market Shifting? • The alternative market has grown from 21% of commercial premium to 33% of the last 20 years • Throughout the last decade traditional commercial line premiums have grown 3% annually, while alternative markets have experienced a 8% annual growth rate • The alternative risk market has expanded beyond individual employer programs to group/agency captives

  10. Regulatory Impact All rate, form, reporting rules apply as the standard insurance market.

  11. Customer Impact • May not know they are in a captive • May receive captive profits

  12. Impact on Independent Agency System • Defends against direct writing, retail, banks selling insurance • Increased revenue on profitable business • Ability to function as your own insurance company • Control of agents own destiny

  13. Pros/Cons of a Captive Structure • PROS • Underwriting Profits to Agent/Insured • Investment Income to Agent/Insured • Direct access to reinsurance market • Ability to separate all insurance service components • CONS • Underwriting risk born by Agent/Insured • Possible tax implications • Collateral may be required

  14. Captive Cycle Insured Agent POLICY ISSUING COMPANY Reinsurer PROFITS CAPTIVE TPA Claimant

  15. Underwriting Control

  16. Underwriting

  17. Gross Premium $2,000,000 Loss Fund $1,300,000 Aggregate Stop $1,625,000 Risk Assumption $ 325,000 Alternative Risk – Financial Impact to Client • Expense Components • Front 7.0% • Reinsurance 8.0% • Rent a Captive 1.5% • Claims 5.0% • Taxes 4.0% • Loss Control 1.0% • Commission 7.5% • FET 1.0% • Total 35% Stat/1M Specific Reinsurance Statutory XS 250,000 W/C 750 XS 250 AL/GL/Prop $250,000 Risk Assumption $325,000 Aggregate Reinsurance Captive $1,300,000 Aggregate Attachment: $1,625,000

  18. Captive Structure $1,235,000 $1,085,000 $988,000 $742,000 $838,000 $592,000 $370,000 $220,000 80% Loss Ratio 100% Loss Ratio $150,000 $150,000 $150,000 $150,000 $150,000 $150,000 $150,000 $148,000 $300,000 Current Income 65% Loss 50% Loss 40% Loss 30% Loss Level Ratio Ratio Ratio Ratio $2,000 $-150,000

More Related